Doomed: The Global Boom Will End in Gloom - Marc Faber comments on the markets

Doomed: The Global Boom Will End in Gloom
By Jane Louis19 Sep 2007 at 06:59 PM
St. LOUIS (ResourceInvestor.com) -- For the first time in the 200-year history of capitalism, there is a synchronised global economic boom, leading to rising commodity prices, shifts in growth and an increase in wealth inequity.
“Now everything is in a bubble stage - the price of art, the price of stocks globally. The price of bonds have also rallied surprisingly, given that commodities have gone up so strongly, commodities have rallied, and real estate has gone up globally, not just in the U.S.,” according to economist Dr. Marc Faber.
But watch out, he warned in the U.S. Global Investors presentation “Gloom, Doom, or Boom? Analysis of the Global Economic Expansion.”
“When these synchronised expansions and booms and bubbles ... come to an end, it will be very bad in all sectors of the economy.”
In the presentation, Faber discussed this current global economic boom, highlighting factors that have come into play recently - including how commodities markets are reacting to growth in emerging economies, the effects of the U.S. Federal Reserve and the impact of worldwide geopolitical situations.
Faber is the editor and publisher of the monthly investment newsletter The Gloom, Boom & Doom Report. In addition, he is the author of “Tomorrow’s Gold,” in which he analyzed historical gold market patterns to look at how new investor trends may emerge. Considered a “contrarian” economist, Faber takes a realistic, though sometimes pessimistic, view on where the economy is headed.
Rising Commodity Prices, Emerging Economies and Geopolitical Risks
The current boom began in November 2001 with economic expansion in the U.S. As U.S. consumption grew, however, domestic production did not, leading the economic expansion to be offset by trade from Asian nations such as China, Faber said.
“What many strategists overlook is that by 2001, the Chinese economy was already larger than perceived. What you see here is that as the Chinese economy was stimulated by exports, its crude oil outlays…grew very rapidly because the Chinese drove up the price of oil. They did not only drive up the price of oil, but also of copper and tin, zinc and agricultural commodities.”
Those outlays have risen to more than a trillion dollars, which, in turn, was funnelled into the world’s other oil producing regions, like the Middle East, Russia and Latin America. This sent the prices of commodities up and produced more money for these regions.
As these countries made more money, they were able to import more goods, including expensive luxury goods, according to Faber.
“Suddenly the whole world was growing very rapidly,” he said.
In fact, Zimbabwe is the only country in a recession at this time, Faber said, although the U.S. may be on its way if Federal Reserve Chairman Ben Bernanke continues to print money.
“If Mr. Bernanke prints money, I think the day will arrive that with one Dow Jones Industrial, you will only be able to buy between one and five ounces of gold, if that. I’m not sure, maybe even less,” he said.
“You can print money, you can print bonds. You can increase the supply of bonds endlessly as the U.S. has done. You can increase the supply of equities endlessly through new issues, but you simply cannot increase the supply of oil endlessly, nor of copper, nor of gold - certainly not of gold. You can find alternatives to oil maybe one day ... but you cannot substitute gold.”
Commodity investments have been very rewarding since 2001, Faber said. They have risen from the inflation-adjusted lowest level ever, and compared to other investments, prices are still relatively low.
Generally oil prices have gone down along with interest rates, but recently the two have begun to diverge.
Bond Yields Divert From Oil
“I think somebody is going to be very wrong,” Faber said. “I think the bonds buyers will be very wrong. I wouldn’t buy a 30-year treasury at the yield of 4.6% in U.S. dollars with Mr. Bernanke at the Fed. Now if someone says to me that the oil price will go down by 50%, and gold and of course commodities will go down by 50%, then yes, if that happens, you have a global total depression and other things will be down much more.... But I think with Mr. Bernanke at the Fed, the likely that oil prices will go down is very remote.”
In addition, the instability of the geopolitical landscape could also affect commodity prices.
“The geopolitical situation has changed dramatically. What is important to understand is America obtains its oil from many different sources and geographical locations. But China and Japan and South Korea and Taiwan get essentially 90% of their oil through one source - the Middle East,” he said.
“A declining commodity price is a symptom of flooded markets. Countries are not worried about their regular supplies of commodities. When prices go up, there’s a shortage in the marketplace…and so tensions increase in the world. As tensions increase, there is the possibility that somewhere war breaks out or serious disturbance occur and tensions rise, and then commodity prices can go ballistic.”
Listen to “Gloom, Doom, or Boom? Analysis of the Global Economic Expansion” here.
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