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An Interview with Dr. Marc Faber

Bill Powers
Canadian Energy Viewpoint
January 3, 2005

After the success of the last January's interview with Andrew Weissman, I wanted to find another expert who could provide us with a unique perspective. This month, Dr. Marc Faber has generously agreed to share his thoughts on a variety of energy issues, Asia and the outlook for the US dollar. Marc Faber was born in Zurich, Switzerland. He went to school in Geneva and Zurich and finished high school with the Matura. He studied Economics at the University of Zurich and, at the age of 24, obtained a PhD in Economics magna cum laude.

Between 1970 and 1978, Dr. Faber worked for White Weld & Company Limited in New York, Zurich and Hong Kong.

Since 1973, he has lived in Hong Kong. From 1978 to February 1990, he was the Managing Director of Drexel Burnham Lambert (HK) Ltd. In June 1990, he set up his own business, MARC FABER LIMITED which acts as an investment advisor, fund manager and broker/dealer.

Dr. Faber publishes a widely read monthly investment newsletter "The Gloom Boom & Doom Report" report which highlights unusual investment opportunities, and is the author of several books including "TOMORROW'S GOLD - Asia's Age of Discovery" which was first published in 2002 and highlights future investment opportunities around the world. "TOMORROW'S GOLD" was for several weeks on Amazon's best seller list and is being translated into Japanese, Chinese, Korean, Thai and German. Dr. Faber is also a regular contributor to several leading financial publications around the world.

A book on Dr. Faber, "RIDING THE MILLENNIAL STORM", by Nury Vittachi, was published in 1998.

A regular speaker at various investment seminars, Dr. Faber is well known for his "contrarian" investment approach.

This interview was recorded on 12/9/2004

Powers: Dr. Faber, thank you for sharing some of your time with me and my readers today.

Dr. Faber: My pleasure.

Powers: Let's start off with your views on the world oil market. After the recent spike up to $55, oil has come back to the low $40's, what do you see as the range for oil in the next 12 months?

Dr. Faber: Well, in general, I think we may first go down somewhat because we have had significant inventory building this year, both in China and the US. At the same time, I envision that the global economy is in the process of slowing down. Next year, demand from China will continue to rise but not at the rate it was rising in the first nine months of this year. So, in general, I look for oil prices and other industrial commodities to come off somewhat. Having said that, every price depends to a large extent on how much money the US Fed prints. If they embark on a massive money printing exercise, then obviously, it becomes difficult to give any price targets. In an extreme case of money printing, the Dow Jones can rise very quickly to 20,000, gold to $2,000, oil to $100 to $200 and so forth and so on. We have to make certain assumptions about the sanity of the Fed, which is very difficult to make.

Powers: In your book, "Tomorrow's Gold," you suggest that growing oil demand in the developing world will lead to significant upward pressure on prices. Please explain.

Dr. Faber: Well basically, the daily supplies of oil are around 80 million barrels. The US consumes around 22 million barrels with 295 million people. Asia consumes around 20 million barrels with 3.6 billion people. The per capita consumption per annum in China is 1.7 barrels, in Japan and South Korea around 17 barrels, in the US 28 barrels, in Mexico 7 barrels, in India 0.7 barrels. So I think that based on the industrialization of not only China, but India and other Asian countries such as Vietnam, the demand in Asia will double. The question is, will it double in six or in say 15 years? Let's take a ballpark figure and assume that oil demand outside Japan grows 6% per annum in Asia. Then, I think we will go to 40 million barrels of oil consumption daily on daily production of 80 million barrels in say, 10 years' time. I don't think that the oil supplies can be increased that much more. So this incremental demand from Asia is likely to mean higher oil prices. This is without even considering some problems in the Middle East for a war or anything of that sort.

Powers: Let's focus on China for a minute. While much has been written about China's soaring oil imports, not much has been written on China's increased use of natural gas and imported liquefied natural gas. Do you believe natural gas has a bright future in China?

Dr. Faber: Well I think natural gas has a relatively bright future everywhere but there are other issues concerning natural gas. It is expensive to transport and there are some danger factors, so for the time being I do not think natural gas will totally replace oil.

Powers: There have been reports that China has reduced its exports of coal to other Asian countries due to increased demand at home. This has caused a spike in coal prices from Australia to Canada. Do you believe China can continue to grow at such a rapid rate and continue to be such a huge force in the world coal market?

Dr. Faber: I think there is plenty of coal in the world and I suppose China needs more coal because of power shortages. But as new coal mines are developed, prices will ease somewhat. The same would go for steel prices and tanker rates and so forth. I take the view that this year we experienced a tremendous bull market in industrial commodities and I think this bull market needs a rest. I don't think that commodity prices will decline and make new lows below their 1999-2000 lows, this I very much doubt. They are likely in some cases to outperform the Dow Jones. But I equally feel that speculation that drove prices higher may abate and next year new supplies could come onstream.

