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Investors should avoid oil and alternatives – an interview with Dr. Marc Faber

By James Stafford
web posted March 26, 2012

Dr. Marc FaberAs the world economy teeters on the brink and rising oil prices threaten to de-rail the delicate roots of recovery Oilprice.com asked legendary investor Dr. Marc Faber to join us and give his views on high gasoline prices, the shale boom, alternative energy, developments in the Middle East and much more.

Dr. Faber is a very well known commentator throughout the investment community. He regularly appears on CNBC and is a member of the Barrons round table.

Marc is the editor and publisher of the Gloom Boom & Doom Report, which is a very popular investment newsletter that highlights unusual investment opportunities for its subscribers. You can find out more about the Gloom Boom & Doom Report at Marc's website: www.GloomBoomDoom.com.

James Stafford:   A number of our readers have been enquiring about the recent oil price increases, where a few weeks ago we saw them rise to a ten month high. Where do you see oil prices going from here, and what do you see as the main reasons for the rapid increase?

Marc Faber: I think there is a risk that oil prices will go much higher. At the same time, the bullish consensus on oil is now at one of the most elevated levels it's ever been. In other words, from a contrarian point of view, you shouldn't buy oil right now. I think it may go down somewhat. In general, if trouble breaks out in the Middle East, or if there is a war, I think the price of oil could go much higher.

James Stafford:   What are your 3-5 year projections for oil prices?

Marc Faber: Well, you'll have to give me a second. I need to call Mr. Ben Bernanke and ask him how much money he will print. Commodity prices were in a bear market from 1980 to 1998, and since then they've gone up. But because of expansionary monetary policies and artificially low interest rates they have increased more than would have otherwise been the case. We don't know exactly how long this asset bubble will last - but say if you had interest rates in real terms, of five percent, instead of negative five percent, then I think all commodity prices, including gold, would be lower.

James Stafford:   Obama is being pressured by the Democrats to use the Strategic Petroleum Reserve in order to flood the market with a large supply of oil in an attempt to drive down prices. Some commentators seem to think that this will help, although only in the short term because low supply isn't the cause of the high prices. Do you think it's sensible advice to use the reserves now to lower short term prices or should Obama remain strong and only use the stockpile for what it was designed for?

Marc Faber: I think selling down the reserves would be a useless strategy as one of the main reasons prices are rising is due to international tensions. It's possible for an increase in supplies to drive down the price a little bit. But in emerging economies like China and India, the demand continues to go up. Now, it may not go up every year by the same quantity it did in the last 3 years, because in the last 15 years, oil demand in China tripled, from 3 million barrels a day to 9 million barrels a day. So it's conceivable that in a recessionary environment in China, oil demand will not go up substantially for one or two years. But because the per capita consumption is so low in countries like China and India compared to say the U.S. and Japan and Western Europe, I think the trend will continue to increase.

James Stafford:   There's a great deal of political theater going on around the Keystone XL pipeline. Do you see the pipeline as being essential to U.S. energy security and something that has to be pushed through at some point?

Marc Faber: Yes, I think it would be important to have the pipeline. But as you say, there's a lot of political pressure and so forth. I think it would be very desirable for the U.S. to become energy self- sufficient. Some observers and forecasters say they can achieve this goal within ten years, due to advances in natural gas extraction. I don't believe it, but I have to respect the view of some experts.

James Stafford:   The media has been full of reports on the coming shale gas boom. What are your thoughts on shale gas? Is it the energy savior we are hoping for?

Marc Faber: I doubt it. But as long as the market believes it, we have to translate every forecast and every view into investment opportunities. I think a lot of people believe in shale Gas's potential and so this may underpin some strength in equities and currencies. But as I said, I don't believe it.

James Stafford:   Do you think the shale boom could lead to a change in U.S. foreign policy priorities?

