March 21, 2007
Dr. Marc Faber

Ipek Cem recently met with Dr. Marc Faber, leading investment expert on emerging markets. Faber shared his cautionary mood with Cem about the prospects for global markets, as well as shedding light on some of the highest growth markets and investment opportunities.

Ipek Cem: Our guest today is Dr. Marc Faber who is a leading expert on the financial and economic trends. Welcome to the show...

 

Marc Faber: Thank you very much for inviting me.

 

Ipek Cem: You publish the highly popular Boom gloom and doom report and we know that you usually take contrarian views on the market. What are some of your views right now which are contrary to what the market is thinking?

 

Marc Faber: Well basically we have been in a very strong increase in assets prices, real estate prices have gone up, commodity prices have gone up all since 2002. And the view is that this recent decline in market is a correction and after markets can continue to go up. I happen to think that this may be something more serious and that for a while asset prices could decline.

 

Ipek Cem: Recently I was reading TIME magazine and you had an article there called "the pain isn't over yet" meaning that you see the beginnings of a bear market. So this is something that you feel is going to slowly unfold or have sharp turns. Do you have any indication of that?

 

Marc Faber: Well, on Feb27th it didn't unfold slowly. A big big decline in one day. Whereby we have to see it in the context of the increase in the stock markets over the last couple of years. Since 2003, India to its peak rose almost 5 times. Turkey from its low end in 2001 and 2002 rose 6 times so even if these markets drop 10-20 percent in the context of the long-term, it wouldn't be such an unusual occurrence. But I happen to think that we have had an economic expansion in the world that is artificial in the sense that the US printed money, it led to consumption it led to the trade deficit. And the current account deficit led to a lot of global liquidity and that liquidity is slashing around. Every asset price has been inflated in the world. It's not like on previous occasions where you say that an asset bubble in stocks or one in properties or one in oil. This time around, there is an asset bubble in everything in the world. That is very dangerous in my opinion.

 

Ipek Cem: At this same time, we have enormous economies now really putting their power into motion, such as China and India. You're saying also that there's something very interesting coming up in the market which is synchronized growth. Some people are arguing this is why this goldilocks idea may go on...

 

Marc Faber: Yes. Forecasting is very difficult business, but in general I would say bull markets and great investment opportunities arise, will happen when everything looks terrible. When the business is bad and when people have lost a ton of money in stocks and in bonds and on currencies, when the mood is very negative, then you get bull markets. And when the mood is very optimistic and there is no cloud in the sky and when on the first correction, everybody says "this is a buying opportunity" that is the dangerous stage and also you have to look at the valuation. Stocks are no longer particularly cheap, commodities are not particularly cheap, and real estate depends where. Maybe in the countryside in Turkey it is cheap. But it is not cheap in London, and New York and Boston. So I think, we are, unlike in the '70's when we had high consumer price inflation, now we have high asset price inflation. Real Estate, stocks, commodities.

 

Ipek Cem: Um, when you talk about Turkey, you are still bullish on the real estate market in Turkey. Is that so?

 

Marc Faber: Yes yes, I think first of all because of the breakdown of the communist socialist ideology and also because of the increase in oil prices since 1998, the oil price has gone from $12 a barrel to last year to $78 and now its 57, That of course has had a huge impact on the economies of the former soviet union including central Asia and eastern Europe and so the opening of these countries shifts the economic centre of gravity from the west more towards the east. And I mean Mr. Bush may think that he is the most powerful man in the world, but the fact is that right now Mr. Putin is the most powerful man in the world because he controls 10 million barrels of oil production. He has also other resources, so he has tremendous leverage in the global economy. And therefore I think that Istanbul being geographically well positioned and by the way Istanbul has now an airport whose quality is much better than any American airport. I mean it's actually interesting to compare. Turkey is joining the modern world and America is joining the 3rd world.

 

Ipek Cem: Why the 3rd world in America?

 

Marc Faber: Well because they never built infrastructure and you have of course in America highly qualified people like the people that go to Yale and Harvard that are universities, but that is an elite, a very small portion of the population. The large segment of the population is, I wouldn't say totally but largely uneducated.

 

Ipek Cem: You're an economist and you I'm sure study also talent. Talent going from country to country and you just mentioned the U.S. With the Sept 11 attacks and in the aftermath we see a much more closed U.S. society towards foreigners. At least this is how we feel. Do you think it will have an impact on the amount of innovation or on foreign brains flocking to the U.S.?

 

Marc Faber: Well I think that is certainly or has to some extent already happened. Secondly you have to see one thing. The people that were under communist regimes. The communist and socialist regimes were a catastrophe in every respect except in one, education. So we don't have illiterate people in China and Vietnam and in the former Soviet Union.

