By Sumit Roy
Swiss-born and Swiss-educated, Marc Faber's distinct voice is a common sound on CNBC and Bloomberg TV when it comes to big-picture forecasting in investments. Publisher of the "Gloom, Boom & Doom Report," Faber's views on the markets are highly regarded. HAI Managing Editor Sumit Roy caught up with Faber at his Hong Kong residence and spoke to him about debt, gold, and stocks.
Hard Assets Investor: What are your views on the stock market?
Marc Faber: Following the huge increase in stock prices we had since March 2009, when the S&P was at 666, a 20% correction would not surprise me at all. I don't look at the 20% correction as a huge decline in stock prices. In Asia, we've had corrections in the order of 20% in many markets. We had a huge decline in bond prices in the U.S.
In July 2012, yields on the 10-year bond were at 1.43%; we're now close to 2.9%. Yields have doubled. The longs have been hit quite hard. I don't regard a 20% correction in stocks as a huge bear market.
HAI: So no more than 20%?
Faber: We have to assess stocks when we are there. We don't know to what extent the Fed will continue bond purchases, increase bond purchases or even buy stocks. We're dealing with markets today that are basically manipulated by the Federal Reserve and other central banks. That's why any forecast is very tentative.
HAI: It's been awfully quiet in Washington after a series of battles over the debt ceiling and the fiscal cliff in 2011 and 2012. Do you see any political risk lurking either in the U.S. or elsewhere?
Faber: It's a fair assumption that the U.S. government debt will continue to increase. And it's also a fair assumption that the U.S. and other central banks around the world will continue with the monetization of the debt. To what extent there will be a battle in Congress between the Republicans and the Democrats over the debt ceiling and about spending cuts is anybody's guess.
But the facts are that the U.S. government debt took 200 years to reach $1 trillion in 1980; we were at $5 trillion in 2000, and we're now around $17 trillion. You can clearly see where the trend is. And the deficit will actually start to increase shortly a) because of the increase in interest rates, and b) because more and more people are retiring, so the entitlement programs will increase. I do not see the debt in the U.S. diminishing. The question is: Will it increase by $1 trillion annually or $2 trillion? Who knows?
HAI: In light of all these issues, what's your view on gold? Is the current rebound in prices sustainable?
Faber: We have had a meaningful correction. From $1,921 in September 2011 to less than $1,200 at the bottom is a fairly large correction. But in longer-term bull markets, these kinds of corrections do occur. We had a 40%-50% correction in 1987 in equity markets. But the bull market lasted until the year 2000. Looking at the fundamentals, looking at how debt will continue to increase and how central banks will continue their monetization not only in the U.S. but on a worldwide scale, I assume the price of gold will trend higher. Most likely we've seen the lows below $1,200.
HAI: Will gold revisit its highs?
Faber: Eventually we will be over $1,921. The question is: Will it be this year or in five years? That I don't know. But as I have argued repeatedly, I think that part of your assets should be held in physical gold. I emphasize physical gold.
HAI: You don't like the ETFs -- the GLDs of the world?
Faber: I don't. There are a lot of question marks about the paper market. I would imagine that more and more money will flow into the physical metal.
HAI: Finally, what's going on with China? Has the government been successful in the ongoing transition to slower growth?
Faber: In my view, the economy in China is much weaker than it is generally perceived and the problems are larger than generally perceived. The stock market in China has been very weak since 2006 and has underperformed just about any other market over that period of time. In general, I would be very careful to invest now in emerging economies, especially under the condition that we have had declining trade and current account surpluses in most emerging economies.
In the last 20 years we've grown in China by approximately 8%-12% per year. Going forward, China will be lucky to grow at something like 5% to 7% per annum. There may be years when it only grows at 3% to 4%, or not at all.