Dr. Marc Faber & Jim Rogers
FSN Roundtable Discussion
"The Long-Term Bull Market in Commodities"
Transcription of Audio Interview, September 6, 2003
with your host, Jim Puplava, and two Renaissance men
Editor's Note: We have edited the interview in this transcription for clarity and readability. The original real audio interview may be heard on our Ask The Expert page.
JIM PUPLAVA: Welcome back everyone, joining me this week on the program I have two special guests. I have Mark Faber joining us and also I have Jim Rogers. Jim Rogers is an investor who has been chronicled in John Trains, Money Master’s of Our Time and Jack Schwager’s Market Wizards. He has been frequently featured in Time, The Washington Post, The New York Times, Barrens, Forbes and Fortune. In 1990 Rogers fulfilled a lifelong dream with a companion, motorcycling 65,000 across six continents. He chronicled his travels in his first book called, Investment Biker. At the end of the decade he did it once again, spending three years going around the world. He has written about it in his new book called, Adventure Capitalist. Dr. Marc Faber was born in Zurich, Switzerland. He studied economics as the University of Zurich and at the age of 24 obtained his PhD in Economics. Since 1973 he has lived in Hong Kong and from 1978 to 1990 he was Managing Director of *Drexel, *Bernum, *Lambair. Beginning in June of 1990 he set up his own business, Marc Faber, Ltd. He has a new book out called Tomorrow’s Gold; Asia’s Age of Discovery. Gentlemen, I would like to start our discussion with a debate that is hanging over the financial markets particularly since about May, and that is deflation and inflation. If we look at the markets from the year 2000 to 2002 with declining prices, one may argue that we saw deflation, but it looks like inflation is leading today. Any comments?
JIM ROGERS: Well there is no debate in my mind; I don’t know where these guys do their shopping. Everything went up a whole lot. I was gone three years 1999, 2000 and 2001. I had a unique window. When we came back, I can give you a long list of things that went up into double digits. Our Commodity Index Fund is up 100% since 1998, so something is going up. The BLS massages the numbers, those are phony numbers. I don’t get my advice from the US Government or from any government.
JIM: Do you think one of the reasons we don’t see this talked about in the press is the way we compile our numbers, because certainly the US is moved more towards a service based economy. Anything that I use as a service, whether it is going to see my dentist, paying for a doctor bill, having someone clean my pool All those prices are going up in double digits.
J.R: Education, entertainment, service or hard goods, dry cleaning, popcorn or going to the movies, all this is up in double digits in the last five years. The Bureau of Labor Statistics hedonically adjusts the numbers and they are absurd. I have had letters from former BLS employees telling that they are instructed to smooth things out.
JIM: Dr. Faber?
FABER: I think that it is important to realize that you can have inflation and deflation at the same time because an economic system is obviously a composition of different sectors. If you have a Central Bank that prints money the way we have done it in the US over the last couple of years and prints money aggressively. Obviously some sectors of the economy do inflate. It is most unusual that since 2000 the markets have been in a terrific bear market. At the same time you have the continuous bull market in housing. The money shifted into hard assets and we have a housing inflation and as Jimmy correctly pointed out, most services have increased in price. Insurance premiums, school fees, et cetera. Manufactured goods frequently are deflating because you have the inexpensive goods coming in from China, therefore prices for a number of items, whether it is a fax machine or a PC or a cellular phone, these types of prices have been deflating.
ROGERS: Marc is exactly right on that. I will say though, some of that in my mind is really the learning curve. Mobile phones have gone down a lot but whenever you bring out a new product, it is very expensive at first. Whether it is a new airplane or anything, as the leaning curve volume picks up, the prices go down. I am not sure I would define that as deflation or rather the normal course of introducing new products. There is no question that mobile phones and that sort of thing have come down. The cost of using mobile phones, the service is now going up.
JIM: One of the consequences of the bear market and the recession we went through in 2001 is certainly we have seen monetary **reflation of the United States, proceed at historic levels. The Fed is keeping short term rates below nominal GDP growth and they have created this powerful wave of liquidity, which appears at least at the moment to be flowing into financial assets. Any comments, have they resurrected the bubble?
ROGERS: They certainly resurrected printing money, but I don’t think they have ever stopped. Greenspan was printing money like a madman in 1998 and 1999; going into the Y2K problem which he was so convinced existed. He has been printing money for quite some time and he has certainly accelerated again. He and Bernakey and the rest of them have made it official Fed policy to print money. The money had to go somewhere whether it goes into houses or commodities or stocks or whatever, it is going to go somewhere.