They all know how to read and write and some are actually brilliant and the people now coming out of universities the young people they know in China and India unless they work 10 hours a day 7 days a week 52 weeks a year, they have no chance in life. Because the competition is so huge. The 500,000 science students absolvent in China every year. So they have to be very good in order to get a good job and you will see that over time, all the research in the world will be carried out in Asia and India and in China.

 

Ipek Cem: You were mentioning that a lot of product components of highly sophisticated products, such as airplanes, are already being manufactured outside of the US. And this is a trend that is increasing. Is this parallel with what you just said or something more than that?

 

Marc Faber: Yes yes of course the first time I saw Japanese cars was in the 50's in Switzerland. People laughed about these cars because they said they cannot be competitive because of transportation costs. The Japanese will be able to make motorcycles, but cars they will never be able to compete.

Today they make essentially the best cars and Japan Taiwan and South Korea in the 70's, they were certainly Korea and Taiwan, poor countries and produced cheap textiles and garments and toys. They all went upscale. Now all the computers essentially come out of Taiwan and of china. And so China went it entered into the global economy, they produced cheap goods, Nike shoes and apparels and garments, textiles and now they are moving up the value-added chain and produce very high quality products.

 

Ipek Cem: Right now the world economy is much more linked to each other than many years before. Like a recession in the US will impact Chinese exports and the many things will trigger each other. so does that mean that if we have a bear market we will continue to see more global trends as opposed to just a good market there, bad market elsewhere? Also across asset categories?

 

Marc Faber: Well I think there are 2 different issues to consider here. First of all, as a percent of the global economy the American economy, its importance has diminished. So in theory you could have a recession in the US and you would still have expansion in Asia maybe not growths of 10% per annum like we had in china in the past 5 years. The first 2 months of this year industrial production in china was up 18.5%. So it may slow down. But we are starting from such a low level in china and India that I believe that we could have even in a global downturn, some economic growth. The financial markets and the asset markets, that's a different story, because we have globalized financial markets, where the global players these are the proprietary traders,the investment banks in New York like Goldman Sacks, Morgen Stanley and Meryll Lynch. You have the hedge funds and you have a lot of people that behave like hedge funds like the treasury department of Exxon-Mobil or of a multi-national. They will trade the markets day and night. and so when one market, or when something happens somewhere, we can have repercussions and spreads throughout the world and the global liquidity expands and then everything goes up and some things go up more than others. When the global liquidity contracts, then everything goes down, some things go down more than others.

 

Ipek Cem: Energy is a very important component of industry and growth and in the past G7 countries were the largest users of oil and now that trend is shifting with huge emerging markets utilizing a lot of the new resources. And the commodities scarcity is a problem. How do you see the commodities market going forward by category?

 

Marc Faber: Well basically china has become for most commodities the largest user. They take up 27% of iron ore production in the world, 22% of copper production in the world. Up from 6% in 1990 so industrialization and also urbanization in China there are 20 million people moving every year from the countryside to the cities. This requires resources and so they have lifted commodity prices and now India comes with a billion people. So in general I think that the demand will of course stay up and will continue to grow. Maybe not every year by the same quantity. But in general the demand will be there.

 

Ipek Cem: We were talking about your expectations on commodities getting scarcer and also the prices getting higher and higher. What is your outlook on some of the commodities, and specifically oil, in the world today?

 

Marc Faber: Well basically the world produces at the present time 84million barrels of oil and there is a lot of debate of oil production being increased substantially or not but the fact is some of the very large oil fields have actually lower or declining production and Gava which is the largest oil field in the world in Saudi Arabia and produced 500 million barrels in was discovered in '49 and started production in '51 so it will also one day have declining production. In the meantime the US in the 70's when the first oil shock happened in '73 were still 60% self sufficient in oil. Now they are only 35% self sufficient. So, essentially 65% of oil requirements in America are imported and in the case of china they were self sufficient until '94 and now they are the second largest oil consumer after the United States. America needs oil for consumption and china and India need oil for economic growth. That leads to tensions. Because there is a limited amount of oil around and then there is another point: When commodity prices went down we had the collapse of the Soviet Union after the oil price decline in '85-'86 and we had the Russian crisis in '98 after the oil price decline in '96 to '98. With rising oil prices, the balance of power has shifted to all kinds of people including Mr. Putin and Mr Ahmedinajad and Mr. Hugo Chavez and Mr. Moralez and these people now have a lot of power because the control a lot of resources.

 

Ipek Cem: Our geography in Turkey is also very much in the middle of some of the oil pipelines. the newly completed Baku Tbilisi Ceyhan and then there's the project to bring Azerbaijan natural gas from the Caspian sea and through Turkey to Sell it to Greece Italy and Europe, this would be clearly a rival to Gazprom selling natural gas and it would be cheaper. And the Americans are very much giving support to this project.
When you look at Turkey as being kind of a crossroads of energy, more of a degree than it has ever been, how do you see that impacting our economy?

