ANDREW ROBERTSON, PRESENTER: In 1987 economic forecaster Marc Faber told his clients to get out of the stock market one week before it crashed.
10 years later he was ahead of the game again when he predicted the Asian financial meltdown.
Mr Faber is based in Hong Kong and publishes what's known as the 'Gloom, Boom and Doom Report,' and in fact is known as Doctor Doom because of his regular bearish predictions.
His track record though suggests he's somebody who should be listened to, and he's in our Melbourne studio now.
Marc Faber, welcome to Lateline Business.
MARC FABER, ECONOMIC FORECASTER: Good evening.
ANDREW ROBERTSON: Well, you really lived up to your nickname today with a speech in which you said the global economic outlook will include rolling inflation, stagflation and then deflation in quick succession. How bad is it going to get?
MARC FABER: Well I think that if you look back over the last 25 years, we were very much in a period of accelerating credit growth thanks to GDP and the US increase in particular in the last seven years. We had accelerating credit growth until 2007 and that drove all asset prices up and it led to US over consumption, to the build up of the trade and current account deficit.
Now what has changed is lending standards have tightened and credit growth has collapsed. It's still growing, but no longer at 12 per cent per annum, but only at around four per cent per annum, and that usually leads to some serious disturbances in the equilibrium in the system, and in my opinion, will have a global recession after the synchronised global boom we had over the last five years.
ANDREW ROBERTSON: How bad do you think that recession will be?
MARC FABER: Well, you don't want to know.
ANDREW ROBERTSON: Yes we do, that's why I asked you.
MARC FABER: I think it will be quite bad. Because if you look we had an incredible global boom. If you travelled around the world six months ago, everywhere we had boom conditions, and now in the US housing has started to go down, meaningfully in some areas we're down 30 per cent. In Las Vegas business is down. We have businesses that have contracted, so the imports into the United States will slow down. This will have an impact on the Chinese export industries, and as China then slows down it will have an impact on the raw material producers of the world, the demand for commodities will probably no longer expand. It will lead to some discomfort among the commodities producers and among the export industries of Europe and Japan. I think it will be quite bad, yes.
ANDREW ROBERTSON: When you say raw materials producers, of course, Australia is one of the biggest. So you're suggesting that Australia will be hit hard?
MARC FABER: Well, I think that Australia will also get hit for two reasons: first of all, household balance sheets are not in a good position. The typical Australian household is very leveraged, is highly geared and the property market here is in for, in my opinion, quite a serious downturn. And so I think the Australian economy will be hit actually quite hard.
ANDREW ROBERTSON: You think a downturn of US-style housing slump type proportions?
MARC FABER: Yes, could be larger.
ANDREW ROBERTSON: Could be larger?
MARC FABER: Yes, could be larger.
ANDREW ROBERTSON: Well, we have, as you would know, what's loosely called a two-speed economy. Where do you see this slowdown hitting hardest, is it the eastern States or the West of the country which is based on commodity exports?
MARC FABER: Well, I think that if you look at, say, prices in Sydney and in Melbourne, they would seem to me to be on the high side. And, of course, obviously if commodity prices come down then the property market in Perth will also ease and possibly quite considerably.
So, I think, it could be nationwide. Now in which village the price of a property will drop the most and in which corner of the city they will drop less, that I don't know, I'm not a specialist on Australian property prices. But just looking at property prices in Anglo Saxon countries, whether it's the UK, Ireland or Australia or the US, I think they're vulnerable everywhere. And by the way, everywhere in the world.
ANDREW ROBERTSON: A lot of people here talk about decoupling and the fact that the world is very different now since the last US recession and that a lot of people here believe China will insulate us from any large scale US slowdown. Clearly from what you've said tonight you don't believe in that?
MARC FABER: Well, I think that the connectivity in trade flows in the world has increased, and certainly if you look at how financial stocks behaved after the summer of 2007 then we certainly didn't have a decoupling in financial issues around the world. All financial stocks went down and I think the global economy is very closely connected and linked through trade flows, through capital flows. And I'm not a great believer in this decoupling theory. This is another invention of the Goldilocks Crowd.