Powers: While nuclear power has fallen out of favor in North America, China remains fully committed to developing its nuclear energy program. Do you believe the West will be forced to follow China's lead and re-evaluate nuclear energy given your outlook for other forms of energy?

Dr Faber: Well I think nuclear power will again become a more important source of energy. In France, 80% of electricity is supplied by nuclear power. In Asia, in particular, we will see the construction of nuclear power plants and I am actually quite positive about the uranium price.

Powers: That leads nicely into my next question. Do you believe we are in a long-term bull market in uranium given the imbalances that exist between consumption and production?

Dr. Faber: I am not an expert on uranium but I have friends who are experts and they are very positive about uranium. Uranium prices will to some extent track oil prices. If I take a negative view on oil prices for say the next 3 to 6 months, I think that uranium prices will track oil prices and will not likely rise. In the long run, I think there is a very strong case for uranium prices to go up, especially if there is a war.

Powers: Speaking of wars, how do you think the war in Iraq will impact oil prices over the next year? Do you think a positive resolution will depress prices or is continued turmoil more likely?

Dr. Faber: I think you are a real optimist to even consider a positive outcome for Iraq. I think the outcome can only be negative. Supply will not rise very much for the foreseeable future. In addition to that, we have reliable information the Iranians are pushing ahead with their nuclear weapons program. They have also tested ballistic missiles that can carry nuclear warheads. I think it is quite likely that some time in the next 6 to 12 months either the Americans or the Israelis will bomb nuclear facilities in Iran. If that happened, I think the mess would really escalate in the Middle East. In retaliation, the Iranians would aggressively support the militants in Iraq and they would also launch strikes in Saudi Arabia, which they view as an ally of the US. So let's just say the bombing of nuclear facilities in Iran could trigger an escalation in conflict.

Powers: That would lead to quite a spike in oil prices I presume?

Dr. Faber: Possibly.

Powers: Turning to Canada for a minute. The Chinese government is clearly taking an interest in Canadian natural resource companies. Canadian- base metals producer Noranda is in talks to be bought out by a Chinese firm and there are rumors Husky Energy is also in talks with a Chinese firm. Do you see this trend continuing?

Dr.Faber: The Chinese are not only interested in Canadian resource companies. Worldwide, they are in the process of either acquiring resources, concessions or companies that control these resources and concessions. For the Chinese government, the procurement of reliable sources of energy is a top priority. Also the procurement of iron ore and other resources is a top, top priority.

Powers: Do you see the Chinese government re-valuing their currency upward to keep a lid on commodity prices?

Dr. Faber: I doubt they will do that for the time being. Now it is possible that in the first six months of next year, they move to an exchange rate that is tied to a basket of currencies. But the problem for the Chinese is a re-valuation of 10% to 20% will not do any good at all in rectifying some of the imbalances that exist in terms of price levels. I do not think at the present time there will be a move, but who knows. A move by the Chinese on their currency will depend on the performance of the US dollar. I happen to think US dollar is oversold and that it could rebound somewhat in the next couple of months. Whether this rebound will lead to a new bull market in the dollar will have to be assessed if the dollar has this kind of bounce rally. But if the dollar bounces and strengthens, that would be due to tighter monetary conditions in the US which would lead to exports to the US probably not rising much. In that case, the Chinese would probably not re-value. But if the dollar continued to tumble, the Chinese would probably make a move.

Powers: Do you view energy investments as a good hedge against a falling US dollar?

Dr. Faber: Yes, in regards to the fall of the US dollar, I would view energy investments as appropriate as well as metals, mining companies and other commodities.

Powers: Much has been made about the recent high in oil prices; however oil in euro terms has not risen nearly as much. Do you think oil exporters such as Russia and OPEC will begin pricing oil in euros to protect themselves against a falling US dollar?

Dr. Faber: It doesn't matter how they price it. They could price it in US dollars and then convert the dollars they receive to euros. The price ultimately depends on demand and supply.

Powers: In your book you discussed several investment themes that produced spectacular profits for long term investors. Do you think the energy sector will be one of these sectors?

Dr. Faber: This is very difficult. In the back of my mind I think deflation and poor economic conditions are still a possibility. I am not so sure we will have the huge bull market in commodities like we had in the 1970's when the price of a barrel of oil rose from $1.50 a barrel to $50 on the spot market in 1980 or when gold rose from $35 an ounce to $850 an ounce. A lot depends on the purchasing power of the US dollar. If Mr. Greenspan and Mr. Bernanke drop dollar bills from helicopters, anything is possible. If we assume moderate money supply growth in the US or if we assume the US economy is slowing down and may experience a recession and if we consider that China can have a hiccup or a hard landing, oil and commodities may come off. As I mentioned earlier, oil and industrial metals may come off for some time. If industrials come off for three to six months, I will look at the situation again and decide if we have bottomed out and are ready to launch the next leg in industrial commodities or are deflationary forces so powerful that nothing is working except government bonds.

Powers: Please share your views on the Canadian dollar. Do you think it will continue to do well against the American dollar?

Dr. Faber: The Canadian dollar has done well against the American dollar. I think that just now, the (US) dollar may be in kind of a bottoming out process. As these raw materials come down somewhat, these currencies that benefited from strong commodity prices such as the Australian dollar, the South African rand and the Canadian dollar may come under some pressure. But in general, I think that the Canadian dollar based on the fundamentals of the country and especially on its foreign policy, which is much more desirable than the foreign policy of the US, I think that in general, Canadian dollar assets are quite attractive. Canada is not the bargain that it was two years ago. Asset prices in Canada have narrowed compared to the US but they are still cheaper and it's a nicer country. So people should have to pay to have the privilege to live in a country that is not run by a bunch of lunatics.

Powers: I am assuming you believe we will see parity before too long?

Dr. Faber: It is possible. As I said, right now if industrial commodity prices come I have to repeat. You tell me what monetary policy is going to be in the US, and I will tell you what the fate of the dollar is going to be. If the Fed prints money, the dollar is going to collapse against everything. In other words, its purchasing power will diminish very rapidly.

Powers: Do you believe the recent increases in interest rates are making any difference or is it too little too late?

Dr. Faber: The market has tightened a long time before Greenspan increased interest rates. I mean he is a kind of lagging indicator. He should have increased interest rates a long time ago. Now he is in a difficult position because if the economy weakens, it would be difficult for him, given the weak dollar to actually cut rates. I think he will be forced to increase rates, but knowing him, he will increase a quarter of a point, a quarter of a point and take his time. We ought to have a Fed funds rate given GDP growth of around 400 basis points and we are at 200 basis points. We are still below the rate of inflation.

Powers: So, until we see the dollar at parity with inflation, the dollar will be weak?

Dr. Faber: Well, as I said, the dollar can stage a rebound since it is oversold. The market will not wait..the market will discount events. You look at commodity markets, they bottom out when conditions are horrible and peak out when conditions are very good. And the dollar, as you know, will bottom when everything looks terrible. And then it will rally and people will say the dollar rallied for this or that reason. The reasons will only become apparent at a later stage.

Powers: Longer term, what do you see as the major investment themes given your outlook today?

Dr. Faber: Well, I still think that whether you believe that the world will have a deflationary recession or an inflationary boom, whatever scenario you look at, on a relative basis, Asian assets are more attractive than US assets because we have at the present time in Asia relatively favorable macroeconomic conditions. We have favorable demographics. We have rapidly growing markets, expanding markets. The Asian manufacturers are very competitive and tradable services are becoming more and more a factor in some countries such as India. At the same time, in Asia, we have equities that are more attractive than in the US. So I think that if you close your eyes and say, I do not know how the world will look in five years, then on a relative basis, you are better off invested in Asia than in the US, including Asian currencies. Whether assets around the world are truly a bargain, I doubt it. Interest rates are so low that a lot of assets are not terribly attractive in the sense that you could buy assets and then think the downside risk is 100% and the upside potential is maybe 1,000%. I don't think that exists around the world. Everything is quite expensive. I think Asian real estate is reasonable but equities around the world are not terribly cheap. Bonds are not very cheap either. I mean we had a bond bull market for 20 years. How much longer will it rally? I think agricultural commodities are quite attractive. Corn and wheat are very depressed. They had a move and then fell back. I would also include coffee.

Powers: Any final thoughts you would like to share with our readers?

Dr. Faber: As I said, it is very difficult to make any economic calculations or financial calculation or estimates if you have a government that manipulates the markets. Under a planning economy, we had central planners planning the economy and steering the economy and it ended in disaster. I suppose that today's equivalent of the central planners of the communist regimes are the central bankers like Mr. Greenspan in that they can steer the economy with just one tool, monetary policy. I think the same way the planning economies ended in disaster, central banking as we know it today, will end in disaster. If there was a tribunal whose laws or criteria were sound money, Mr. Greenspan would be hanged.

Powers: That is an excellent analogy. I greatly appreciate your time today.

Dr. Faber: You are most welcome.

Bill Powers
Editor, Canadian Energy Viewpoint

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