Marc Faber, the legendary contrarian investor and author of The Gloom, Boom & Doom Report, talks to Jitendra Gupta on recent market correction, the road ahead for Indian markets, global economic recovery and whether there is a bubble in China or not. Excerpts:
Indian markets have corrected over 8 per cent since their recent highs. What do you expect now?
Even if equity markets, including in India, continue to rebound over the next couple of weeks, I do not think we will be touching new highs. It’s quite possible that for the current year, the stock market high has been left behind. I will be cautious about buying equity now. The upside from these levels is limited; the Sensex may make marginal new highs around 18,000-19,000, but the risk has increased and the days of big moves are over. I think markets will correct further.
What are the chances of a double-dip global economic recovery?
Yes, the economic recovery seems to be of that kind due to the unprecedented increase in fiscal and monetary stimulus. The main problem that caused the crisis was the debt overhang. Debt has moved from the private sector to the government sector, but it has not been eliminated. Moreover, the process of deleveraging will take a long time.
With the (slow) economic growth that countries such as China and others have witnessed, and a slight recovery seen by the US, the world economy will face a kind of renewed weakness in 2011 and 2012.
What are your thoughts on withdrawal of global stimulus packages?
I do not think they can get out of the stimulus at this point in time. I would expect more stimulus packages to be announced in the US. The US Federal Reserve’s exit strategy will make the country print even more money and impair its balance sheet further.
People are divided on whether China is a bubble or not. What are your thoughts?
I think to some extent, China is a bubble. Last year, total loans by Chinese banks increased by a quarter of the country’s gross domestic product. In addition, China has excess capacities across industries. Hence, I expect its economy to slow down considerably.
But, the bigger question is that, will it crash? To that my answer is, yes, that’s also possible. If you look at the economic history of the US from 1800 to 2000, they had lots of ups and downs caused by the financial crisis, Civil War, World War I, the Great Depression, and so on. I think there is a 99 per cent possibility that China will slow down considerably and a 30 per cent chance that it will crash.
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If China slows, it will have a devastating impact on industrial commodity prices and on those who supply these.
Since you have been tracking so many crisis and bubbles, what do you think is common about them?
The common thing in every crisis is that during the period of trouble, there is excessive debt growth, excessive credit growth, excessive leverage, and excessive speculation because of excessive credit growth. But the Federal Reserve does not seem to understand that.
The other point I would like to mention is that during such crisis, governments should do nothing and let the market adjust from the downside.
As prices decline and drop, affordability improves again. As a result, buyers come in at some point and the system is cleaned.
However, if governments intervene with fiscal and monetary measures, as the US did, it sows the seeds for the next crisis.
What is your view on growth in India as compared to China. Which country holds more growth potential?
India’s long-term economic growth should be supported by its tremendously growing population. But, China is expected to slow down after the incredible economic growth it has registered in the last 25 years. Its 10 per cent GDP growth rate is not sustainable in the long run. India is yet to achieve long-set targets and, therefore, has a huge growth potential. For instance, infrastructure has not been put in place. Similarly, unlike China, the consumer market in India is not saturated.
What is your view on the global interest rate cycle and its impact on the markets?
I think we have seen a downward trend in interest rates from 1981 to 2008. Now, interest rates have bottomed out, and because of the large deficit, will lead to payment of higher interest on government debt. We are in a rising interest rate structure from here. Although it is possible that interest rates may decline in the coming week or month, over the next ten years, the rates should go up quite substantially everywhere.