 An Interview with Dr.
Marc Faber
Bill Powers
Canadian Energy Viewpoint
January 3, 2005
After the success of the last January's interview with Andrew
Weissman, I wanted to find another expert who could provide us
with a unique perspective. This month, Dr. Marc Faber has generously
agreed to share his thoughts on a variety of energy issues, Asia
and the outlook for the US dollar. Marc Faber was born in Zurich,
Switzerland. He went to school in Geneva and Zurich and finished
high school with the Matura. He studied Economics at the University
of Zurich and, at the age of 24, obtained a PhD in Economics
magna cum laude.
Between 1970
and 1978, Dr. Faber worked for White Weld & Company Limited
in New York, Zurich and Hong Kong.
Since 1973,
he has lived in Hong Kong. From 1978 to February 1990, he was
the Managing Director of Drexel Burnham Lambert (HK) Ltd. In
June 1990, he set up his own business, MARC FABER LIMITED which
acts as an investment advisor, fund manager and broker/dealer.
Dr. Faber publishes
a widely read monthly investment newsletter "The Gloom Boom
& Doom Report" report which highlights unusual investment
opportunities, and is the author of several books including "TOMORROW'S
GOLD - Asia's Age of Discovery" which was first published
in 2002 and highlights future investment opportunities around
the world. "TOMORROW'S GOLD" was for several weeks
on Amazon's best seller list and is being translated into Japanese,
Chinese, Korean, Thai and German. Dr. Faber is also a regular
contributor to several leading financial publications around
the world.
A book on Dr.
Faber, "RIDING THE MILLENNIAL STORM", by Nury Vittachi,
was published in 1998.
A regular speaker
at various investment seminars, Dr. Faber is well known for his
"contrarian" investment approach.
This interview
was recorded on 12/9/2004
Powers: Dr. Faber, thank you
for sharing some of your time with me and my readers today.
Dr. Faber: My pleasure.
Powers:
Let's
start off with your views on the world oil market. After the
recent spike up to $55, oil has come back to the low $40's, what
do you see as the range for oil in the next 12 months?
Dr. Faber:
Well,
in general, I think we may first go down somewhat because we
have had significant inventory building this year, both in China
and the US. At the same time, I envision that the global economy
is in the process of slowing down. Next year, demand from China
will continue to rise but not at the rate it was rising in the
first nine months of this year. So, in general, I look for oil
prices and other industrial commodities to come off somewhat.
Having said that, every price depends to a large extent on how
much money the US Fed prints. If they embark on a massive money
printing exercise, then obviously, it becomes difficult to give
any price targets. In an extreme case of money printing, the
Dow Jones can rise very quickly to 20,000, gold to $2,000, oil
to $100 to $200 and so forth and so on. We have to make certain
assumptions about the sanity of the Fed, which is very difficult
to make.
Powers:
In
your book, "Tomorrow's Gold," you suggest that growing
oil demand in the developing world will lead to significant upward
pressure on prices. Please explain.
Dr. Faber:
Well
basically, the daily supplies of oil are around 80 million barrels.
The US consumes around 22 million barrels with 295 million people.
Asia consumes around 20 million barrels with 3.6 billion people.
The per capita consumption per annum in China is 1.7 barrels,
in Japan and South Korea around 17 barrels, in the US 28 barrels,
in Mexico 7 barrels, in India 0.7 barrels. So I think that based
on the industrialization of not only China, but India and other
Asian countries such as Vietnam, the demand in Asia will double.
The question is, will it double in six or in say 15 years? Let's
take a ballpark figure and assume that oil demand outside Japan
grows 6% per annum in Asia. Then, I think we will go to 40 million
barrels of oil consumption daily on daily production of 80 million
barrels in say, 10 years' time. I don't think that the oil supplies
can be increased that much more. So this incremental demand from
Asia is likely to mean higher oil prices. This is without even
considering some problems in the Middle East for a war or anything
of that sort.
Powers:
Let's
focus on China for a minute. While much has been written about
China's soaring oil imports, not much has been written on China's
increased use of natural gas and imported liquefied natural gas.
Do you believe natural gas has a bright future in China?
Dr. Faber:
Well
I think natural gas has a relatively bright future everywhere
but there are other issues concerning natural gas. It is expensive
to transport and there are some danger factors, so for the time
being I do not think natural gas will totally replace oil.
Powers:
There
have been reports that China has reduced its exports of coal
to other Asian countries due to increased demand at home. This
has caused a spike in coal prices from Australia to Canada. Do
you believe China can continue to grow at such a rapid rate and
continue to be such a huge force in the world coal market?
Dr. Faber:
I think
there is plenty of coal in the world and I suppose China needs
more coal because of power shortages. But as new coal mines are
developed, prices will ease somewhat. The same would go for steel
prices and tanker rates and so forth. I take the view that this
year we experienced a tremendous bull market in industrial commodities
and I think this bull market needs a rest. I don't think that
commodity prices will decline and make new lows below their 1999-2000
lows, this I very much doubt. They are likely in some cases to
outperform the Dow Jones. But I equally feel that speculation
that drove prices higher may abate and next year new supplies
could come onstream.
