Dr Marc Faber was born in Zurich, Switzerland. He studied Economics at the University of Zurich and, at the age of 24, obtained a PhD in Economics magna cum laude. Dr Faber publishes a widely read monthly investment newsletter "The Gloom Boom & Doom Report" report which highlights unusual investment opportunities, and is the author of several books including “ TOMORROW\'S GOLD – Asia\'s Age of Discovery”.
Marc Faber, Editor and Publisher of “The Gloom, Boom & Doom Report’” talks about long-term cycles in economics and the current Kondratieff wave.
You already mentioned commodity cycles. Economists have long debated the existence of long term waves in economics – the most prominent concept of which is the so called Kondratieff cycle. In your 2002 book you pick up on the idea by guessing where we might find ourselves in the current Kondratieff wave. If you did the same today, what do you think? Are we still in a falling wave? What are the important characteristics to look at? And most importantly, what does it mean for the medium to long-term outlook?
I mean, Irving Fisher the economist who essentially became famous because of his book Booms and Depressions in the 30s, said well this is a very difficult issue with knowing where in the cycle you are because basically it is like you are sitting on a ship and there are waves that will move the ship but then there is also wind that may come from another direction and the waves are not all regular and so forth, so the ship can have many different motions.
My view regarding the Kondratieff is that first of all it is important to understand that it is not really a business cycle but a price cycle. The price cycle obviously in the 19th century when economies were much more commodities related because agriculture until the beginning of the 20th century was the largest employer, so when agricultural prices went up, the farmers had more money and it benefitted the farming population and so the economy picked up and when the farm prices went down especially in the US with cotton obviously the economies that were producing these commodities suffered.
So in the 19th century we had several cycles, upcycles and down cycles. Basically the last down cycle as I mentioned would have been in essentially 1980 to around 1998-1999, so approximately twenty years. The up cycle before was between the 1940s and 1980s. You can’t measure it precisely. My sense is that one missing element in the Kondratieff in the late 1990s and early part of 2000-2005 was that normally when the Kondratieff bottoms out, Schumpeter, he built his business cycle theory around the Kondratieff and he explained that usually in the trough of the Kondratieff, in the depression, you have a massive liquidation of debts, and that hasn’t happened, it hasn’t happened.
And so it is conceivable that we were in a downward wave of the Kondratieff after 1980 and then we had within the downward wave this upward wave because of the opening of China, between 2000 and 2008. And as the Chinese economy weakens and as the debt level today is globally as a percent of the global economy 30% higher than it was in 2007.
So we can´t say that there has been deleveraging, on the contrary! The debt level is even more burdensome today than it was in 2007. Therefore it is possible that the big debt deleveraging is yet to occur and when it occurs then obviously commodity prices will still be weak for a while.
Therefore it is possible that the big debt deleveraging is yet to occur and when it occurs then obviously commodity prices will still be weak for a while.
The question is then, if we follow through and say ok, the price of copper went from 60 cents a lb to over 4 dollars a lb and now we are around 2 dollars a lb, if it goes back down to 60 cents a lb, which I don’t believe it will, but say if it did, or if gold went back to 300 dollars and oz., if it did, what about financial assets?
Where would they be? Because that decline in commodity prices would signal a huge problem in the global economy and under those conditions I doubt that financial assets would do well, there would be massive bankruptcies among governments and massive write offs in sovereign debts. Greece should write off at least 50% of their debts and even then the debt would probably be too burdensome for an economy that hardly produces anything! So these are signals that I take very seriously and I quite frankly given the recent weakness in commodity prices, I can´t see how the global economy is getting stronger. I just can´t see it.
What was still in place until recently is this long term down trend in interest rates.
Yes, sure. You see, traditionally the Kondratieff is a price cycle and interest rates follow the Kondratieff very closely. So if you take the last cycle, the peak 1980 for commodity prices and at the same time you had the interest rate peak in September 1981 when long term US treasuries were yielding over 15%.
Then we have the down trend in the Kondratieff until 1999 -2000, the commodity prices start to go up but interest rates continue to go down. So that would again suggest that there is a possibility that this entire boom in commodities in 2000-2008 was actually a bull market within still a downward wave in the Kondratieff, it is possible.
Interview conducted by Johannes Maierhofer and Peter Matay
Full Interview - The big picture with Marc Faber