Faber on the Markets: Situation More Dire Than Realized

by: Robert Sinn

Tuesday I had the pleasure of meeting Marc Faber for the first time and I thoroughly enjoyed his detailed, logical, and smooth flowing presentation. Faber is good on television, but he is much better live as he is more animated and open with regard to his disdain for Bernanke, Greenspan, Krugman et al. He even ended the Q&A portion by saying ‘I hope you have a better idea of what to do with YOUR wealth, but what you do with your client’s wealth is another story’. Below I have listed the main concepts that Faber’s presentation impressed upon my thinking:

Key takeaways from Marc Faber Luncheon - January 11, 2011

  • The Eurozone is worse off than even the US at this point because they lack a single fiscal authority. Difficult to implement a federal/super-sovereign approach in the Eurozone due to challenge of implementing a single taxing authority with supervisory and enforcement powers.
  • When asked about the possibility of dividing the Eurozone into a north and south euro he dismissed this idea as being very unlikely.
  • The most likely path forward for the Eurozone will be for the ECB to continue to monetize the sovereign debt of the weaker Member States. He also stressed the point that the ultimate solution will be highly political and unpredictable and that there will be plenty of ‘noise’ on the way to the final outcome.
  • Faber is concerned about a slowdown in China and India over the next 3-6 months. China currently has negative real interest rates and may need to raise rates over 100 basis points in order to bring the real interest rate back near zero. He also mentioned that he had recently reduced his investment exposure to China and India.
  • Faber seemed most bullish on the price of oil and pointed out that Chinese consumers consume only 2 barrels of oil per capita/year while US consumers consume over 20 barrels of oil per capita/year.
  • Faber pointed out how under-leveraged Asian consumers are compared to Western European/ US consumers. He cited that only 10% of Vietnamese have a bank account which demonstrates how much room there is for leveraging in Asia.
  • He was VERY bearish on US government debt long term and even pointed to a chart of US 10-year note yields over the past 60 years. He then waved the laser pointer to indicate that yields will eventually go past the early 1980s' highs.
  • He illustrated the performance of Mexican government bonds and the peso currency from the late 1970s to 1988. The peso lost 98% of its value vs. the US dollar and Mexican bonds performed horribly while Mexican equities priced in US dollars ended the 10-year period slightly positive.
  • Finally, Faber pointed out that there is potential for geopolitical tensions between China and India as they compete for natural resources (oil, water). He pointed out that China and India share the Brahmaputra River. There has been continued speculation that China plans to build a dam on the river in order to divert water to the North of the country (Doug Kass also mentioned the possibility of a military conflict between China and India over this river in his year end predictions for 2011). In addition, Faber explained that China isn’t happy about the US recommendation that India join the UN Security Council.

Oddly enough, I agree with almost everything Dr. Faber discussed; however, I doubt that gold will undergo a 20% correction this year (I would say 10-15% is the maximum unless there were to be a complete paradigm shift in monetary policy from the ECB/Fed). The crowd was most amused by Dr. Faber’s disdainful comments about Messieurs Bernanke, Greenspan, and Krugman. While I agree with the latter two, I believe Chairman Bernanke is doing the only thing he can do with the terrible hand he has been dealt. I also believe the possibility of a military confrontation between China and India is extremely remote due to the potential magnitude of the consequences.

Dr. Faber managed to cause me to be even more concerned about the state of the US fiscal situation than I already was. I didn’t think that was possible, but when he explained the US would be using 30% of total tax revenues just to pay interest on the national debt within a few years, I realized the situation was more serious than even I had realized.