Powers:
While
nuclear power has fallen out of favor in North America, China
remains fully committed to developing its nuclear energy program.
Do you believe the West will be forced to follow China's lead
and re-evaluate nuclear energy given your outlook for other forms
of energy?
Dr Faber:
Well
I think nuclear power will again become a more important source
of energy. In France, 80% of electricity is supplied by nuclear
power. In Asia, in particular, we will see the construction of
nuclear power plants and I am actually quite positive about the
uranium price.
Powers:
That
leads nicely into my next question. Do you believe we are in
a long-term bull market in uranium given the imbalances that
exist between consumption and production?
Dr. Faber:
I am
not an expert on uranium but I have friends who are experts and
they are very positive about uranium. Uranium prices will to
some extent track oil prices. If I take a negative view on oil
prices for say the next 3 to 6 months, I think that uranium prices
will track oil prices and will not likely rise. In the long run,
I think there is a very strong case for uranium prices to go
up, especially if there is a war.
Powers:
Speaking
of wars, how do you think the war in Iraq will impact oil prices
over the next year? Do you think a positive resolution will depress
prices or is continued turmoil more likely?
Dr. Faber:
I think
you are a real optimist to even consider a positive outcome for
Iraq. I think the outcome can only be negative. Supply will not
rise very much for the foreseeable future. In addition to that,
we have reliable information the Iranians are pushing ahead with
their nuclear weapons program. They have also tested ballistic
missiles that can carry nuclear warheads. I think it is quite
likely that some time in the next 6 to 12 months either the Americans
or the Israelis will bomb nuclear facilities in Iran. If that
happened, I think the mess would really escalate in the Middle
East. In retaliation, the Iranians would aggressively support
the militants in Iraq and they would also launch strikes in Saudi
Arabia, which they view as an ally of the US. So let's just say
the bombing of nuclear facilities in Iran could trigger an escalation
in conflict.
Powers:
That
would lead to quite a spike in oil prices I presume?
Dr. Faber:
Possibly.
Powers:
Turning
to Canada for a minute. The Chinese government is clearly taking
an interest in Canadian natural resource companies. Canadian-
base metals producer Noranda is in talks to be bought out by
a Chinese firm and there are rumors Husky Energy is also in talks
with a Chinese firm. Do you see this trend continuing?
Dr.Faber:
The
Chinese are not only interested in Canadian resource companies.
Worldwide, they are in the process of either acquiring resources,
concessions or companies that control these resources and concessions.
For the Chinese government, the procurement of reliable sources
of energy is a top priority. Also the procurement of iron ore
and other resources is a top, top priority.
Powers:
Do
you see the Chinese government re-valuing their currency upward
to keep a lid on commodity prices?
Dr. Faber:
I doubt
they will do that for the time being. Now it is possible that
in the first six months of next year, they move to an exchange
rate that is tied to a basket of currencies. But the problem
for the Chinese is a re-valuation of 10% to 20% will not do any
good at all in rectifying some of the imbalances that exist in
terms of price levels. I do not think at the present time there
will be a move, but who knows. A move by the Chinese on their
currency will depend on the performance of the US dollar. I happen
to think US dollar is oversold and that it could rebound somewhat
in the next couple of months. Whether this rebound will lead
to a new bull market in the dollar will have to be assessed if
the dollar has this kind of bounce rally. But if the dollar bounces
and strengthens, that would be due to tighter monetary conditions
in the US which would lead to exports to the US probably not
rising much. In that case, the Chinese would probably not re-value.
But if the dollar continued to tumble, the Chinese would probably
make a move.
Powers: Do you view energy
investments as a good hedge against a falling US dollar?
Dr. Faber:
Yes,
in regards to the fall of the US dollar, I would view energy
investments as appropriate as well as metals, mining companies
and other commodities.
Powers:
Much
has been made about the recent high in oil prices; however oil
in euro terms has not risen nearly as much. Do you think oil
exporters such as Russia and OPEC will begin pricing oil in euros
to protect themselves against a falling US dollar?
Dr. Faber:
It
doesn't matter how they price it. They could price it in US dollars
and then convert the dollars they receive to euros. The price
ultimately depends on demand and supply.
Powers:
In
your book you discussed several investment themes that produced
spectacular profits for long term investors. Do you think the
energy sector will be one of these sectors?
Dr. Faber:
This
is very difficult. In the back of my mind I think deflation and
poor economic conditions are still a possibility. I am not so
sure we will have the huge bull market in commodities like we
had in the 1970's when the price of a barrel of oil rose from
$1.50 a barrel to $50 on the spot market in 1980 or when gold
rose from $35 an ounce to $850 an ounce. A lot depends on the
purchasing power of the US dollar. If Mr. Greenspan and Mr. Bernanke
drop dollar bills from helicopters, anything is possible. If
we assume moderate money supply growth in the US or if we assume
the US economy is slowing down and may experience a recession
and if we consider that China can have a hiccup or a hard landing,
oil and commodities may come off. As I mentioned earlier, oil
and industrial metals may come off for some time. If industrials
come off for three to six months, I will look at the situation
again and decide if we have bottomed out and are ready to launch
the next leg in industrial commodities or are deflationary forces
so powerful that nothing is working except government bonds.