FABER: I think that is very important to understand. You can define inflation as money supply growth and if you take money supply growth as inflation, house price increases and stock price increases are just a symptom of excessive liquidity reaching the system. Let’s say if we have a country like the US and if you double the money supply, then very clearly, as Jimmy pointed out, certain assets and certain goods and services will rise in price because the supply of assets will not increase at the same rate as money is increasing. This has happened in the housing market where so much money came into the housing industry and boosts its prices into what I would call a relatively high level.
JIM: What about the idea that we have seen this amount of liquidity, Dr. Faber, you have always talked about one of the problems with money leakage is that Central Banks face when they create it is that they can’t always control where that money flows to.
FABER: That is absolutely correct. In a global economy, what you have in the US is this tremendous increase in the quantity of money followed by a totally mad increase in credit. In 2002 GDP increased by something like 360 billion dollars but non-financial and financial debt increased by 2.3 trillion dollars. So, you have debt growth that is eight times faster than the nominal GDP growth and this money then �. Liquidity boosts and asset prices leads to symptoms of inflation in services, but part of it also flows outside of the country in terms of investments or in terms of speculative flows. Obviously the more money you print, the more people will lose confidence in the integrity of the currency that you have. The dollar began to weaken and it is likely that this dollar weakening is just the beginning of a major downtrend in the dollar in the next couple of years. The question obviously we will have to address, the dollar weakening against what? I think, as Jimmy pointed out, it is largely weakening against commodity prices who supply commodities such as precious metals, which cannot be increased as fast as the currency.
JIM: The perception in the financial markets recently is that the dollar is resuming some of its strength on the perceived perception that the US economy is much stronger than other economies in the world, in particular against let’s say for example what is going on in Europe . If we examine the strength behind this, it is coming form mainly excess money, excess credit. How long do you think this perception will last and are we in fact postponing some of the imbalances and excesses of the day of reckoning day of reckoning with those?
ROGERS: If you are asking me, the dollar is having a rally. But everything rallies in a bear market, in a bull market everything has consolidation, nothing goes straight up. My shorts always go straight up, but nothing else, as always there is a set back a consolidation, which is what happening with the dollar right now. It is in a bear market as Marc points out and it is having a rally. It is nothing more than a rally in a bear market, all bear markets have rallies. Greenspan and Bernakey and all the Federal Reserve governors have made it official policy, they have all made speeches, it is in their minutes that they are going to debase the dollar, and they are going to print money. They will drop it out of aircrafts or helicopters if they have to. That money, when you print too much of it, it is going to go somewhere. Some of it will go into real things, commodities; some of it will leave the country. That is what is happening, as Marc points out, he says it is a two year bear market, I suspect it is going to be much longer than that, I suspect it is a long term secular bear market now, pretty much what happened to the Pound Sterling as it lost its status as the world’s reserve currency.
JIM: Dr. Faber, you and your June newsletter talked about the financial implications of reflation and you quoted an Italian professor about hyperinflation. I wonder if you might address some of the problems the Fed may be creating if they proceed, unstopped, with this course of action.
FABER: I Think the Fed has proven that each time there is a problem in the system; they will try and resolve the problem by massive easing moves and by renewed credit expansion. As a result of this policy, you have had, since 1980 and especially since 1990, a huge expansion of debt as a percentage of the economy. Today, the debt level of the US is more than 300% of the economy. Obviously that will continue to rise. The dollar, as Jimmy pointed out will likely remain under pressure. The current account deficit which is now approximately 5% will stay at this level and probably will even increase over time. You are indeed postponing the problem and it is clearly not sustainable forever. The next problem that will arise, the Fed will have to inject even more liquidity into the system to solve the problems and eventually that leads to rising inflation rates, then when inflation rates start to rise, the Feds reaction will probably be to keep interest rates too low for too long and eventually you can end up will fairly high inflation rates. Since I wrote the report in the Gloom, Boom and Doom report in June, we had this big sell off in bonds markets around the world. In Japan , long term interest rates on **JGB’s have risen from less than half a percent to 1 � %. In other words, interest rates on long term bonds have tripled and in the US we had the biggest two month decline in bond prices ever. Something has changed in the perception of investors; the reaction of the Fed’s to that is that we didn’t ease sufficiently so they may ease even more at some point, going towards the end of the year, which will then lead to relatively high inflation rates sometime next year.
JIM: In your June Newsletter, you talked about some of the consequences of inflating. One is that it annihilates thrift, and certainly you can say that there is very little incentive to save when banks are paying less than 1%, inflation is running in the high single digits. If you take a look after taxes the returns are negative, you also talked about how this destroys moral and intellectual value and also creates a chasm of the classes in the sense that those are smart enough to get on board an inflationary train and those that are not able to do so. Say they can’t raise their wages to make up for inflation. Another element which I want to address on several issues, which is wide spread speculation.