 

Marc Faber: Well I think in general it increases the importance of Turkey to be essentially kind of a transmitter or enabler of transportation to the western world. At the same time it puts Turkey in an odd situation because who will they support one day? Essentially in central Asia and in the Middle East you have 3 super-powers. You have the Americans that are in Iraq, and maybe they will attack Iran who knows. But you also have Chinese influence. The Chinese they have a 2000 miles long border with central Asia, with Kazakhstan, Kyrgyzstan, Tajikistan and even a small border with Afghanistan and of course Pakistan. And for them central Asia is very important for the resource. They have a pipeline to Kazakhstan already and they want to essentially have the access to the Middle East through central Asia. For the Russians this, central Asia is very important as you know we have this Shanghai corporation that includes Russia, china Kazakhstan, Kyrgyzstan, Uzbekistan. And this is developing into quite a powerful organization to counter balance the American influence in the region.

 

Ipek Cem: It's interesting you mention this because you were also mentioning how empires shift through time, when you look at economic power it is usually coupled with political power and military power. And right now the U.S. has been the superpower in the world for some time after fall of the soviet union especially. So how quickly do you see china and perhaps other Asian countries taking more of a politically powerful role?

 

Marc Faber: Well I think that its changed in the past 4-5 years dramatically. The Chinese president Hu Tzing Tao he has already taken several trips to Latin America. Several trips to Africa and unlike the Europeans and the Americans that essentially only want to buy oil from Africa, the Chinese can build the whole infrastructure. It is cheaper for the Chinese to ship 5 million Chinese to Africa to build infrastructure than to keep them at home and so they can build the infrastructure and they are also interested in agricultural products that is the sticking point of the relationship between the 3rd world and the industrialized countries. The subsidies of agriculture you have subsidies in America for cotton for sugar for everything. And the Chinese they just want to buy agricultural products form Latin America from Argentina from Brazil and so forth and from Africa. So the shift of power has already been very pronounced in the last couple of years and Mr. Putin of course controlling 10 million barrels of oil production, and platinum and other resources has become a very powerful man.

 

Ipek Cem: Where does that leave the European Union?

 

Marc Faber: Well I think that the European Union whether they like it or not they will have to be on friendly terms with Russia. I think that's the better way for them to go forward. I don't think that Russia today is like Russia under the communist and I don't think the communists ever wanted to invade Europe in the first place. I think that this is the fact and I believe that it is important that we have in the world, countries that have a different view from the United states and that have a counter balance to the power to the United States because the American foreign policy by and large especially under this administration has been a total disaster.

 

Ipek Cem: So since you are talking about a disaster, what are your views on Iraq and how that impacts the region and economic growth in the region?

 

Marc Faber: Well I mean, the economic growth in central Asia and the Middle East is largely driven by oil prices and we had an increase in oil price from $12 in '98 to recently $78 now it is $57. That has lifted the economies of the Middle East from which Turkey has also benefited because the exports to the Middle East are rising very rapidly. And the demand for oil from the Middle East will of course go up over time for China because the US can source oil from Nigeria and Venezuela and other countries. But in the case of Japan, china and also South Korea, most of the oil shipments come from the Middle East. So that has boosted the growth rate. There is more trade between Middle East and Asia, There is more investment flows. But obviously the growth will depend on the oil price. If someone makes the argument that oil prices will collapse then I can mean you can write-off Saudi Arabia.

 

Ipek Cem: And the situation in Iraq. Can it have spill over effects in your opinion? Because if its not being contained, to a satisfactory degree.

 

Marc Faber: I think its a huge problem because you had under Saddam Hussein a Sunni government. The Americans get rid of Saddam Hussein but they don't like the Shiites either because the Shiites are closely related to the Iranians.

So basically they have to support again the Sunnis. Believe me in this whole game, the next war is not the Chinese division of tanks facing a division of tanks from the United States. But as you can imagine, the Chinese and the Russians have no interest whatsoever that the Americans succeed in central Asia and in the Middle East. It is totally counter to their interests. So I believe when commodity prices go up, countries become worried about the supplies of commodities and the tensions internationally increase and eventually come to war and obviously in war times the price of oil will go up a lot... that I can tell you.

 

Ipek Cem: How about alternative energy. Do you feel it is moving at a reasonable pace to really become an alternative?

 

Marc Faber: Yes. I'm convinced that your children and my children will one day use much less oil than we do at the present time. There's a question of price. Alternative energy is quite expensive and of course there is new technologies and cars that use less energy. But look, you go to china, in the US the per capita consumption of oil annually is 27 barrels, in Japan 17, in china only 1.8 and in India 0.8. So these countries regardless of alternative energy or whatever it is, their demand will go up.

