Dr. Marc Faber Reckons World Economy Will Slow Due To Inflation.

Here's another extremely interesting interview on Dr. Marc Faber.

• Excerpts from CNBC-TV18’s exclusive interview with Marc Faber:
  
  Q: Do you see more pain for global equity markets in 2008 even from here?
  
  A: Over the last twelve months financial stocks are breaking down in the US. But the rest of the market has held up very well. Material, energy and some capital good stocks went up. So gradually the market place is beginning to realize that the financial crisis is not going to resolve in ten minutes and it will take a lot of time. Many more banks will go bankrupt and it will spill over into what I call the real economy. The world will slowdown very because of the inflationary pressures. The consumer has two major categories of expenditure, the non-discretionary like food, energy, healthcare etc and the discretionary, which are typical consumer goods, appliances, cars, motorcycles, television sets and so forth. When the price of necessities go up substantially, as is the case for energy and foods now, we have less money to spend on discretionary items that then will have a spillover effect on the economy.
  
  Q: What about something like an India? We have been one of the worst performing equity markets. Do you see more pain for the Indian stock markets even from these levels?
  
  A. When the market had hit 21,000, I had expected it to drop to12,000. On March 18, it dropped to 14,800 and then we had a typical bear market rally. That’s when all the Indian investors turned bullish again and the Sensex went to almost 18,000 levels on May 5. Now we have been drifting again and I still maintain that the Indian markets will go lower. The only people in the whole world who don’t understand that the economy and the equities are moving in different directions are Indian investors, they say the economy is strong and is growing rapidly. The economy growing strong and growing rapidly has nothing to do with the performance of the equity markets.
  
  Q: What about the role that the crude prices have played in it up until now for many markets both developed and developing and where do you see that market headed?
  
  A: Crude is at USD 135 per barrel we have gone up 12-times since 1998. I personally would not buy oil here because I think a correction is overdue. But in the long run I cannot see the demand declining too much. Although some countries have alternate sources of energy, the demand in some countries like India and China will continue to increase. OPEC and other oil producers cannot increase their production significantly. So I think in our lifetime we will never again see oil.
  
  Q: If crude was to stay at the levels it is at right now. Do you expect a prolonged phase of high inflation and high inflationary fears for most emerging markets?
  
  A: I think inflation is a very funny phenomenon. First of all I define inflation as an increase in the quantity of money and of credit. In the last twenty-five years we have had a huge expansion of money and credit in the United States, especially after 2001, which then led to trade and current account deficit. The current account deficit grew from 2% of GDP to close to 8% of GDP. USD 800 billion was flowing into the world annually from the United States. This essentially is the money that is being made available by the Fed and the treasury, and that of course is inflationary per se. Inflation is occasionally in asset prices, in equities and in real estate, in commodities and at times it will shift to consumer prices. In the 70s we had a very high consumer price inflation and then starting form 1981, inflation then shifted into asset prices. I believe that period between 1999 to 2003 essentially marks the thrust in the consumer price inflation. From here onwards, the world will live with higher inflation rates on the consumer price level for the next 10-20 years.
  
  Q: Where do you see the Dow and the S&P bottoming out? Do you see that happening in 2008 at all?
  
  A: It is very difficult to tell. If you really print money, you can probably support asset markets to some extent. But I believe that the Fed is now in a very difficult position for the following reasons. The Fed can print money and make money available and the treasury can send cheques to the household sectors in order to spend money. That can support the economy to some extent. If you increase the fiscal deficit and if you print money, the interest rates will start to go up significantly. The interesting thing is, since September 18, when the Fed started to cut the Fed’s fund rate from 5.25% down to 2%. The only bonds that are still at a lower yield than they were before the Fed fund rate cut are the treasury bonds. All the other bonds, whether it is AAAs or BBBs or mortgage rates are higher than at that time. So if the Fed can print money, the bond market may actually not like it and go may down, which can result in higher interest rates.

Source of article: http://www.moneycontrol.com/india/news/fii-view/indian-mkts-to-go-lower-going-forward-marc-faber/13/44/343702