FABER: Yes, of course, if you have a choice, you should never aim a policy at inflating the system. Eventually it leads to total disaster. I am not talking about one or two percent inflation, which is tolerable. If you have inflation rates that rise above ten percent per annum and eventually they may go up to much higher levels. Then you destroy your society. I have to say I am very concerned with the United States because first of all you have a Fed, which as Mr. Bernakey pointed out, is prepared to essentially drop dollar bills out of a helicopter. This is a suicidal monetary policy in the first place. Secondly, you have rising fiscal deficits. This rising fiscal deficits will put upward pressure on interest rates anyway, so that will force the Feds to keep money supply ample in order to finance the deficits. Thirdly, you have a war effort going on by the United States where the US is trying to play the policeman around the world, or dominate the Middle East , whatever you may call it, all these adventures lead me to the belief that actually the rate of inflation could surprise on the upside. Of course the government, as Jimmy pointed out, is doctoring the figures. The inflation rate here is probably much higher than what the figures suggest.
ROGERS : Marc is exactly right about the dangers of inflation. I thought we all knew it, which is why after the Second World War; the Government passed a law saying the Fed’s number one responsibility was to maintain the value of the currency. Everyone from Marx to Hemingway has all said that there is no better way to undermine a society than for inflation because it does it in ??? waves, people don’t know what is going on and the next thing you know the whole society collapses. Bernakey policy and Greenspan’s policy of printing money is a disastrous policy. It has never worked in history, in the long term it never has, it has always lead to horrible results when you debase a currency. I happen to hate the policy. I think it is terrible, for me for my child, for everyone listening to this broadcast; unfortunately they have the printing presses. I cannot live by what I wish would happen, I have to invest by what is actually happening and I have to live my life by what I actually see happening. With war and printing money, we are really debasing the currency and inflation is going to rise again, is rising again, and despite their doctored numbers and assets are going to go higher. We have to pick the assets.
JIM: When we take a look on the debate of inflation and deflation, there is a large segment of the financial community that thinks we may be heading for real deflation, I wonder if you gentlemen might contrast the difference between societies. For example the US in the 1930’s went through deflation. Japan in the 1990’s went through deflation, but both those countries, the US in the 1930’s and Japan in the 1990’s were all creditor nations. What are the differences and perhaps the implications for the US which is now a large debtor nation? Is the outcome different?
ROGER: We are the largest debtor nation in the history of the world. In fact, if you add up our foreign debts, they exceed the foreign debts of every debtor nation of the world put together. It is not that we are just a debtor nation, but we are a serious debtor nation. You are exactly right; it is going to lead to very serious problems down the road. What will probably happen Jim is that there will be serious inflation first as the Fed tries to drop its dollar bills out of helicopters. Ultimately there will be a collapse. That will lead to a deflationary collapse. It is not going to be deflation first; it is going to be inflation first, serious inflation.
FABER: I would also like to point out that you can deflate the price level in different ways. The depression years, they were quite unusual, that you have to count the price declines we experienced at that time. There may have been special factors involved. Under the present monetary policies, this kind of deflation we had between 1929 and 1933 is pretty much out of the question. What you can get is measured in gold prices is deflation. Let’s assume the price level stays stable in a recession, but the gold price goes up by 100%. Then the price level expressed in gold has been deflating. The other point that is important to understand, say in Latin America in the 1980’s, and I think the US has some similarities to Latin American countries in the 1980’s, when the government in Latin America printed money like there was no tomorrow and created large fiscal deficits and the countries were burdened by large foreign debts and therefore they experienced hyperinflation in the domestic price levels. Everything went through the roof at that time in terms of domestic currencies, but because the Latin American currencies collapsed against the dollar, for a dollar holder Latin American became very inexpensive in the years 1985 to 1990. You could buy an office building in Buenos Ares for one million US dollars. So, in dollar terms, the price level actually had deflated. I think if I look at the last twelve months, it is true that in the US prices have continued to go up, but I am a euro holder, a holder of euro denominated currency, for me America is somewhat cheaper today than it was a year ago because of the decline of the dollar against the euro.
JIM: What happens in the US for example, if the dollar is no longer accepted as payment globally? If we look at the US today, we are no longer self-sufficient in capital, we are no longer self sufficient in manufacturing and we are no longer self-sufficient in energy so we have to import much of the energy of this country. We are importing capital and we are importing just about everything else. What happens to the US , it seems to me that if we have to pay for these goods and the dollar depreciates against other currencies, than we are going to see as you see Jim, large amounts of inflation first.