Marc Faber: Well, I don't really believe it. But as you know, Mr. Obama has engaged in more foreign policy initiatives in Asia. For what, I'm not quite sure. The thinking is in the U.S. is that China is a threat. Therefore, they have to increase their cooperation with Asian countries, such as India and the Philippines.

Personally, I think it's an ill-timed move, because I don't think that China has any military ambitions in Asia. But put yourself into the chair of China's leadership. What is the top priority? China obtains 95% of its oil from the Middle East. The top priority is to make sure that this oil continues to flow and that the supply is secure. So they have to secure the oil shipping lanes, from the Middle East, past the southern tip of India, through the Straits of Malacca, up the Vietnamese coast, into China.

Each time they do that or attempt to do that, America and it allies in Asia perceive it as a threat. So the tensions increase.

James Stafford:   You just mentioned that you don't believe China has any military ambitions in Asia, but we're seeing quite a lot of tension in the South China Seas, especially the Spratly Islands and the energy resources located there. How do you see the situation playing out between China and its small neighbors in this region who all have a good claim on the resources?

Marc Faber: As I just mentioned, China's a huge country. They have certain views about territories in Asia, and I think the U.S. would not react particularly positively if say China or Russia or any other nation had numerous military and naval bases, in the Caribbean or in the Pacific, and military bases in Canada and Mexico.

You have to look at the world from the perspective of the Chinese. I'm not saying that because I'm super-bull about China. On the contrary, I think the Chinese economy faces numerous problems. But I'm saying that if you put yourself into their position, a top priority is to secure a regular supply of oil, iron ore, and copper. If you look at the Kondratiev Cycle where Kondratiev said it's not a business cycle. It's a price cycle, and certain things happen during the downward wave, and certain things happen during the upward wave.

During the upward wave, we have rising commodity prices, which is a symptom of shortages. Then countries become more belligerent, because they begin to be concerned about the supply of commodities, and so tensions increase.

I'm not saying war will break out tomorrow. I'm just saying the conditions have improved.

James Stafford:   Aside from the South China Seas, where do you see the potential flash points in the world over resources?

Marc Faber: Well, I think a big potential flash point is obviously the Middle East and Central Asia, because neither Russia nor China wants permanent American military bases in Central Asia and to be encircled. The Chinese are encircled by the Americans in the Pacific with naval bases, plus the Americans have 11 aircraft carriers. The Chinese have just one. Plus, in the last 12 months, Mr. Obama has made initiatives to have India as a strategic ally. The result of this is that China, which always had good relationships with Pakistan, has strengthened their relationships with Pakistan. This of course has increased tensions in the region.

James Stafford:   Moving off fossil fuels, what role do you see renewable energy playing in the future? Do you think government should help innovation in this area?

Marc Faber: This is a very difficult question to answer. Basically, I'm convinced that, over time, to drill a hole in the ground in the Middle East or in other emerging economies and then bringing that oil through a pipeline onto a ship into the countries that consume oil is not an elegant solution to the energy problem. I think eventually this will go away. But in the meantime, alternative sources of energy are extremely expensive. Unless the oil price collapses to like $50, most alternative sources of energy will not be profitable. If someone says to me, we need alternative sources of energy for security reasons, yes, I agree. But for profitability I doubt it.

James Stafford:   As an investor then, are there any renewable sectors you're bullish on? Or would you stay away from the space entirely?

Marc Faber: I would stay away from it.

James Stafford:   Following the Fukushima disaster Japan has now shut down 54 nuclear power plants. The population's trust in nuclear energy has been shattered – but do you think this is only temporary and how would Japan make up the energy shortfall - as before Fukushima Japan met around a third of its energy demand with nuclear?

Marc Faber: Well, I guess they'll lean towards more natural gas and more oil so they can offset this shortfall of nuclear energy. Now I don't think that this will change the nuclear energy prospects long term in the world, because other countries like India and China will build their numerous nuclear energy plants. In the case of Japan, I think the power plants which had the problems were antiquated. In other words, they were not up to modern standards.

