

This could be Marc Faber’s best interview in 2015. For about one hour during an exclusive interview with Marcopolis.net made by Johannes Maierhofer and Peter Matay, Marc Faber covers it all: from commodities and China to the outlook on inflation, the Euro and gold. According to him the global economy is not healing. To the contrary, we might find ourselves back into recession within six months or a year. In that case he expects more money printing by central banks, which eventually could lead to high inflation rates and renewed strength in commodity prices.

On the other side, Marc likes a few emerging markets: Vietnam and Iraqi and believes their stock markets have good potential. Especially for Iraqi after the deal with Iran is reached. While mining stocks are extremely depressed we might see defaults before any meaningful recovery he said. This is a new comment by Marc who has been a mining bull for quite sometime. Other famous investors believe that bottoms are hit when there is a mass wave of defaults which comes in line with what Marc shared now.

These are keynotes from Marc’s comments taken from this wonderful interview:

– Commodity prices are in major correction but still in a long-term bull trend which could last more when taking into account past historical bull and bear markets – iPath Bloomberg Commodity Index Total Return ETN (NYSEARCA:DJP).

– The Chinese stock market has not hit a bottom yet. Chinese government intervention in the market will fail. The bottom could be about 2500 for the SSE Composite Index (SHA:000001).

– Marc’s gold allocation is no longer 25%. Its about 10%-15% now. Gold SPDR Gold Trust (ETF) (NYSEARCA:GLD) price could go form its major bottom between $700 and $1000 per ounce. Gold mining stocks are very depressed but could go down: Market Vectors Gold Miners ETF (NYSEARCA:GDX).

– Vietnam, Market Vectors Vietnam ETF. (NYSEARCA:VNM) and Iraqi present wonderful emerging market opportunities. The problem is how to invest in Iraqi.

– More academics and influential people start to question the FED and its integrity. There is also a trend among the Republicans.

Is this the end of the commodities-super-cycle, as some have claimed, or is it more like a correction?

Well that’s a very good question because obviously the weakness in commodities this time is not due to, like, contraction in liquidity as we had in 2008. 2008 commodities ran up very quickly in the first half until July. The oil prices in 2007, just before they started to cut interest rates in the US were still at 78 dollars a barrel and then by July 2008 they ran up to 147 dollars a barrel. Afterwards they crashed within six months to 32 dollars a barrel and then as you said in 2011-2012, they recovered and were trading around 100 dollars a barrel. Now they have been weak again as well as all other industrial commodities and precious metals.

My sense is that this time around, commodity prices are weak because of weakness in the global economy, specifically weakening demand from China, because if you look at the Chinese consumption of industrial commodities, in 1970 China consumed 2% of all industrial commodities, by 1990 it was 5% of global commodity consumption for industrial commodities and by the year 2000 it was 12% and then it went in 2011-2012 to 47%, in other words almost half of all industrial commodities in the world were consumed by China.

Therefore a slowdown in the Chinese economy has a huge impact on the demand for industrial commodities and on the wellbeing of the commodity producers, whether that is the commodity producers in Latin America, in Central Asia, Middle East, Australasia, Africa and Russia.

And so because of the reduced demand from China, the prices have been very weak and I think that may last for quite some time because the Chinese economy will not go back and grow at 10% per annum any time soon. My view is that at the present time, there is hardly any growth in China. In some sectors there is a contraction and in some sectors, and don’t forget China is a country with 1.3 billion people, so some provinces may still grow and other provinces may contract, as well as some sectors may grow and others may contract. But in general I think the economy is weak.

My estimate is that at the very best the Chinese economy is growing at the present time at say 4% per annum and not at 7.8 or 8% as the government claims. We have relatively reliable statistics like auto sales and freight loadings that are down year on year, electricity consumption, exports, imports and so forth. So there has been a remarkable slow down and to answer your question about commodity prices, if the global economy slows down as much as I do believe, because other economists predict an acceleration of global growth, a healing of global growth, my sense is that it is the opposite, that within 6 months to one year we are back into recession and then it will depend on central banks and what they will do. Up until now, they have always printed money and I suppose they will continue to do that.

Now from a longer term perspective, commodity cycles last 45 to 60 years roughly, from trough to trough or peak to peak. In other words we had a peak in 1980 and then commodity prices were weak throughout the 1980s and 1990s, then in 1999 they started to pick up and went and made a peak for most commodities in 2008 and for the grains 2011-2012. Since then everything has been weak. I could argue that well, maybe this is a major correction in the commodities complex within still an upward wave of commodity prices and that the final peak prices are not yet seen.