ROGERS: Yes, Marc and I both have said that. You are going to see that. Worse than that, you are going to see the standard of living deteriorate here. It has already been deteriorating compared to where it was. There have been examples of this, look at what happened to the UK after they lost their position, Spain , Portugal , the Netherlands . It has happened to many countries throughout history, where they have been a dominate economic or political power, and they lose it, the whole thing falls apart. Bright people immigrate; the others send their money out of the country and survive that way. Usually when they get as bad as they will probably get, they put on exchange controls and they make it difficult if not illegal to take your money out of the country and peoples standard of living continues to decline. This is not radical. This is what has happened throughout history. I hate it, but this is always what has happened before.
FABER: I may add, one of the problems that I have with this scenario, and I basically agree with it is, I think that you have today a number of major currencies. The US dollar, the euro, the yen and the Chinese RNB. Then you have gold. The four currencies that I mentioned are paper currencies who supply can be increased indefinitely. The supply of gold cannot be increased indefinitely. As it happens, nobody in the world today wants to have a strong currency, because if the euro would appreciate significantly against the US dollar, they lose some of their competitive positions. The Japanese don’t want to have a strong currency because then they lose their competitive position against the Chinese, the South Koreans, the Taiwanese and so forth. The Chinese are quite happy to have their currency pegged to the US dollar. Incidentally, the Chinese trade balance has been deteriorating. They used to have a large trade surplus but now their trade account is imbalanced because their imports have been rising very rapidly. Not imports from the US , but imports from other Asian countries and the Middle East in terms of oil. I think that eventually the dollar and all currencies will depreciate against hard assets and not so much the dollar depreciating against the euro.
ROGER: Marc makes a very good point. There are no sound currencies anymore. Forty years ago, the Swiss, the Germans, there were plenty of people around the world who understood the necessity of a balanced currency. Every politician in the world now has learned to buy votes, including the Swiss, including the Germans, the Dutch, you just don’t find sound currencies. In the 1930’s everyone was trying to “beggar thy neighbor� with tariffs and customs duties. Now, it is beggar “thy neighbor’s currency�. Even Singapore , which would like to have a sound currency, cannot have a sound currency anymore, because if they do they would go broke because everyone else is debasing their currency.
JIM: How long can this go on with nations depreciating their currency against the other major currencies before the whole system collapses? Just as it did in the 1930’s leading eventually, as we know, to war.
FABER: I think it can last a very long time. It is a painful process and as Jimmy pointed out it leads really to a society deteriorating and enormous problems. The consequences are essentially or eventually are war and social striving it is a sad picture. I think that as was said, nobody today can really afford to have 100% sound currency and that is why my advice to people would be to some of their assets in a currency whose supply cannot be increased indefinitely. That is gold. There is one more point I want to make. In principal the soundest currency today is the Chinese RNB, they could easily revalue by 50% to the US dollar and they would still sell goods to the US and buy very little from United States and still have a trade surplus in the order of 100 billion US dollars annually. The problem for China if they revalue is more that it changes that competitive position against other exporting countries, notably the exporting of Asia . What I think will happen in the future, and this is probably quite important. The Asians are piling up these US dollar foreign exchange reserves, at the same time there is now a free trade agreement with China and ??? and I think this free trade agreement will eliminate duties between the various Asian countries. Trade between Asian countries is growing very rapidly. This year alone, the exports from Thailand to China increased by 82% and this integration of the Asian block among each other will probably lead down the road, four or five years from now, to the Asian’s saying, “We have too many dollars and we have a dollar that looks very wobbling and we have no longer any confidence in dollars so they will shift some of these reserves into gold and then probably form, like the Euro, and Asian currency unit. That Asian currency unit can then appreciate by say 30% against the US dollar very quickly.
ROGERS: That is a very good point. I suspect that it will go up more than 30%. Even if wages in China double, or if their currency doubles against the US dollar, they still have a gigantic advantage over American producers. Jim, you asked how long this can go on, Marc is right, it can go on for a while. Look at Argentina, it debased and destroyed its currency for 30 or 40 years. The **Perones came in there and ruined the place. The people continue to live and dance and drink and everything else in Argentina. It wasn’t a very good life, they got worse and worse and they had military dictatorships, et cetera, but it didn’t fall off the face of the earth, it just wasn’t a lot of fun.