ANDREW ROBERTSON: Well, given that gloomy scenario you've been painting, the Governor of the Reserve Bank of Australia has indicated that in the current economic conditions, the fight against inflation is more important than ever. Whereas in the United States, the Federal Reserve's focus now seems to be on kick starting the economy. Who do you think is right?
MARC FABER: I have to give credit to the Reserve Bank of Australia for pursuing a very responsible monetary policy, whereas in the US we have a money printer who pursues misguided economic policies and misguided monetary policies.
He has now again slashed the Fed Fund rate to two per cent when the US rate of inflation is probably in the neighbourhood of between six and ten per cent per annum at the present time. So you have very negative real interest rates, in other words, interest rates adjusted for inflation. And that by itself is, of course, inflationary.
ANDREW ROBERTSON: Well, we saw last week the official figure was, I think, 5 per cent. Should the Fed be raising interest rates and by not doing so, is it creating conditions for stagflation?
MARC FABER: Well, if you look at the problems in the financial service industry, the banking problem and so forth, it's a direct consequence of ultra expansionary monetary policies of the US Federal Reserve that allowed, essentially, debt growth to accelerate and the leverage to go to the extent it went in the US banking system. And now that the banking system has a problem, the Fed tries to solve the problem with the medicine that created the problems in the first place. The monetary policy in the United States doesn't make any sense at all.
ANDREW ROBERTSON: Well, just on, you mentioned the banking system, just on that, in the last week we've seen the stock market celebrating what are really quite awful results. What does that say about where we're at, at the moment?
MARC FABER: Well, basically, over the last 18 months, say, from the start of 2007 until now, the weakness in the market in the US has been principally concentrated in financial stocks. And a lot of financial stocks dropped by 90 per cent, some by 100 per cent, some by 95 per cent. And as of a week ago, the entire market had become extremely oversold from a technical point of view and the banking shares and financial shares such as Fanny Mae and Freddy Mac were also extremely oversold and they had very large short positions, don't forget that.
Now they changed the rules, or they made some proposal to change the rules about naked short selling that then motivated the short sellers in financial stocks to cover it. And that's why some financial stocks such as Fanny Mae, they doubled from the lows. But never mind double from the lows, they're still down close to 90 per cent from the high.
So you can have very strong performances in financial shares for a couple of days with financial shares rebounding 30, 40 per cent in some cases, maybe even 50 to 100 per cent. It could still drift down again and, I think in this period of de-leveraging and with the lack of transparency among financial institutions, because they report earnings but nobody asks exactly how they fiddle around and get to these earnings because they shift assets around from level one to level two to level three. In level three you don't need to value your assets. So you can essentially massage your earnings as you like when you're a bank.
ANDREW ROBERTSON: Can I just ask you very briefly, is the Federal Reserve and other regulators right to bail out these banks?
MARC FABER: Not in my opinion. What should happen is basically that the people that were running these financial institutions are responsible and the shareholders that own the shares and the bond holders of these institutions, they should take the haircut and not the taxpayer, the simple man on the street, bailing out the rich kids on Wall Street.
ANDREW ROBERTSON: Well, you've painted a very gloomy economic picture tonight. When's the recovery coming and how long is it going to take?
MARC FABER: Well, I think we'll have to wait for that for quite some time. But in general, even if I'm wrong, I'd like to make the following point: even if I'm wrong and the economies continue to expand, the big change that has occurred in the world is that we moved from an environment of falling commodity prices and falling interest rates and disinflation between 1980 and 2001 to an environment where now prices are going up.
So if the global economy continues to expand, I assure you that commodity prices will continue to go up and that inflation will accelerate and that interest rates will go up. And as a result of that, even if the scenario is very optimistic, I don't think that equities will perform particularly well, simply because liquidity will tighten and interest rates will go up.
So in any event, I wouldn't buy necessarily equities at the present time. I think for the next 10-15 years, equity prices will kind of move sidewards, up and down, volatile, in a volatile fashion, but the big bull market in financial assets is over in my opinion.
ANDREW ROBERTSON: Alright, Marc Faber, thank you very much for your time and for your insights.
MARC FABER: It's my pleasure.
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