U.S. Global Investors, the San Antonio-based fund shop that boasts a chart-topping performance with its gold/precious-metals fund and its global-resources fund (among others), recently hosted a broad conversation between its CEO and CIO Frank Holmes and noted economist and commentator Marc Faber of Hong Kong.
Faber has written several books, including Tomorrow's Gold: Asia's Age of Discovery, while Frank Holmes has just co-written The Goldwatcher: Demystifying Gold Investing.
Some highlights from their extensive dialogue, which touched on economic, investing and political topics affecting mutual funds and the broader financial markets, include the following:
Faber: The conditions that led to the Depression in 1929 and 1932 are very different than what we are facing today because commodity prices at that time had been in an upward trend from 1890 to 1921. Throughout the 1920s [through 1999-2000 we were] in a downtrend ... We [today] are now in an uptrend. So the more money [the U.S.] prints, the higher commodity prices will go and the lower the dollar will go and the more inflationary pressure the U.S. will face.
Let me emphasize that the weak currency is one of the clearest symptoms of inflation -- inflation as defined by an increase in the quantity of money and credit. And based on the dollar weakness we have experienced, the U.S. has much higher inflation than what the Bureau of Labor Statistics has been broadcasting.
Holmes: We have noticed that industrial production in the E7, the most-populated emerging countries, has a higher correlation to the price of copper and oil than does industrial production growth in the G-7. Do you have any concerns about this correlation or that this pattern will change?
Faber: I think that we are at the junction in economic history that is very important ... If you look at history books, economic history books, then in the advanced economies, the most developed economies, gross domestic product per capita in real terms has increased 21 times over the last 200 years. But in the poor countries it has only increased by two and a-half times.
But now comes 2001 and going forward, and suddenly the emerging economies are growing at a much faster pace than the developed economies of Western Europe, Japan and the United States. And so the share of the G7 countries, the rich countries, as a percent of the world's GDP is going down and the share of the poor countries is going up.
Say the United States made 32 percent of the world's GDP in 2000; now it is less than 28 percent. So that pattern, I think, is a permanent feature that will be evident in the next 50 years going forward. It does not mean that the West will go poof into nothing, but it means that your and my children will have essentially stagnating percapita incomes -- that is for the median family, for the typical family, for the average family; some people [in the West] will make a lot of money ... but in emerging markets like China, real percapita incomes are kind of doubling every 10 years.
The world has over 6 billion people, and 5 billion live in poor countries. They are the drivers of the demand for raw materials basically.
Holmes: As I try to explain to people, in 1970 there were only 3 billion people on planet Earth. "Chindia" [China and India] had no global footprint. There was no significant contribution of GDP, and they were at war with each other. In fact, [there were] a lot of skirmishes along their border.
Today, they have a massive global imprint, 40 percent of the world's population. They're consuming more and more food [and] ... the tipping point was not Y2K; it was [when] the world had 6 billion people. Would you agree with that, in terms of commodity demand?
Faber: What people frequently overlook when it comes to commodities is that the supply response takes a very long time ... But if there is a shortage of copper and of oil and during the period in which the shortage develops, most of the producers feel that it is a temporary blip up in prices and [prices] will come down, so they never really in earnest went to spend money on new exploration. So until that response comes into the market, it may take 12 years. You and I go and we look at copper on until we find a large mine and until we do the project, study and build the infrastructure and until we supply the world's market, in my opinion nowadays, minimum 15 years.
Holmes: Asia's GDP has been growing at 9.5 percent for the past five years, far outstripping the United States. Do you think that this growth rate is sustainable, and what do you think it says about how much Asia's economies are decoupling from the U.S.?
Faber: I think in Asia we have one potential problem -- inflation ... In Vietnam, people have per-capita incomes of annually say $700. Then, obviously, they spend 50 percent of their income on food, maybe 10 percent on energy. So as that goes up, it hurts them very badly. Their discretionary spending then goes down. So ... in real terms, inflation-adjusted [growth] could slow down in some countries meaningfully, and the average family [in the cities] could be hurt quite badly for a while.
Holmes: Do you think [commodity prices, like those for iron ore/coal used in steel production] are sustainable, or do you think this is a bubble?
Faber: I would think that if you look at commodity price movements over the last 200 years, specifically say since 1980 and in real terms since 1974, we were in a bear market for essentially the old-economy companies. We were in a bear market for commodities, and so very little investment went into capacity expansion.
I mean there was a visionary, Mr. [Lakshmi] Mittal who essentially bought all the steel mills for nothing, and he had the vision that one day that demand would go up and there would be no additional supply. I kind of think that the money printing of the Fed, essentially since 1981 when debt to GDP was 103 percent and now it is 350 percent, will lead to a permanently higher-price level for commodities.
In other words that in your lifetime and your children's they will never again see $12 a barrel of oil -- never again. That I am quite sure about.
Some [commodities] have corrected already, like nickel, down 50 percent, [and] zinc down 50 percent. But in general my view is the central banks of every country; they cannot really pursue tight monetary policies, so they will print money. Commodities will correct. But the long-term uptrend is intact.
Janet Levaux, MBA/MA, is the managing editor of Research; reach her at firstname.lastname@example.org.