James Stafford:   Iran has finally offered to resume talks about its nuclear program and has agreed to allow UN inspectors from the International Atomic Energy Agency to visit its Parchin military complex where a nuclear weapons program is suspected of be being developed. How do you see events developing here and how can investors protect themselves from an escalation in this region?

Marc Faber: Well, if there are escalations, then obviously you have to be long, oil and gold. My sense is that the Iranians are playing the same game the Japanese played in the '70s and '80s. They always negotiated but never did anything about the changing balances - they just want to delay the hour of truth. Every day, I think the Iranians are getting closer to having nuclear weapons. I can understand why. The whole world is hostile towards Iran, and they are encircled.

In the west, France has nuclear weapons and Britain and the U.S., and their neighbor Israel, towards the west. Then in the east, India and Pakistan and of course China. So why shouldn't they have nuclear weapons?

Mind you, either there is all around abandonment of nuclear weapons by all the powers, or every country should be allowed to have them. We in the Western World, we have the misguided belief that we are there to judge which countries may have and which countries should not have nuclear weapons.

But maybe our view is wrong. My view is that if I were looking after Iran, for sure I would want to have nuclear weapons. For sure!

James Stafford:   Okay. So on to investments - you've mentioned oil and gold, but which other sectors are you bullish on, and what would you advise investors to avoid?

Marc Faber: Basically, since March 2009, equities have doubled in value by and large. Some have gone up more than 100%, some a little bit less, we've had a huge bull market. Last year, almost a year ago on May 2nd, the S&P reached a high of 1,370. Then we dropped into August and into October, and we bottomed out on the S&P at 1,074 on October 4th. Since then, we have a 25% rally. The mood in October and November of last year was extremely negative.

I think this is the time to be rather cautious. Personally, if I had heavy exposure to equities, I would take some money off the table.

James Stafford:   Where do you see the best opportunities for investors in Asia at present?

Marc Faber: Right now, for the next one or two months, I don't think that stocks will go up a lot. I personally think they will correct. But long term, I still like Asia. My concern is if the Chinese economy slows down meaningfully that we could have economic weakness spreading around Asia as well, as well as in countries that supply commodities to China, like Australia, Brazil, Argentina, and so forth.
Right now, say for the next two months, I'm very cautious.

James Stafford:   I was looking through some of your previous interviews as well, and in one of them, you mentioned Barack Obama. You said he was by far one of the worst presidents that the U.S. has had, and that you still believe he'll be re- elected. In what ways do you think he is unsuitable as a president? I mean, are you fundamentally against his ideas and position on certain topics?

Marc Faber: I don't want to get into an overly political discussion, but I think that first of all, we have in the U.S. and elsewhere highly expansionary fiscal and monetary policies, but we have restrictive regulatory policies. In other words, Obamacare is a big problem for many medium sized and even large companies, because they don't know exactly how much it will cost them. That has retarded hirings of people.
Mr. Obama has intervened into the economy massively, left, right, and center. Every government intervention has consequences. Just to give you an example, the U.S. government debt - I'm only speaking about the government debt, not the prime debt - has gone from essentially zero 200 years ago, to a trillion dollars in 1980.

By the year 2000, we were roughly at $5 trillion. Now in 12 years, we've gone to close to $16 trillion. That excludes the unfounded liabilities. Under Mr. Obama, the fiscal deficit has exploded.

The big question is: Will we ever, in the U.S., have a fiscal deficit of less than $1 trillion or $1.5 trillion? I don't see it. Under Mr. Obama, spending has gone up and tax revenue has gone down. Change, if there was any change under Mr. Obama, it was for the worse. In my view, he's a very disappointing president.

James Stafford:   Marc, thank you for taking the time to speak with us. It's been a pleasure speaking with you.

Marc Faber: It was my pleasure. ESR

This interview was originally published at Oil, Alternatives, and Nuclear Weapons - An Interview with Marc Faber and conducted by James Stafford, the editor at Oilprice.com.





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