Powers:
Please
share your views on the Canadian dollar. Do you think it will
continue to do well against the American dollar?
Dr. Faber:
The
Canadian dollar has done well against the American dollar. I
think that just now, the (US) dollar may be in kind of a bottoming
out process. As these raw materials come down somewhat, these
currencies that benefited from strong commodity prices such as
the Australian dollar, the South African rand and the Canadian
dollar may come under some pressure. But in general, I think
that the Canadian dollar based on the fundamentals of the country
and especially on its foreign policy, which is much more desirable
than the foreign policy of the US, I think that in general, Canadian
dollar assets are quite attractive. Canada is not the bargain
that it was two years ago. Asset prices in Canada have narrowed
compared to the US but they are still cheaper and it's a nicer
country. So people should have to pay to have the privilege to
live in a country that is not run by a bunch of lunatics.
Powers: I am assuming you
believe we will see parity before too long?
Dr. Faber: It is possible. As
I said, right now if industrial commodity prices come down..as
I have to repeat. You tell me what monetary policy is going to
be in the US, and I will tell you what the fate of the dollar
is going to be. If the Fed prints money, the dollar is going
to collapse against everything. In other words, its purchasing
power will diminish very rapidly.
Powers:
Do
you believe the recent increases in interest rates are making
any difference or is it too little too late?
Dr. Faber:
The
market has tightened a long time before Greenspan increased interest
rates. I mean he is a kind of lagging indicator. He should have
increased interest rates a long time ago. Now he is in a difficult
position because if the economy weakens, it would be difficult
for him, given the weak dollar to actually cut rates. I think
he will be forced to increase rates, but knowing him, he will
increase a quarter of a point, a quarter of a point and take
his time. We ought to have a Fed funds rate given GDP growth
of around 400 basis points and we are at 200 basis points. We
are still below the rate of inflation.
Powers:
So,
until we see the dollar at parity with inflation, the dollar
will be weak?
Dr. Faber:
Well,
as I said, the dollar can stage a rebound since it is oversold.
The market will not wait..the market will discount events. You
look at commodity markets, they bottom out when conditions are
horrible and peak out when conditions are very good. And the
dollar, as you know, will bottom when everything looks terrible.
And then it will rally and people will say the dollar rallied
for this or that reason. The reasons will only become apparent
at a later stage.
Powers:
Longer
term, what do you see as the major investment themes given your
outlook today?
Dr. Faber:
Well,
I still think that whether you believe that the world will have
a deflationary recession or an inflationary boom, whatever scenario
you look at, on a relative basis, Asian assets are more attractive
than US assets because we have at the present time in Asia relatively
favorable macroeconomic conditions. We have favorable demographics.
We have rapidly growing markets, expanding markets. The Asian
manufacturers are very competitive and tradable services are
becoming more and more a factor in some countries such as India.
At the same time, in Asia, we have equities that are more attractive
than in the US. So I think that if you close your eyes and say,
I do not know how the world will look in five years, then on
a relative basis, you are better off invested in Asia than in
the US, including Asian currencies. Whether assets around the
world are truly a bargain, I doubt it. Interest rates are so
low that a lot of assets are not terribly attractive in the sense
that you could buy assets and then think the downside risk is
100% and the upside potential is maybe 1,000%. I don't think
that exists around the world. Everything is quite expensive.
I think Asian real estate is reasonable but equities around the
world are not terribly cheap. Bonds are not very cheap either.
I mean we had a bond bull market for 20 years. How much longer
will it rally? I think agricultural commodities are quite attractive.
Corn and wheat are very depressed. They had a move and then fell
back. I would also include coffee.
Powers:
Any
final thoughts you would like to share with our readers?
Dr. Faber:
As
I said, it is very difficult to make any economic calculations
or financial calculation or estimates if you have a government
that manipulates the markets. Under a planning economy, we had
central planners planning the economy and steering the economy
and it ended in disaster. I suppose that today's equivalent of
the central planners of the communist regimes are the central
bankers like Mr. Greenspan in that they can steer the economy
with just one tool, monetary policy. I think the same way the
planning economies ended in disaster, central banking as we know
it today, will end in disaster. If there was a tribunal whose
laws or criteria were sound money, Mr. Greenspan would be hanged.
Powers:
That
is an excellent analogy. I greatly appreciate your time today.
Dr. Faber:
You
are most welcome.
Bill Powers
Editor, Canadian Energy Viewpoint
Email: bill@canadianenergyviewpoint.com
Website: www.canadianenergyviewpoint.com
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