Western Producer reporter Ed White is talking to the world’s top market analysts to bring a range of philosophies and insights into the current financial crisis. In this series, the analysts discuss what happened to predictions about the world being in a long-term bull market for commodities and whether the financial crisis changes the long-term outlook for commodities farmers produce. This is the sixth in the series.
Hong Kong-based Marc Faber is editor and publisher of the Gloom, Boom and Doom Report. He was born in Switzerland, received his PhD in economics at the age of 24 and was manager of Drexel Burnham Lambert’s Hong Kong office from 1978 to 1990. Since then, he has operated Marc Faber Ltd. His investment advice is internationally sought and his written and spoken opinions are enjoyed for their depth of analysis and their cutting wit. The following are Faber’s responses to e-mailed questions.
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Q: You are one of the people who very early called for a long-term bull market in commodities and for the world to move into an inflationary period.
Do you believe the inflationary period is going to continue, or has the recent lockstep decline of commodities and equities signaled an end to the inflationary cycle? In other words, is this crisis a short-term deflationary period in the midst of a long-term commodities bull market, or is it the beginning of a counter cycle?
A: In 2001, I wrote Tomorrow’s Gold in which I made a case for commodities based on the rising demand from Asia, notably China. I also devoted a chapter to business cycles and in particular excessive debt growth, which inevitably would lead to a financial crisis. Now, we had the financial crisis, but I need to emphasize that the financial crisis is not the cause of the economic distress but was a symptom of huge imbalances in the global economic system.
The financial crisis is just the catalyst to the slump and not its cause. The cause was ultra expansionary US monetary policies, artificially low interest rates, which led to a mispricing of capital and led to excessive debt growth. Between 2001 and 2007, debt grew in the U.S. at five times nominal GDP growth – clearly unsustainable in the long run.
In this situation, I cannot see, for now, a resumption of the bull market in commodities. I warned earlier this year that in the second half of the year commodities, especially industrial commodities, would decline. Now, I think that it will take time for the bull market to resume.
Q: Is there going to be, or has there been, a moment of truth at which there will be clear proof as to whether the inflationary cycle will continue?
A: Between June 2004 and August 2006 the Fed (U.S. Federal Reserve) increased the Fed fund rate in baby steps from one percent to 5¼ percent. However, no monetary tightening occurred because the Fed fund rate was consistently below nominal GDP growth and the cost of living increases – not core inflation, which is meaningless for the typical household – and because lending standards were eased.
Between September 2007 and now, the Fed slashed the Fed fund rate again from 5¼ percent to one percent. What happened?
And it is important to understand how destabilizing Fed monetary policies are and how they actually worsened current economic conditions.
The CRB (a commodity market index) had peaked out at 365 in May 2006. After that the CRB corrected and traded in a range of 280 to 320 until September 2007.
But when the Fed slashed the Fed fund rate, commodities went ballistic and reached on the CRB 473 in July 2008 at a time it was obvious that demand would disappoint the commodity bulls’ expectations.
What I wish to stress is that had the Fed not cut rates aggressively, commodities would not have experienced Helicopter Ben’s (U.S. Federal Reserve Bank chair Ben Bernanke) last rally from around 320 on the CRB to 473.
Thereafter, the collapse was inevitable because of the reduced demand for raw material from the industrial countries and because of the unwinding of speculative positions. The CRB now stands at less than 250.
Now the money-printing U.S. Fed and the incompetent and market-manipulating U.S. Treasury – guess for whose benefit – are trying to revitalize credit growth, the very means that got us in so much trouble.
But something has changed. First of all U.S. credit growth has slowed down from an annual growth rate of 16 percent at the end of 2006 to just three percent at present. In a debt addicted economy, this is a recipe for a prolonged slump.
Secondly, I estimate that global wealth destruction from equities, corporate bonds, commodities and real estate to be close to $100 trillion US – equities alone $30 trillion – over the last 12 to 18 months.
So Mr. Paulson’s (U.S. treasury secretary Henry Paulson) bailout package and the money printer’s monetary efforts to support asset prices are minuscule in scope compared to the total wealth destruction. So, for now inflation will not be a problem.
However, because mining companies and oil exploration companies will run out of money, new supplies will not come on stream and when finally the global economy recovers – in say three to five years – prices will rise. Also, the worse the global economy will become, the more money will be thrown at the system by all central banks since all central bankers are money printers. So, it is possible that we shall see a global slump amidst rising commodity prices in 18 months time or so.
Q: How would agricultural commodities likely fare in a continuation of an inflationary period? Ag commodities were late comers to the commodities bull market. Will they likely be stronger or weaker in the next phase of a commodities bull market?
A: Sorry, I haven’t got a clue, but my impression is that in an environment of potential weak aggregate global demand and money-printing central banks and exploding fiscal deficits, precious metals would be the preferred assets as their supplies cannot be increased at the same rate as paper money and because they will be increasingly perceived as “safe money” since they do not represent a liability of someone else.
I also think that commodities, which require large investments such as mines and oil wells, will remain in relatively tight supplies once the global economy finally recovers as there is no financing available for new supplies.
Q: If we instead go into a deflationary period, will agricultural commodities likely be stronger or weaker than other commodities?
A: The demand for food is less cyclical than the demand for industrial commodities, so they may perform somewhat better than industrial commodities in a deflationary environment.
Q: If you were a farmer, owning lots of land, making interest payments on land, equipment and fertilizers, and producing large amounts of grain and oilseeds most years, what difference would it make whether we move into commodity value deflation versus staying with commodity value inflation?
A: In a deflationary environment, leveraged farmers will go out of business. In an inflationary environment they will do OK but not fantastically well because their input costs will soar.
Farming is a very tough business and only very well financed farmers – no debt – survive in the long run. If farming was a money-printing business, the Chinese and the Jews would all own farms instead of being the traders in physical commodities.
Q: If you were such a farmer right now, what would you do to avoid the risks of the current situation and set yourself up to take advantage of the opportunities of the future?
A: Right away, all farmers should stop paying the interest on their debts and march on financial centres, burn down the banks and ask for a government bailout as well. Hanging the bankers would also be a good idea and lead to a more stable world.
