INTERVIEW WITH MARK FABER- INVESTMENT GURU

With the Indian markets in the grip of a bull run, concerns are being raised as to how long this run will continue. Is this a bubble waiting to burst or is there some substance in the boom? Investment Guru, Marc Faber encountered many such questions volleyed at him in a tête-à-tête with top market analysts and investment advisors, organised by CNBC-TV18.

Allaying the concerns of the investors and analysts alike, he says that just as bear run, bull run, too, can have a longer spell. Citing the famous Japanese example, he says that the bull run can last as long as 15 to 20 years.

Excerpts from CNBC-TV18's exclusive tête-à-tête with Marc Faber:

Q: We are at historic levels, there is a lot of euphoria and good cheer going around at 10,000? What are your thoughts on India as you see it now?
A: I do not do the stock selection as far as the market is concerned. Since May 2003, we have gone up by more than three times. There are some signs that the market is over heated.
We had basically in India bear market from 1994 to 2003 in dollar terms. The index in logo currency terms didn't go down but in dollar terms it went down. So you had basically a nine-years bear market. Now we are in the seventh year of a bull market.
I believe all asset markets at the present time including commodity markets and stock markets around the world are overheated right now. And, may be within the next two weeks a sharp correction will get under way.
But traditionally if you start from a long base then the bull markets can also last for a long time. The bull market in Japan lasted roughly from 1970-1989 and in the US we lasted from 1982-2000. So the bull market can easily be 10-15-20 years long. A bear market can also last for 20 years
Q: Do all bull markets end in a bubble?
A: Every bull market that has been very persistent will in the end attract money from all over the place. In other words, if you have four-asset class real estate, stocks, commodities and bonds, NASDAQ will perform well for 10 years. Everybody will say that this is a new economy and you have to invest in NASDAQ and divide all the economic stocks because they never move. So, also in terms of commodities we had in the late 1990 a situation where if you said to someone that you should buy sugar or gold but then you would say that commodities only go down and then they would list you hundreds of reasons why commodities would never go up again in your life time and why NASDAQ stocks would always rise by 15-20% per annum.

Q: You mentioned that over the last couple of years all asset classes have actually gone up. There is one asset class where the prices have come down. Do you think the fact that the money is now cheaper will actually make sure that we are on a sustained growth path both as an economy and as well as a market?
A: The cost of money is not an asset class. It is essentially the price of a commodity that is the price of money. The price of money has come down has come down everywhere in the world as a result of extremely expansionary monitory policies in the US post 200, when the Fed became concerned about deflation.
So we have had very low interest rates in real terms in the US, when the Fed fund rate was at 1%. Now the Fed fund rate is at 4.5% but it is still an expansionary monitory policy and in mean time inflation is also accelerating. So in real terms, interest rates, in my opinion are still negative.
Worldwide inflation has come down. I believe that we are moving now into rising interest rates structure. In the next three months we could see little bit of easing in the interest rates in the US.
But in the long - term, I believe that inflationary pressures will build in the world and the worst investments would be long - term government bonds in the US dollar.
Q: How long do you think the world economy can remain insulated to the higher energy costs? If one look at the inflation numbers, worldwide inflation is somewhere around 3%, or slightly under it.
A: Between 1970 and 1980 the price of oil went from USD 70 to USD 50. In the seventies the global economy continued to expand because sufficient money was being printed. But it ended in higher inflation rates in 1978 - 1980.
If the US prints enough money, it won't mean that economy will necessarily go into a recession. Of course, if oil prices rise very significantly from here, it may begin to have an impact on inflation figures. And, that would impact on bond market.
Inflation in the world is around 3%. That is for the typical household in the US. The education costs are rising at double digits, so are healthcare costs.
Q: Equities and commodities, both have rallied together, which one will have to give up because both can't rally?
A: In general the best time for equities is an environment of a falling commodity prices such as we had in 1921, 1929, 1980, 2000. For, in times of falling commodity prices, margins of corporations can expand as they buy commodities at lower costs. So input prices decline and the selling price is adjusted only over a time to a lower level.
The margins expand because interest rates in the long run follow the commodity prices. This has been the pattern for the last 2000 years and I don't think that has changed in any way.
It is true that since 2002 we have an unusual situation where stocks have rallied coupled with bonds, commodities and real estate.
When the real estate and commodities go up, it is a clear symptom of inflation. So bonds shouldn't have rallied at the same time but they have.
Q: There is a general feeling that the Indian markets are fairly over heated, fairly fully valued. You as an investor and in your experience of the south emerging markets, what you believe would be the key structural factors or the key structural changes in the Indian economy which could possibly lead to some amount of re-rating of the Indian markets?

A: We have had re-rating of India in the sense that for the first time in the history of modern capitalism India has become an asset class. By the way commodites have also become an asset class among institutions and there are a lot of financial institutions in the world and also a lot of rich people they realize.
According to the global stock market capitalist Asian, America still makes up 52% of global stock market, capitalist Asian and Japan is now down to 9% and the rest of Asia including China, India, Vietnam and the whole of South East Asian region is only 3.5% - 4%.
Some people look at India and say a billion people, some very promising industries. It is an early stage of economic development, if all goes well then you have a huge potential for infrastructure, agriculture, for consumption, for housing we want to have more than 1% of our money in India and less than 52% in the United States. A lot of money will still come to India and be supportive of the market. It doesn't mean the market will go up and the momentum players will one day sell India.

