In a February 27, 2009 interview with Bloomberg, Marc Faber discusses the effects of the global crisis on social stability, financial markets and precious metals. He also provides a contrarian viewpoint to the general consensus of where we are headed in the near-term.
(Three part Bloomberg interview follows excerpts and comments below)
The way I see it, the recession in the US began in October 2007, but it was kind of hidden by the way the US government compiles economic statistics, until the fall of 2008, when the global economy fell of the cliff. An unbelievable decline in economic activity. I would imagine that by now, global GDP has contracted by at least 10% from the peak level. I think the news will continue to be bad, but there will be a deceleration in bad news. That could then lead to a rebound in asset markets. Overall, the global economy will take a very very long time to get back to the peak boom period of 2004 through 2007.
My view is that the fiscal deficits that are now being proposed in the US will actually aggravate and make the recovery less likely had the government not intervened.
Bad news will continue to pour in, but it won’t be occuring as frequently as it has been in the last 18 months. By bad news, I think Dr. Faber is speaking specifically about economic news related to collapsing institutions. One thing to consider is the psychological impact of mounting job losses month-over-month and the potential for some social unrest as has been seen in Greece, France, Iceland, China and Germany in recent weeks. The global equities markets may remain volatile for quite some time, with market rallies occuring during dips in the frequency and severity of bad news stories.
During this period of [coming economic] stagnation, I think that geopolicitcal tensions will increase, and obviously also social strife and social unrest, and dissatisfaction in various countries.
We continue to here warnings of social unrest, the severity of which is hard to predict. We have seen violent riots around the world, and the real question is, how bad will it get right here at home? Forums are buzzing with SHTF scenarios and we’re already starting to hear about Tea Parties around the country where citizens are protesting the new bail out packages and stimulus bills. Will protests and civil unrest remain controlled and subdued, or will the situation detiriorate to a point where we see full-out riots in urban areas of the country most hard hit by the down-turn. Suburbia is relatively safe today, but Gerald Celente and others are warning that roaming gangs may venture to outlying suburbs in the event of a scenario where local and state police have lost control and resources such as food, water and money are in short supply.
I think that in time, all currencies will continue to lose value against the currency where the supply is extremely limited and which you can’t print. That is essentially called silver, platinum and to some extent palladium.
I assume Marc Faber also meant to include gold. He has always said that in an environment like this, one must be your own central bank. Many analysts tend to look at inflation in terms of the exchange rate of other currencies, and as such, they will recommend changing from one currency to another. But if everyone is printing money, inflation (expansion of money supply) and subsequent price increases resutling from it, will lead to loss of purchasing power in all currencies. So, whether you are holding Dollar, Euros, Roubles, or Yuan, you are going to lose purchasing power. What is important to understand in a situation like this, is that inflation will deteriorate wealth over time, and in a crisis like this, it will probably do it at an accelerated rate. So, if you have $100,000 USD (or Euro, et. al.) today, the house you can buy with it today might cost $200,000 5 – 7 years from now. A 50% decrease in your purchasing power vaporized. A CD or Treasury Bill earning 4% a year is not going to help here. In addition to the Trillions in wealth that have been vaporized in the last 18 months, we will see Trillions more destroyed in the coming years due to inflation (if it happens). This is a paradigm shift in the economic system of the world. Someone has to pay for this mess, directly or indirectly, and one way in which this will happen is to significantly reduce the retirement accounts and savings of America. Hard assets like precious metals, commodities and perhaps even real estate when the time is right, will help to preserve wealth during these times, as those prices should adjust with inflation. Beware fiat paper, globally.
Marc Faber: The gold price went up between 1970 and 1980 from $35 an ounce to $850 an ounce. And very clearly, gold was very high compared to other prices that increased in the 70’s.
I think part of the reason gold has gone up is because it was very inexpensive inflation adjusted in 2001 when it was at $250.
I could see a situation where the worse the economy becomes, the more fiscal deficits will go up and the more money Mr. Bernake will print, and in this situation i think that gold will continue to outpeform the Dow Jones – this is now a longer term call. I think near-term we have an overbought market in gold and we have a very high bullish consensus and it distrubs me a little bit. Retails kinds of buying of gold coins and that gold is now being advertised on US television, these are usually signs of a temporary peak. I am little careful about the outlook for silver and gold for the rest of this year.
Does it mean I am selling all my gold – no. It simply means that I believe a counter-trend rally could occur in the sense that stocks will suddenly rise quite substantially.
Dr. Faber gives an excellent explanation of his thinking behind inflation’s impact on gold (listen to the interview below). Gold is one of the few assets that will survive a collapse of our financial system. While prices may potentially remain quite volatile, slowly acquiring the metal for long-term holding purposes is probably the best way to invest here. The long term trend, given the scenarios outlined by Faber, is very bullish for all of the precious metals.
I think we are headed into the worst recession since the depression, and it could be worse.
Â However, there are some opposing views held by Dr. Faber. In this interview he specifically mention Nouriel Roubini:
Where were all these guys like Nouriel Roubini and the super bears that you find now. They had started talking about this in late 2007. There were very few people that were really negative in 2007, not to mention 2006. People who were relatively optimistic at that time and they are now very bearish.
And call me crazy, but I think this one was a shot at Peter Schiff and his decoupling theories (mentioned by Faber earlier in the interview):
And then you had some super bears, that were bearish on the US but bullish on the emerging markets, which was exactly the wrong thing to do. If you wanted to be bearish you should have been bearish on the emerging markets, because they are more cyclical than the US.
The following is, to me, the ultimate contrarian call for the global markets as they stand today:
In general, I would say that the mood is very very negative and I am not suggesting that we may have seen the ultimate market low. But it would be unusual, I am not saying it could’t happen, but it is unusualÂ to see a huge market drop when people are so negative.
Don’t short sell the markets yet. We may see a big rally in the near-term and money can be made on the way up and back down.
We’ve been in paradise for the last 25 years. The financial sector will contract much more than we have seen so far. Much more. The financial sector will have to be diminished in terms of size…There will be a substantial capacity reduction in our industry. I’m sorry to say Bloomberg will also suffer under this. People will need less Bloomberg terminals. They will need less Gloom, Boom and Doom reports.
In the event that a rally does occur, I suspect financials will move up as well. Finding a good time to short sell at the top of the rally will be a fantastic short-term move.
The capitalistic system is based on the market economy continuously making adjustments to economic activity. I’m totally against governments’ interventionin this adjustment process because it makes things much worse.
Actually, the market is not totally stupid. The way it reacted towards the various Obama initiatives is a disaster.
We’ll see if some positive news hits the media, trading floors and individual investors in the near future. This will be the fuel for a market rally. But be warned – this will be a temporary market rally, so be prudent with your investments and lock in profits when the signs for a reversal are there.
Listen to this interview, conducted by Bloomberg, with Marc Faber on February 27, 2009:
Part 1 of 3:
Part 2 of 3:
Part 3 of 3: