Source: BI-ME , Author: Constantine Gardner
Posted: Fri January 20, 2012 2:49 pm
End game
He sees a shift in economic and military power from West to East and is increasingly convinced that the end game will be war. But, so far, he had avoided giving a time frame to the war scenario. Not any longer.
Dr. Faber was amongst 10 investment experts assembled by Barron's last week at the Harvard Club of New York for the Barron’s 2012 Roundtable. The members of the Roundtable discussed the economy, China, Europe, market volatility, investment picks and World War III.
"On an optimistic note, World War III will occur in the next five years," Faber announced to the other members of the Roundtable, in his characteristic contrarian manner.
"That means the Middle East will blow up," he said, without providing any details about specific countries.
When this happens, "new regimes there will be less Western-friendly," he reckons.
"The West has figured out it can’t contain China, which is rising rapidly and will have more military and naval power in Southeast Asia," he explains.
The only way for the West to contain China is to control the oil tap in the Middle East, Faber argued.
The prelude to war will be a "big bust that will see the end of credit expansion," he said in a recent interview. But before this happens, "governments will continue printing money which in time will lead to a very high inflation rate, and the economy will not respond to stimulus".
Cyber war?
"This war will be different from World War I where troops faced each other in trenches or World War II where tank divisions faced each other, he said. This will be Cyber War. A war where you can turn a switch and turn the London electricity supply off. This will be a war where you can stop airplanes from flying and bring the whole financial system of a country to a halt," Faber said in an August 2011 interview.
And during war times, "commodities go up strongly,” he argued.
"If you want to hedge against war, you don't want to own derivatives in UBS and AIG, but you have to own them physically, like farmland and agricultural commodities. That is something to consider for you as a personal safety and hedge. You have to own some commodities," he stressed.
Containing oil flows to China
Tensions have been escalating in the Gulf, with Iran threatening to close the Strait of Hormuz, through which roughly 35% of seaborne crude and 20% of the world's traded oil passes daily, while the US and Europe seek help from Arab and Asian allies to reduce Iran's oil revenues in the dispute over Iran's nuclear programme, Saudi Arabia has reportedly told a senior US lawmaker it stands ready to increase its current oil output of 10 million barrels per day should new sanctions curb Iranian oil exports.
Saudi oil minister, Ali al-Naimi, said in Sunday's edition of his country's al-Watan newspaper that "Saudi Arabia is able to produce 12.5 million barrels per day to meet the needs of the world market and satisfy any increase in demand from consumer countries."
For its part, China, Iran's biggest oil customer, has rejected new US sanctions that seek to block Iran's central bank from clearing oil payments. However Chinese Premier Wen Jiabao was this week visiting his country's prime supplier, Saudi Arabia, as part of a Middle East tour of oil-producing nations.
"I believe that China is not the only country to buy oil from Iran... Legitimate trade has to be protected if global economic chaos is to be avoided," Wen said while visiting Qatar yesterday, according to a Chinese foreign ministry transcript.
A game of chess
The Iranians already have a "nuclear option," namely, the prospect of blockading the Strait of Hormuz. Doing so would hurt them, too, of course, George Friedman wrote this week in a Stratfor report.
"Each side is seeking to magnify its power for psychological effect without crossing a red line that prompts the other to take extreme measures,” reckons the provider of global intelligence.
"Iran signals its willingness to attempt to close Hormuz and its development of nuclear weapons, but it doesn't cross the line to actually closing the strait or detonating a nuclear device. The United States pressures Iran and moves forces around, but it doesn't cross the red line of commencing military actions."
Thus, each avoids triggering unacceptable actions by the other, said Friedman, adding that in that game of chess, "the possibilities of miscalculation, of a bluff that the other side mistakes for an action, are very real."
Relax, stocks will not collapse
Asked if war will be positive for stocks, Faber told the Baron's Roundtable it would be very positive for stocks and negative for bonds, "because debt will grow dramatically. There will be massive monetization of debt."
"When the U.S. entered World War II total credit equaled 140% of GDP, and there were no unfunded liabilities. Now total credit-market debt is 380% of GDP, and unfunded liabilities make that 800%," he added.
Speaking to CNBC Thursday Faber went further: "Relax. I don’t think that equities will collapse. I think we have major support going back to August 2010 when the S&P was at 1010," he said.
"We have a lot of support around 1100, and if the S&P drops 200 points, I guarantee you the Fed will come in with QE3 and QE4 and so forth," he added, referring to a next round of quantitative easing by the Federal Reserve.
"If we look at U.S. government debt, it reached US$1 trillion in 1980 and in the year 2000 we were at US$5 trillion. So between 2000 and 2011 we’ve grown three times and the expansion of the debt will continue"
"The day interest rates go up for whatever reason, the cost of financing will also become burdensome," Faber predicted.
Volatility may continue for five or 10 years
Back to the Baron's Roundtable, Faber said market volatility had little to do with the problems in Europe and everything to do with excessive liquidity that is being created in the system.
"Unless there is a general collapse of liquidity -- in other words, a credit-market collapse -- the volatility will continue, perhaps for five or 10 years, he warned.
The average person's economy will go downhill but stocks and corporate profits will go uphill
Returning to one of his favourite topics, he said governments around the world will print massively.
"The worse the news gets, the more the U.S. and the European Central Bank and China will print money. Then the average person's economy will go downhill but stocks and corporate profits will go uphill. When we talk about the economy, remember that the economy of Aspen and the economy of Detroit are two different things."
"When assets become like cash, it may be safer to hold your money in the bank. If asset prices collapse, you'll be better off in Treasury bills with zero yields. Then the central banks will print money and bail you out. At least you'll get your principal back."
"With money-printing, you never know what sector of the economy will be inflated. Maybe we have had profit inflation and there will be a severe correction. I don't expect corporate profits in the U.S. to collapse by more than 20% in the next 12 months," he reckons.
Investors should opt for asset diversification
Faber said he prefers asset diversification given the current uncertainty. "We don't know how much money governments will print, the size of fiscal deficits and so forth."
The biggest uncertainty is also what will happen to the Chinese economy, he added.
"I am the most bearish person you can imagine on earth, which is why I recommend putting, say, 25% of your money in equities, 25% in precious metals, 25% in cash and bonds and 25% in real estate. These assets won't go up substantially this year, but they could preserve your wealth."
About Dr. Marc Faber
Dr. 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. Between 1970 and 1978, Dr Faber worked for White Weld & Co in New York, Zurich and Hong Kong.
Since 1973, he has lived in Asia. From 1978 to February 1990, he was the Managing Director of Drexel Burnham Lambert (HK). In June 1990, he set up his own business which acts as an investment advisor and fund manager.
In 2000 Faber decided to spend more time writing his newsletters as well as growing his advisory business. He moved back to his home in Chiang Mai, Thailand, maintaining only a small administrative office in Hong Kong.
Dr. Faber publishes a widely read monthly investment newsletter 'The Gloom Boom & Doom Report' which highlights unusual investment opportunities, and is the author of several books.
