Mkt volatility to continue in 2009: Marc Faber

Here is a verbatim transcript of the exclusive interview with Marc Faber on CNBC-TV18. Also watch the accompanying video.

Q: What are your views on when would we actually finally have a recovery? How strong do you think it will be? For instance, you touched on bond yields and we are seeing this bubble in government bond markets, it still may have further to run. But I believe eventually when confidence does come back - be it possibly towards the end of next year, if we do have such a strong recovery, there would be a huge explosion in these bond markets with yields going much higher?

A: Yes, I agree. Also I would say whenever the recovery comes because commodity prices have fallen this much, there is now very little exploration carried out. So, the supply response to a structurally higher demand from emerging economies, notably China and India will not be very high.

When the global economy recovers, the demand will pick up, and the supplies won't pick up a lot, and so the mining companies will then do very well and commodity prices will again rebound very strongly.

Q: Do you have any concerns about the nature of the global recovery, if you buy into the theory that the current stimulus is building up an inflation risk further on down the line?

A: Let's put it this way. If you have fiscal stimulus - in other words you have large budget deficits of governments, and at the same time you have a very expansionary monetary policy with very low interest rates, let's say in the US on T-bills practically zero yield, then this is a medicine for inflation longer-term.

My concern is simply this. At some point when the recovery comes, it could be in two years, it could be in five years, it could be in ten years. But whenever it comes there will be some pressure on prices to go up. And the Federal Reserve having kept interest rates so low will then find it difficult to push up interest rates above the rate of inflation and above the rate of nominal GDP growth. So, they'll keep interest rates like they kept it between 2004 and 2007 at a relatively low level compared to economic growth and inflation. That should be then very inflationary.

Q: We are spending a lot of time this morning talking about the merits of various policies that policymakers around the globe have done to in basically negate the worst concerns, the worst fears over a meltdown. Given the scorecard, how have they performed generally in 2008? They have avoided some of the mistakes made in the 30s, haven't they? But have they avoided longer-term problems?

A: That is very difficult to tell because if you look at the rate cuts that began after September 18, 2007, the Federal Reserve slashed interest rates, as you know, from 5.25% on the Fed Funds rate to now zero.

What it has done is to increase volatility because the CRB Index at that time was essentially down from the level of May 2006; it had declined by 20%. Then suddenly it shot up, the dollar became weak, the Baltic Dry Index shot up and so forth, and then in the summer of 2008, of this year, when finally investors realised that the second half of this year would be weak, all these assets like ships and commodities totally imploded.

So, I would actually tell you, in my opinion that especially the Fed in the US has done a totally disastrous job at steering the economy and I'd like to add that market based solutions are the best and interventions create new problems and unintended consequences.