Faber doesn’t see a huge downside risk in crude and is not sure if it will go up to USD 100 per barrel. “Crude consumption of India and China will rise but the supply will remain weak which will take crude higher.”
On S&P 500, he says, it is unlikely to break below low of 666. It may however go up to 1200 next year after revisiting 900 levels, he adds.
He expects to see weakness in corporate profits in 2010 and believes that it is unlikely for the developed markets to outperform emerging markets.
Faber believes that equities can gain 10-15% from the present levels. He also feels that the Sensex is fully priced but can gain 10-20%.
Turn to Page 2 for Marc Faber's full interview... _PAGEBREAK_
Here is a verbatim transcript of the exclusive interview with Marc Faber on CNBC-TV18. Also see the accompanying video.
Q: It has been marked by volatility, the last three weeks of November, what have you read into the kind of flip-flops that we have seen in emerging markets and US markets?
A: Basically, we have the private sector contracting around the world and then we have these huge stimulus packages that boost economic activity and we have quantitative easing, in other words money printing around the world in concert by all central banks, whereby the Reserve Bank of India (RBI) has been doing a relatively good job at that.
So I think that whereas the economy collapsed between September 2008 and March 2009, we have stabilized but basically considering the size of the stimulus packages and the monetary printing, the economy hasn't responded well. What have responded well are asset markets. The Federal Reserve in the US is basically keen to lift asset markets again – to push them up. Unfortunately, it backfired on them, to the extent that actually oil prices have risen very sharply and other commodity prices also.
So the benefit of quantitative easing has essentially flowed into Wall Street, into investment banks, into the banking sector but it hasn't flowed into the typical household in the US. Unemployment is still horrible at the present time with a lot of people being either unemployed or employed in jobs that they don't really want – in other words under employed.
So we have a very strange economy. We have booming financial markets. The stock market in India is up more than 100% from the lows in March and in the US we are up 60%. But at the same time the average household – the man on the street is basically suffering.
Q: All our trades nowadays are linked to the dollar – whether the dollar is bouncing back or slipping once again. Do you think there is a big dollar carry trade, which is going on and do you see risk of it unwinding – presenting any threats to emerging markets as such?
A: I am not so sure there's a huge dollar carry trade. What happens is that worldwide because interest rates are at zero percent – institutions as well as individuals borrow money and they go and speculate. The dollar carry trade is frequently misunderstood in the sense that there are big short positions in the dollars. But one shouldn't over estimate the short positions in dollars because the world is basically awash in the dollars.
There are too many dollars floating around from the American current account deficit that reached USD 800 billion annually and total international reserves in the hands of central banks now are USD 7.7 trillion. That is the dollar overhang and to some extent some people want to hedge their dollar exposure and then they sell dollars and buy foreign currencies and of course also precious metals including gold, silver, platinum, palladium.
Q: The point about the dollar is that people map weakness in the dollar to comfortable liquidity in emerging markets. They believe as long as that remains, the chances of all markets heading to new highs in the next few months is a possibility. Do you agree with that? Do you see new highs in 2010?
A: The Dow Jones just reached a new high. The S&P hasn't made a new high and it’s possible that they make a new high but the gravy is basically out. We had a 60% rally in the S&P from 666 to 1,101 and in India we're up a 100%. Can we go up another 10% or 15%? It’s possible but obviously the risk/reward is no longer that favourable.
But we have to consider the following: It's very difficult to value assets when you have zero interest rates and when you have a central bank like in the US that has acknowledged and assured investors that they will print money. What you may end up with is that the weaker the US economy is, the more the share market goes up, the more the dollar goes down because of another stimulus package, and further money printing.
Continued on next page... _PAGEBREAK_
Q: What then is the central risk according to you for equity markets across the world at this point?
A: There are many risks. There are geopolitical risks. There is a risk that at some stage in 2010, the government bond markets weaken considerably because I don't understand anyone who would now buy a 10-year US treasury at a yield of less than 3.5%. It's a losing proposition. I also don't understand why anyone could buy a 30-year US Treasury, at a yield of 4.4%.
So I think that eventually yields will go up and this could disturb the stock market. In addition to that we have very high valuations because corporate profits have held up better than expected, in the sense that corporations have cut expenditures very substantially in notably the workforce. You have to see in an economic system if you keep on laying-off your workers, who's going to back your product at the end?
So maybe in 2010 we see again more weakness in corporate profits and that the expectations are disappointed and that we go down again.
Q: In a tactical sense, how would you approach the equity markets given what you just outlined?
A: I think that I was lucky in the sense that I was interviewed in Canada on March 6 by a major media station. I said at that time that the markets would go up because sentiment was extremely negative. I’ve been basically optimistic until recently when I said that we might have a correction and we had minor corrections. Since July, the markets haven't gone up dramatically.
But there's a risk for individuals to hold cash because at zero interest rate – for sure cash is going to depreciate over time in its purchasing power. So there's risk in cash, there’s risk in bonds – so what else is there?
There are industrial commodities, precious metals and equities. I think that an investor should diversify and be long some precious metals and obviously some equities as well because in a money printing environment what can happen is that equities do go up but the currency depreciates in its purchasing power.
Q: Where does all this leave commodities, which you track very closely? What about crude, where do you see that heading in the next few months?
A: I don't think that crude oil has a huge downside risk. Now will it go up to a USD 100 right away? I'm not so sure about that. But in general it's very clear and the experts agree on this point that basically the world consumes more oil than the world is adding in terms of reserves every year. So the level of oil reserves in the world is basically going down and we could have at some stage a more acute shortage of crude.
It’s also clear to me that countries like India and China that have very low per capita consumption – their consumption will continue go up. We have had this year, shrinking consumption in G-7 countries, in the industrialized countries of the West and also in Japan but still growing consumption in emerging economies. I believe that emerging economies today, in terms of their size, are very significant.
We have now more car sales in emerging economies than the industrialized countries of the West and Japan. So overall, I think the outlook for demand is strong. The outlook for supply is weak and that this should result eventually in higher prices.
Continued on next page... _PAGEBREAK_
Q: What about gold then that has been the one, which has been hitting new 2009 highs? How do you see that panning out?
A: Basically we had a good move in gold whereby we had fluctuated for two-years between USD 800 per ounce and USD 1000 per ounce and now we've broken through the USD 1000 per ounce level with quite conviction and heavy volume. I believe that whereas in the past the USD 1000 per ounce level was kind of a resistance level, now it becomes a support level. I don't think that you'll see gold below a USD 1000 per ounce probably ever again.
So I’m actually quite positive. Maybe gold at this level is a better buy than it was at USD 300 per ounce in 2001.
Q: The S&P 500 and the Dow Jones, what are your targets for next year?
A: That I don't know. I mean I think it may go up a little it may go down. It will be volatile. I think we may still go up a bit more – maybe the S&P to 1,200-1,250 and then move in a trading range. But that's not the high confidence forecast.
I also think we might revisits around 900 at some point because at some stage in 2010 people will realize the economy is still weak – it is not really recovering and another stimulus will have to be implemented and that will start to disturb investors. Because don't forget each stimulus package adds to government debt. The government debt in the US is growing and as a result of that eventually the interest payments on the government debt will go up very substantially because one day the interest rates will be higher than they are today.
Of course they will be higher and they won't be at zero forever. The problem then will be that if you increase interest rates, the Fed Reserve, the interest payment on the US government debt will go up dramatically to maybe 30-50% tax revenues in the next 5-7 years and that will essentially bankrupt the US.
Then there will be only one way to get out of this problem and that is to completely monetize the government debt and then you get into inflationary spiral.