 

Ipek Cem: You know when you look at globalization when you talk about economic development; some people also look at political reforms. Sometimes societies stay behind in these terms and when you look at a country like china a country like India. How is society keeping up with this pace of change?

 

Marc Faber: You see I'm always asked the question. "What about social unrest in China?" I can assure you that no Chinese 20 years ago ever dream his life would improve as much as it has. and not just in the cities where people have become quite affluent, but even in the countryside people are much better off than under Mao Tze Tung and at the beginning of the breakdown of communism. So the expectations of people have actually been exceeded and most of the people want stability they don't want trouble and people say "well they don't have democracy" well we have some kind of democracy in China in the sense that the mayors of the cities and also the communist party they have elections. It is a one party system but they essentially elect who is in the central committee and who gets the top job. And I feel if you look at Japan, Singapore, Taiwan and South Korea, 1950 to late 1980's and even Singapore today they don't have true democracies and yet they have done a fantastic job of lifting the standards of living. The people they had in some countries real GDP growth rates inflation adjusted to 8% for 35 years in a row. And in China per capita income, in real terms have doubled every 10 years for the last 25 years.

I mean people are much better off than they were, say, 20 years ago. I'm Swiss, I can tell you Switzerland the middle class and the working class today is not better off than 25 years ago. The rich people are because we had this bubble in asset prices in real estate and stocks that benefits the rich. It does not benefit the middle class.

 

Ipek Cem: So you believe that in China and India it trickles down to the lower classes?

 

Marc Faber: Of course we have large wells in equality like we have in Turkey and like we increasingly have in the United States. This has to be stated very clearly, but in general as companies are successful, they hire people and the people they hire are well educated they earn 2000 - 3000 US Dollars a month and then they go and spend money in restaurants and in shops and so forth and so that lifts essentially the lifestyles of practically everybody.

 

Ipek Cem: You were mentioning the impact of increasing wealth in Asian countries and how that relates to tourism revenues in part of countries like Europe or maybe even in Turkey. The population that is coming up, it is huge amounts that will be traveling, right?

 

Marc Faber: Yes. Well you see. In South Korea, and in Taiwan they couldn't travel until '85-'86. Now the departure rate the number of people leaving the country every year is about 20% of total population. In China they couldn't travel and they still have some restrictions today but it has been liberalized but outbound travelers from china have risen in say 10 years from 5 million to now 35 million. 80% of those traveling outside of china they go to a casino. They also come to Europe and Turkey and visit and what you will see it that in the long run by far the largest group of visitors in Turkey and Europe will be the Chinese. By far the biggest group.

 

Ipek Cem: This is something to keep in mind. Basically... (Maybe you should learn Chinese) Yes my husband keeps telling me that our kids should be learning Chinese. Yes definitely (at least a few words) He means real business Chinese. (Yes I agree)... Basically you are from Switzerland but in 1973 you moved to Hong Kong and have been based there ever since. What prompted this move?

 

Marc Faber: I started to work in 1970 after I finished my studies in New York and I didn't want to live in Switzerland because I know so many people in Switzerland and my family was there. I always dreamt to go somewhere where I know nobody. Build my own life with my own freedom and not to have to say thank you to anyone.

 

Ipek Cem: So it has worked for you... Now we can see that it is a boom but at that time did anyone question it?

 

Marc Faber: You see at that time we still had the Vietnam War. Mao was still alive. There were a lot of tensions in the systems in Asia. But I saw the opportunity because I had seen the growth of Japan and I figured out if Japan developed as much as it did the next ones will be Taiwan and South Korea. And then I looked at other countries in Asia and see when communism broke down I was immediately interested in china and in Shanghai and Vietnam in particular.

 

Ipek Cem: What would you say are your favorite countries in investment?

 

Marc Faber: Well right now I would be careful to buy equities anywhere. But let's say I would still focus on emerging economies where the growth potential is strong or higher say in than Western Europe and the United states. And if markets sold off, I would probably invest in China and in Vietnam and in some of the other Asian countries. Singapore is probably a relatively interesting situation in the sense that the price level is lower than in London but it is going to be a very important city in Asia because it is a sovereign state. Hong Kong is not a sovereign state.

 

Ipek Cem: On that note I want to thank you very much for your time.

 

Marc Faber: My pleasure. Thank you very much.

 

This transcript was typed from a transcription unit recording and not copied from an original script. Because of the possibility of mis-hearing and the difficulty, in some cases, of identifying individual speakers, NTV networks and Ipek Cem cannot vouch for its accuracy.