Q: What is your view on tea as a commodity?

A: Well, I am not a tea expert so I do not know the tea plantations stocks in India very well. But in general I would say agricultural commodities are the commodities that haven't moved yet in this bull market and when you look at the stock market or a commodities market, then you will have different sectors that will move at different times.
In commodities, the price of coffee and coco has nothing to do with industrial production in the world. It has to do with the demand and the supply of that particular commodity.
So I think that what we had in the last couple of years is a huge bull market in industrial commodities because suddenly the world work up to incremental demand from China and everybody is saying China is buying this and that and so the prices of industrial commodities in my opinion, in some cases, are actually too high; like copper and I think the copper prices will eventually adjust quite significantly on the downside.
On the other hand of the spectrum the price of cotton is low and the price of wheat, corn, soybeans and other agricultural commodities, sugar has started to move. But the sugar bull markets are very rare but when they occur they can be very powerful.

Q: In view of the demand coming from China and Pakistan for sugar, and crop failure in Thailand, do you see the demand jacking up, particularly in Asian regions? How would it impact on the global pricing of sugar?

A: Well, I think the demand for sugar is rising from some countries; even India and China, but mostly the driving factor of the sugar market in future is going to be the production of ethanol.
It is very clear to me that in Asia the demand for energy will continue to rise very substantially. In my opinion Asia now consumes 22 million barrel of oil a day on a production of 84 million barrel of oil a day. I think Asia's oil demand will double in the next 10-12 years. Countries like China and India cannot only rely on crude oil shipments from the Middle East and Africa to satisfy their future energy needs.
So what we will have is the production of ethanol like in Brazil, and we will also have much more production of nuclear power. Therefore I am personally optimistic about the outlook for uranium.

Q: How do foreign investors view the issue of government's policy response? This present government hasn't done anything earthshaking so as to take the credit for this bull market. How do foreign investors view this kind of a lackadaisical response in terms of taking reforms forward?

A: I think it is a very good question; I think the present government in India has done very little which is extremely positive because other governments have done a lot, but it was all wrong. So it is a huge improvement relatively speaking.
But obviously I believe in India. You should not expect that reforms will come from any government. The government is removed from any kind of reality. What has happened over the last five years is that business itself has reformed and society has changed a lot and a new society and also new businesses have come up especially in the IT sector and the pharmaceutical sector. This business environment that has been created now, outside the government and the business sector will force reforms upon the government.
So it is not the government that will reform the economy but it is the economy that will reform the government in India and it is very obvious. You see for instance, the discount airlines in India, and as you know the airline traffic has risen very substantially in terms of passengers carried annually.
So one the private sector has reformed itself, has done a fantastic job and the other is the government sector, as represented by the airport, that taught us about the worst in the whole world; Africa aside. Now because the airline traffic has increased so much the government is scratching its head and saying, well we better start to also look at the airports because otherwise people won't be able to get in and out of airports. That is where the bottleneck is occurring.

Q: Does it frustrate you or other foreign investors, because things keep getting talked about but very little happens on the ground and when it does happen, it takes a lot of time?

A: Frequently foreign investors ask wrong questions. I look at it as a positive from a long-term perspective. India has suffered on the kind of government it has had for the last 35 years. We are about to say that the miracle of India is that business in the last five years has developed as well as it has despite the government.
As an investor I am looking at the future, I say to myself, Thailand, Malaysia, they have relatively well organised infrastructure; but what is the upside potential in those countries. In my opinion economically relatively limited. What is the upside potentially in India, India has a reasonable environment where infrastructure is put in place and where the liberalisation of economy continues, where the real estate market improves, then I would say just domestically without any incentive the economic growth line is 6% to 8% very easily, if the government become pro-business which is not likely in the near term.
The macro economic potential of India is similar to say Brazil . At the end of the 1980's when the whole world said that Brazil is the land of the future but it will remain the land of the future pickers, and in the next 15 years, Brazil has improved dramatically.

Q: Do you think funds will allocate more money into commodities rather than equities? Will that affect margin of corporations worldwide?
A: Every asset market is over heated because of hedge fund buying. Treasury operation has become a huge source of profits. Many corporations make out of their treasury operation more money than out of their manufacturing business.
So everybody in the world basically is a hedge fund. What you will eventually get is huge movements in markets where you over-shoot in one sector and then under-shoot again and so forth. In all commodities there is at least a 20% premium that is represented by essential investors. There is huge premium by people who are speculators. They are not interested in the companies that they buy. Rather they are interested in the momentum.

Q: When you do see a substantial revaluation of the Chinese Yuan and what do you think would be the effects on the emerging economies especially in the Indian economy?
A: The Chinese fixed the currency in 1994 against the US dollar and left the peg unchanged until the summer. Now in a cosmetic revaluation, they have slightly revalued the currency.
In my opinion the Chinese could revalue by 100% and would still have a current accounts surplus. They would still be comparative.
I suppose the currency will have an upward movement against the US dollar in the long run. It suited the Chinese quite well to keep the currency where it was. It meant that all the investments came to China and boosted the economic growth rates in China. It transferred technology to China, management skills and was very beneficial for the Chinese economy