As for Chinese stocks, they went up very strongly over the last year, but recently they crashed just as hard. Is this a precursor to something worse or is it merely a bump on the road towards a still ascendant China?

Well I think that a year ago in June/July 2014, Chinese stocks were very inexpensive compared to other markets in the world. They had been going down relative to the S&P since 2006 and compared to other Asian markets like the Philippines, Indonesia, Thailand… they had performed very poorly.

So a year ago my view was that a) because of the crackdown on visitors to Macau and more importantly because the property market in China was beginning to show cracks, prices were no longer going up and many markets were over supplied so my sense was that domestic money would shift out of the property market or de-emphasise property investments and go into equities, at the same time international investors were grossly underweight Chinese stocks and my sense was that as an international investor you look around the world and see all of these markets, the S&P is up at an all-time high last year already and then you see a market like Japan that two years ago was very depressed compared to other markets, so money went into there.

A year ago what was very depressed relative to everything else was the Chinese stock market. So money flowed also internationally into Chinese stocks and the market in China is relatively illiquid. You have to see. Because most blocks of shares are owned by the government or by large Chinese groups so what is available for trading is not that large.

Then the money flowed into Chinese stocks and they went up by more than 100% within a year and the whole thing became very speculative because in China people borrow a lot of money against what they buy whether it is properties or stocks and so the margin accounts increased dramatically and the margin debt reached almost 4% of GDP whereas in the US it is around 2% of GDP and it is at its highest level ever. So 4% was a very big figure. I think the government´s measure to support the market will largely fail and that eventually there will be more selling pressure and stocks will retreat somewhat more.

Do they go back to the levels of a year ago, to the 2014 lows? I don’t think so. I think this may be the beginning of a new bull market in China, but after a 100% rise we could have, like, from peak to trough a 40% correction. Or even 50%.

What about Europe and Russia? E.g. many German industrialists don’t seem too happy with the current sanctions regime.

Not at all. Actually, you ask ordinary people in the whole of Europe about the policies of the governments towards Russia, 90% of ordinary people disapprove of the politics and policies that have been implemented and with the way European governments behave as if they were feudals of the United States and vassals of the US.

The reality is that Europe should be very close to Russia as it was in the 19th and 18th century, with very few exceptions like for example when Napoleon attacked Russia or when Hitler attacked Russia, but ordinarily the two regions, western Europe and Russia were much closer than say western Europe and the US because of the proximity and also culturally they were quite close.

What about gold? Being in a correction mode for a couple of years already, it recently has broken down some more.

Well as you know there are so many explanations ranging from manipulation to essentially Chinese selling which could have been the case you know that margin calls went out for stock accounts, the margin buyers may not have been able to sell their shares because still about 20% are not trading.

Number two, they can’t sell their properties because you can’t sell overnight the properties so the margin call has to be met the next day and property transactions may take, I don’t know three months until you close and maybe there were some corporations or individuals that were holding gold and so that they could liquidate, that is an explanation that I could sympathise with.

Or you could say because of the strong dollar people became, or had hesitations of owning gold because they said if the dollar is strong why would I own gold? I mean there are lots of explanations. The simple explanation is of course that there were more sellers than buyers at that particular time. Now if you look at the pole market in gold, 1999 – $255 dollars went to $1921 dollars in September 2011 and then we had this correction which now we are in 2015, four years on and the price was always holding around 11 or 12 hundred and now it looks like it has broken down on the downside and then you have to ask yourself well is it a breakdown that will lead to further selling in other words, prices would move lower and find the low at, I don’t know, maybe $700, $800, $900 dollars, a thousand or is it a final liquidation from which prices will start to move up.

I really don’t know, all I know is that I own gold and it doesn’t worry me that it went down because as I mentioned to you I have this diversification, the bonds in US dollars and the cash in US dollars has been a good investment essentially over the last twelve months. Then I own equities and I own properties in Asia that have been reasonably good investments so the fact that gold is going down doesn’t worry me and I buy every month a little bit but I think on this weakness I will increase the position substantially because I had maybe say 25% in gold but because equities and properties went up, the dollar went up and gold went down, the allocation to gold is no longer 25% but maybe only 10 or 15%.

So then I have to stock it up again. But I would say an individual should definitely own some physical gold.

The bigger question is where should he store it? because I think if we think it through, the failure of monetary policies will not be admitted by the professors that are at central banks, they will then go and blame someone else for it and then an easy target would be to blame it on people that own physical gold because they can argue, well these are the ones that do take money out of circulation and then the velocity of money goes down, we have to take it away from them.