JIM: I want to continue on with this thought on China. It almost seems like there are some similarities. Just as the US was sort of the engine of economic growth in the 20th Century, its manufacturing might became the center of the economic universe, do you see this role gradually shifting over to China, as you talked about Marc, as China ’s demand for goods. As consumerism rises, the standard of living rises in the region that they begin to trade, not only in the Asian block, but in itself, becomes the center of economic growth.
FABER: I think the trend is very clearly towards China becoming the workshop of the world. India will probably the service center of the world. Not only because wages are low but because you have a highly educated workforce. The Chinese are thrifty people that we have to see. I doubt wages will rise a lot in China simply because you have 600 million people in the countryside that are essentially unemployed and will conjoin the labor force. The outcome is that China will produce the goods for the world, India will provide the services and the standards of living in Western Europe and the US will have to adjust downwards. I would also like to point out that the Chinese economies are far larger than the figures would suggest officially. The US has a GDP of 11 trillion dollars and China ’s GDP of say one trillion dollars. Statistically the US economy would be ten times the size of China ; in fact I think that the Chinese economy in many sectors is already larger than the US , because you have 1.2 billion people. In terms of units of motorcycles sold and produced, refrigerators, radios, televisions. The steel industry in China is larger than the US and Japan combined and they are still importing steel. It is a huge economy already, but because the price level is so much lower than in the US , it doesn’t show up in statistics. My guess would be that today, the Chinese economy is somewhere between 40% and 60% of the US economy already.
ROGERS: Jim, the best advice I could give people would be to teach your children Chinese. I don’t say that facetiously. I have a little girl, she hasn’t even had her first quarter yet, she is 89 days old and I am already getting her a Chinese nanny to learn Chinese.
JIM: I want to continue with this in terms of a major investment theme. In one of the things that I have seen in my experience, a lot of the times, investment themes in their Genesis state aren’t obvious to many when they are most attractive. That seems to me to be the case today with commodities. Jim, you talked about your fund being up over 100% since 1998. We have seen the AMMEX Gold Index up over 400% over the last three year. Gold prices are up, silver is starting to move. Basic commodities, energy prices did not fall down to twenty dollars a barrel after the Iraq war. They are closer to thirty. Let’s talk about the implications of what I think is the bull market of the next decade.
ROGERS: You are right; people rarely recognize the beginning of a new bull market. If you may remember in 1982, the DOW Jones was 800 and everyone was most pessimistic and by 1984 it had gone up to 1200 and everyone said it is up to 50% this is a new high, you better get out. This is crazy. People doubted the bull market for ten or fifteen years in stocks. By the time they all realized it was a bull market, it as coming to an end in 1998, 1999 and 2000. That is the case with every bull market when it begins and likewise every bear market when it begins. People don’t recognize it at first. I will still tell people about commodities and they think it is a bear market and it will go down. I say the index fund is up 100% in five years and it still doesn’t register. They won’t believe it that something is changing. By the way this is an index fund; it is not in my brains or anything else. I am not managing an index fund; a simple computer manages this thing. That is the way it has been throughout history and Jim, yes, DNBC will be broadcasting from the soybean pits of Chicago . We will be getting towards the end of the bull market. Hillary Clinton will start speculating in cattle futures again. This will happen. *Merrill Lynch, Pierce �and Smith, the largest broker in the world decided to get out of the commodities business in 1998 because it was a very bad business. That is the year we started this fund by the way. Some day Merrill Lynch is going to come back into the commodities business. They will be advertising these businesses and they will sponsor *Maria Bartaroma to floor the soybean pits in Chicago and we will have to start thinking about getting out. That won’t be the end by the way because you have to have the public to come back into this thing in order to make the final blow off top. It has a ways to go. Nobody recognizes it yet. It is wonderful.
FABER: I agree and I think people and investors must realize that we had a major trend. 1980 to around 2000 we had a major bear market in commodities, 1981 to 2003 major bull market in bonds and 1982 to 2000 major bull market in stocks. Now this period 2000 to 2003 is a milestone in the markets in the sense that commodities are turning up and entering a bull phase that can last ten years or even longer and bonds and equities have turned down. Of course there are always counter-trend rallies and I think this rally we have here in the US is a counter-trend rally. We were in a long term bear market for equities, equities will not perform well over the next few years. In five years time the S&P could still be at 1000 where it is roughly today. In the mean time, commodities will have had very substantial upwards moves because the demand for commodities is very strong coming out of countries like China that are in the process of industrialization. I think it is quite likely that in the next five years, you will see oil prices much higher than they are today, possibly at 100 dollars a barrel, you will see the gold price at the multiple of what it is today, including silver. The price of coffee will be up a multiple of what it is today. That is entirely possible. I doubt the S&P will be up a multiple of what it is today.
ROGERS: The only way it will be up is if the US dollar collapses. The S&P may be 2000 but the US dollar will be paper.
FABER: That is possible yes.
ROGERS: It will be down in real terms, it will be down dramatically in real terms. When the German’s had their wild inflation in the early 1920’s their stock market went through the roof, although everyone was losing money because their currency was going down even faster.
FABER: It would also imply a total collapse in bond prices.
ROGERS: Marc makes a good point about stocks and the US market. I know others have also pointed it out; the Japanese market has had several huge rallies in the past 14 years, up 40 and 50 percent at times, on its way down to 75 or 80 percent, nearly 90 percent before it is over. You can have huge rallies in stocks, but in the end, you are not really going to go anywhere, the only place you are going to go somewhere is in commodities.
JIM: I want to talk about some of the supply and demand fundamentals of commodities, with demand coming very strongly from China and India where you have nearly half the world’s population. On the supply side, Jim I wonder if you might address Russia and the former Soviet Republics , which you have had a bit of experience traveling the back roads through those countries. Commodities take time. You have to go out and find a mine; it takes about three to five years to bring a mine on board in terms of production, even if you find the raw materials. Even if you are talking about the agricultural commodities, where you have a lot of arable land in let’s say China, is being converted into pavement high rises today. Talk about the implications of supply and demand as coming from those major countries in that region.
ROGERS: As we discussed and as the market pointed out, the Chinese are beginning to import huge amounts of stuff because they don’t have it. They would like to be able to produce copper and steel and other things. As far as copper is concerned, they can’t find any copper at home, so they have to import it. The trick to making money in China is to figure out what you can sell to the Chinese. They are not going to buy televisions or light-bulbs from us, but they are certainly going to buy copper and things that they cannot produce themselves. That is how you get rich with the boom in China. Nobody has invested in productive capacities in commodities for twenty years. You have had a lot of people give you hot new mutual funds, hot new stocks in the last twenty years, but nobody has come to you with a sure thing in a sugar plantation or a can’t miss in a lead mine. People just don’t invest in bear markets. Not many have built many off shore drilling rigs since 1981, there were scores built in the 1970’s. The production capacity has been flat to down. Demand has continued to grow. We know what has happened in China, we know what has happened all throughout Asia . Demand aggregate consumption is up, even if we do have hard economic times, we are still consuming more than we are used to. The third factor of course is inventories; supply and demand in inventories. There were huge inventories built up in the cold war and after the commodities bubble in the 1970’s, everyone went into the 1980’s and 1990’s with a lot of inventory. That has all been whittled down now. The Russians have dumped everything. The Russians are not investing anything in productive capacity. They have a whole new crowd of outlaw capitalist but they are stripping assets, they are not building for the future. They are selling and dumping as much as they can. The pipelines are not being taken care of. The drilling rigs are not being taken care of. The highways are not being taken care of. Everyone in Russia is trying to get rich as fast as they can by selling what they can but it is leading to future less production in Russian than what is going on now. It is all coming together and then as Marc pointed out, you have war and printing money so you put together flat supply, down supply, increase demand, inventories worked off, war, and printing money. It is just history. This means commodities are going to go through the roof.
FABER: As I would also like to point out, in the US as we know, capacity utilization rates are around 75 percent for industry. But in the mining industry the capacity utilization rate is over 95 percent. In other words, you cannot increase the supply all that much, particularly in the oil industry. The oil production in the US has been coming down for the last 30 years and for the world as a whole it is likely that oil production will peak out in the years 2006 and 2008. Probably the demand for oil, coming from China and India will increase very dramatically. Because the exploration budgets of the large oil companies have been cut over the last twenty years, as a result of the oil price decline until the year 1999, there aren’t any major new oil fields coming on stream. Then you have the uncertainty of the Middle East , like in Iraq, where the oil production is unlikely to rise very much as the potential of Saudi Arabia blowing out. I think the situation for energy is very bullish for prices and bearish for the global economy.
ROGERS: Jim, you said before about how long it takes to bring mines on stream, because it takes a while, you haven’t even gotten into the whole environmental question. Suppose you and I found a new copper mine or lead mine, then we could raise money on Wall Street, which would be problematic because nobody wants to invest in a copper mine these days, but if we did we still have to go through the environmental hoops in many countries of the world, obviously not everywhere. That is just another added delay into bringing new stuff, which is why bull markets and commodities last a long time, you cannot just turn on a faucet and bring the stuff on stream right away, which is why bear markets last a lot of time in commodities because every time everyone gets their mines or plantations on streams, they all come on at once. Then you have long bear markets.
