The Gold Report: After Standard & Poor’s (S&P) downgraded a cluster of Eurozone countries in January, you came out saying that downgrades should have been even deeper, depending on the country’s credit-worthiness. S&P did give below-investment-grade ratings to Portugal and Cyprus–BB and BB+, respectively–but you indicated that some of these countries warrant CCC ratings. Do you anticipate additional downgrades?
Marc Faber: If you accounted for the unfunded liabilities of most European countries, as well as the U.S., the quality of the government debt would be significantly lower. In other words, yes, I do expect to see more and more downgrades over time.
TGR: Could that happen in 2012?
MF: Yes, and some thereafter.
TGR: Have the markets priced in further downgrades already or should we expect a bigger impact in the next round?
MF: I don’t think the market has priced it in because the yield today on U.S. 10-year government bonds is 2%, and 3% on 30-year bonds. If the market were priced properly based on the quality of these bonds, the yields would be far higher.
TGR: Did yields change much with these recent downgrades?
MF: Yes, particularly in the U.S., where investors perceive U.S. government bonds as safe. The U.S. will pay the interest as long as it can print money. But suppose you buy a 10-year government bond that yields 2% and inflation is perceived to be 5-7%. To what extent would investors still buy these bonds? That question will arise one day.
TGR: You’ve discussed investors leaving the European markets in favor of a “safe haven” in the U.S. Would U.S. bonds continue with such low yields with the European downgrades?
MF: For a while, yes, but at some point people will wake up and realize that the U.S. will default through a depreciating currency–in other words, through printing money–or by not paying the interest on the bonds. I don’t think the U.S. will stop paying the interest, but printing more money will weaken the currency and produce higher inflation in consumer prices, asset prices and commodity prices. So being in U.S. government bonds will result in losses to investors through currency depreciation.
TGR: You’ve pointed out that negative real interest rates force people to speculate, which creates enormous market volatility. That seems to be happening now, but apparently investors are keeping a great deal of money on the sidelines as well. If that comes in, would it make the markets even more volatile? Or would you say the smart money will stay on the sidelines and the speculative money is in play already?
MF: I think there is a lot of money on the sidelines. Some will stay there, because people who don’t trust the system anymore will just keep it there. Some will be invested, but it may not go into equities. It could go into some other asset class, perhaps hard currencies such as gold and silver, or real estate, which is now relatively inexpensive in the U.S.
As for volatility, it increased sharply last year, but has diminished over the last three-months. I expect we’ll see increasingly very high volatility in all asset classes in the next few years. The money in an environment of negative real interest rates will flow. It might flow into fewer and fewer stocks, or into fewer and fewer assets that could go ballistic on the upside.
TGR: Which asset classes would you expect on the speculative upside?
MF: We had the NASDAQ bubble 12 years ago, the housing market bubble probably five years ago, and I would say also a bubble in commodities in 2007-2008, when oil spiked to $147. What’s next, I’m not so sure. I could imagine some stocks, maybe some precious metals, in a bubble stage–not the entire market necessarily.