That has happened in 1933 in the US. With our brilliant governments in Europe that follow US policies and with the ECB talking every day to the Federal Reserve, they would do the same in Europe, take the gold away from people.

Back to where we started: major investment themes. Which ones are you seeing on the horizon, if any at all?

Yes, I mean first of all some investment themes are not easy to implement for individuals. In Asia, one country that stands out as having great economic potential is Vietnam.

And by the way the whole Indochinese region with Vietnam in the east and then north west with Laos, south west with Cambodia and then Thailand, Myanmar, India, Bangladesh and in the north China, and in the south Malaysia, Singapore… that whole region with over 500 million people has tremendous growth potential and Cambodia at the present time is a boom town, a boom country because it is also politically related, the Japanese and Koreans invest a lot of money as well as the Americans and the Chinese so they all compete essentially because Cambodia is strategically important.

Vietnam has a very strong export performance, the stock market has performed very badly for the last few years like China, until a year ago, properties have come down but in my view they are now bottoming out. The Vietnamese people are hardworking people not like say easy going like the Thais or the Indonesians or Philipinos, so I believe the country has a great potential.

Number two with the agreement with Iran, I think the future of southern Iraq is guaranteed in other words, from Bagdad south, that whole region where the oil is, Basra, that is Shia, their political future is essentially guaranteed because the Shias of Iran will not let ISIS capture that territory nor let Saudi Arabia invade. The Iraqi stock market is very inexpensive, it is very cheap. It is very difficult to invest now in Iran but in Iraq it is much easier and there are funds so that is an opportunity in my view. For the last few years emerging markets have underperformed say the US grossly, but if I look at the next ten years and in the immediate future, I don’t think that the emerging markets will perform well, they will come off further in my view but they are markets that offer relative good value in the sense that you have many shares say in Singapore, Malaysia, Thailand…that have a dividend yield of say 5-6% so at least you paid to wait. It is not yet at a very attractive valuation level but it´s reasonable. It is a world of inflated assets. Mining stocks are extremely depressed, I mean if someone says what is cheap in the market place then I would say the miners are incredibly low, next station is bankruptcy and maybe one of the big ones still goes bust and that would probably signal the end of the bear market in precious metals. Possible.

I would say the miners are incredibly low, next station is bankruptcy and maybe one of the big ones still goes bust and that would probably signal the end of the bear market in precious metals. Possible.

The future is unknown and we are not dealing with markets that are free markets anymore. A free market is defined as a market when no market participant has a dominant influence and can manipulate the market. Now we have government interventions everywhere and you don’t know what they will buy next. They bought bonds and mortgage backed securities to depress the yields on these securities, they pushed interest rates essentially everywhere to 0, and by doing that they basically expropriate savers because money, one of the functions of paper money is to store value but at zero interest rates there is no store of value.

They may through sovereign funds, they have done it already and the Swiss National Bank already bought shares, the Swiss National Bank they own over a billion dollars in Apple stock! You can be sure that Apple will go down because whatever the Swiss National Bank does is a disaster!

That is a very good sell signal! The other sovereign funds have also bought equities. Now the sovereign funds are not going to increase anymore because most of them are oil related so they have to actually liquidate and that is a game changer from one trillion dollars in assets, sovereign funds in year 2002, they went to over seven trillion, I think they are going to come down to maybe three trillion, that will have an impact on liquidity and on yields.

As for the long-term outlook, if the current set-up fails, what could replace it?

That’s why I think they will take the gold away and go back to some gold standard by revaluing the gold say from now $1000 dollars an oz. to say $10,000 dollars an oz.

This sounds rather far-fetched; at least when listening to professionals and people in academia.

Yes but I want to tell you, just in the last say twelve months, I have observed an increasing number of academics who are questioning monetary policies.

I mean some academics that have been quite mainstream in the past. I mean John Taylor has been critical for a long time as well as Ana Schwartz but she passed away and as Milton Freedman who also passed away a long time ago. But basically now I see more and more academics and influential people, also among the Republicans that are actually questioning the Fed and also the integrity of the Fed. That is a crack and as you said the credibility of the ECB is in my view badly tarnished already because people say how could they lend so much money to Greece?

But you understand, they never ask ordinary people, they ask academics, or economists and they all also get paid somewhere because they are either in the one or the other commission, so they are not going… it’s like if you go into a hospital and a doctor has killed a few patients unintentionally, another doctor will never testify against him. He will shut up because he is afraid one day other people will turn against him. Mistakes happen. And so among academic circles you will very seldom find criticism of central banks.

To read the whole interview please go to: Marcopolis.net