FABER: I agree with that. I am on the board of a mining company called Ivanhoe Mines and we have a large deposit in Mongolia, but from the time you know that there is something there until you have all the drilling results, they take three or four years and a huge exploration budget, it is very difficult to actually find new resources in the world. They are very scarce and to find them is incredibly expensive. As Jimmy pointed out, the supply can come on stream for some commodities. The Vietnamese have increased coffee production dramatically over the last ten years and are today the second largest producers of coffee in the world after Brazil, but never the less, for nonferrous metals and precious metals, this is very difficult to do.
JIM: This is one of the aspects of commodities in terms of a bull market that make it much different in the paper market. If the demand for example for paper assets, such as stocks or bonds increases, it is much easier for a company to issue more stock or for the government to issue more bonds to satisfy that demand. In the case of commodities, I don’t care if it is grain or oil, cocoa, lead, zinc or copper. Even if the price was to go up today, let’s say 100 percent that still doesn’t mean we will have more supply come into the market to satisfy that because of the long lag time.
ROGERS: That is why bull markets in commodities last a long time when they come.
JIM: Gentlemen, in reading both your books, and in reading your book Jim, you have a chapter in there that talk about some of the best investments that you have made have always been long term investments, not trading decisions. Dr. Faber, you talk about one of the best things you can do is when a new trend or bull market primary trend comes into play, is to get on board that trend and then ride it until it completes itself. Isn’t that the real way to make wealth, rather than this trading mentality that is so prevalent today?
ROGERS: I am a horrible trader so I have to do it out of necessity. That is the only way I know how to make money is to buy things that are going to go up for a long time. If I try and trade, I promise you I am the world’s worst trader.
FABER: I would also add to it, if you look at the people who became rich in real estate, my family had houses and so forth and they bought it for a third in price. They didn’t buy it for the appreciation; it just happened accidentally that it went up in value. Frequently you should do things, not necessarily because you think it will go up, because if you think it will go up, maybe lots of other people think the same way, and then there is already a premium price into that market. There are some people who are very good and could make a living out of trading; the majority of players in the market place actually loose money by trading because of the transaction cost and the emotional involvement. They find it hard to take losses or they find it hard to withstand adverse market movements and so forth. My view would really be that the average investor would be better off getting on board assets that are out of favor, such as commodities today or maybe the Asian markets, who are not yet fully discovered, given the size of the economies that we have in Asia . There are always opportunities in the world. The best opportunities are obviously where there is a bubble, where the publicity and where the media is focusing upon. There the pricing is already relatively high.
JIM: I guess the point I am trying to make here is if we take a look at this rally that we have going, this counter trend rally we have in the market. Rather than trying to chase a fleeting rally in a bear market cycle, getting on board let’s say, a new primary trend in commodities and just holding that position until it completes itself.
ROGERS: You say it is a counter trend, but I think it is a counter trend too. I do know that the place to be is commodities for the reasons we discussed. Marc says that if you buy something a lot of other people may think the same way. I will point out that there are no commodity mutual funds these days. In the end of the 1960’s there were no gold mutual funds. When gold went through the roof, a lot of people started gold mutual funds and everyone jumped on board. In my opinion that is going to happen with commodities. There are no commodity mutual funds right now; eventually there will be as everyone piles in. But you talk about an area where nobody wants it and nobody cares, there are not any mutual commodities these days.
JIM: Getting to some final thoughts, we all agree that there is a new commodity bull market that is taking place. It is just in the beginning stages, it is likely to last a long period of time, do to fundamental reasons, China, Asia , lack of supply. How would you best play this?
FABER: There are many ways to play a bull market in commodities. First of all, the fund Jimmy has, this index fund, is a very good way to play it because you are in commodities on the long side. If you give your money to your commodities trader, they are commodity funds that manage money in commodities. They could actually miss a lot of the action because they could be short at the wrong time, so I would prefer to go for a fund such as Jimmy has. Of course people can buy commodity futures such as coffee, gold, silver, copper, zinc or whatever it is and roll them over. That would be a possibility. Then they can buy underlying equities. In other words, mining companies, nonferrous mining companies, copper companies, aluminum, gold mines, silver mines. They can also invest in emerging economies that are commodities based or rich in resources such as Russia, Brazil , Argentina , Indonesia , Malaysia to some extent Thailand and the Philippians. In currencies that have a large commodities backing because of the resources, The Canadian dollar, the Australian dollar, the New Zealand dollar and so forth, really many ways. If commodities go up, one thing is clear, bonds won’t perform very well, although I think that as of today the bond market is oversold and have a counter trend rally, the way the stock market has become terribly over bold and may sell off now in September, October. There are really many ways to play the commodities cycle. You could be short bonds or long commodities or long equities in emerging markets, long oil stocks and so forth.
ROGERS: Marc is exactly right; he covered all the ways to play. One thing about buying stocks is you would have to worry about the management, the stock market of the local country. Copper may go up, but the New York Stock Exchange may go down. You have to worry about a lot of stuff. Copper is pretty dumb, it is very simple to analyze copper, there is either too much of it or too little of it. If there is too little, it will go up, if it is too much it will go down. Buying commodity futures gets a very bad wrap, Jim, because everyone has a brother-in-law who lost his shirt in soybeans or pork bellies or something, yet he did lose his shirt on soybeans because he bought on five or ten percent margins, he put up very little money and the fluctuation wiped him out. You don’t have to buy commodities that way. If you buy ten thousand dollars of IBM, put up ten thousand dollars, or maybe five thousand. You can buy commodities the same way. You can buy ten thousand dollars worth of pork bellies and put up ten thousand dollars. If you look back, you will see that pork bellies have fluctuated a whole lot less than Cisco has over the last five years, or a lot of other stocks on the stock market. Commodities get a very bad wrap, everyone is afraid of them. It is another one of those myths and legends which is false upon examination. The best way, in my view is to buy the futures, roll them over if you need to. Marc is exactly right; there are many ways to invest in this if we are right about commodities.
JIM: Gentlemen it is getting to the end of the interview. Any possible parting thoughts you would like to give our listeners.
FABER: I think that coming back to the theme of commodities, if we assume that we are at the major inflection point that commodities bottomed out sometimes in the period 1999 and 2001 and have started a bull market. Then periods of rising commodity prices, by and large were not very conducive for financial assets. Financial asset stocks and bonds performed best in a bear market for commodities, where at the same time interest rates declined and because of the decline of the commodity prices, corporations can boost their profit margins as their costs come down for the materials the purchase and the selling price is relatively stable. In times of accelerated price increases for commodities, the financial markets tend to move sideward or down. From 1964 to 1982, in principal a sideward trading Dow Jones, where in real terms the Dow Jones depreciated by seventy percent, in other words, inflation adjusted. I think the implication for the investor if they believe that commodity prices will rise, is that stocks simply won’t perform particularly well.
ROGERS: I couldn’t say it any better. We are in a period, in my view for the next several years, stocks and bonds are not the place to be. The US dollar is certainly not the place to be. Some foreign currency, I don’t know which one is best, but the best investment I know is to buy commodities. Whether you do it through an index fund or how, it is up to you. That is the only place where I can see on the horizon, where I am confident there will be money made in financial markets, if you call them financial markets.
JIM: Finally gentlemen, just speak briefly about your book, Marc in Tomorrow’s Gold and Jim about Adventure Capitalist.
ROGERS: I recommend Marc’s book.
FABER: I also recommend Jimmy’s book. I think investors have to read a lot. They have to visit the many tents in the bizarre to be informed and they have to study a lot and be diversified. Ultimately we all don’t know how the future will look. Therefore a certain diversification is necessary, whether it is real estate or different currencies. I would also like to say, my concern about the United States, and this point was raised by Jimmy early on, that they may one day impose foreign exchange controls. I think if you own gold, I think you should own it in a safe deposit box outside of the United States . Since commodities will be owned by a minority of people, if they appreciate dramatically in price, the majority, the government in other words, will find it as a popular measure, to expropriate people who own gold and hard assets. I think that the assets of an individual should also be diversified in terms of who holds these assets.
ROGERS: No question, as Marc’s advice to have some of your assets outside of your home country, whatever your home country is, very sound advice, which has stood the test of history for thousands of years.
JIM: Gentlemen, I want to thank you both for joining us on the Financial Sense Newshour. You have very generous with your time. I know you are both busy. On behalf of our listeners, we would like to thank you and hope to talk to you again in the future. Unfortunately this week’s program has run out of time. I would like to thank you for joining us on the Financial Sense Newshour. It is good to be back again. I want to give you a heads up on the new segment of the program that we are going to be introducing. Joining me next week is a special segment that we are going to be calling, “Ahead of the Trend� it will be Ike Iossa, a very well known money manager and technician will be doing a joint program together. We will have some special guests. We are going to take a look at the stock market. Is it undergoing distribution? And the gold market with Frank Barbara. We have a special program we are going to introduce to you next week. Hope you will be there to join us. In the mean time, on behalf of John Loeffler and myself, we would like to thank you for joining us here on the Financial Sense Newshour. We wish you the best on the week ahead.
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