Posted : 2009-07-01 17:02
Updated : 2009-07-01 17:02

Hyperinflation Looming Large

Marc Faber
By Lee Hyo-sik
Staff Reporter

'Korea Unfit to Become Financial Hub'

Investors around the world should be prepared for hyperinflation in the coming years as a result of loose monetary policies adopted by the U.S. and other governments, according to one of the world's most famous investment advisors.

In an interview with The Korea Times, Marc Faber, better known as Dr. Doom for his negative views on the global economy, said that to hedge against rising inflationary risks, long-term investors should buy stocks and gold bars, rather than hold onto cash.

But he said for short-term equity investors, they should take a wait-and-see attitude for the time being as stock markets across the globe will likely undergo corrections in the near future after first-half rallies. Faber was here to attend the 3rd Annual Korea Institutional Investment Forum, organized by Hong Kong-based business magazine Asian Investor.

Faber projected the United States will go into hyperinflation similar to that of Zimbabwe, harshly criticizing the U.S. Federal Reserves for causing unnecessary inflationary pressure through its zero interest-rate and credit-easing policies.

``The U.S. central bank has structured and introduced policies without considering exponential credit growth and its consequences. I think the Federal Reserve is not independent and has become a mere political apparatus of the U.S. government. Keeping interest rates artificially low and printing money has and will cause an asset bubble,'' Dr. Doom said.

People have been encouraged to borrow and speculate on stocks and other assets over the past year because they do not earn anything from putting money into bank deposits due to the record-low interest rate, he said. ``It will again create an asset bubble and next time when it bursts, we will not be able to respond to it in the same manner as we can now.''

Since 2002, the U.S. has maintained the interest rate low to prop up the economy by prompting corporate investments and private consumption. But it created a real estate bubble, which led to the collapse of the U.S. subprime mortgage sector, bringing about the greatest financial market distress since the Great Depression in the 1930s.

``The United States will not raise interest rates for many years to come because it needs to pay off its huge debts. With higher interest, its borrowing costs will go up, putting a heavier financial burden on the U.S. government. It means the interest rate will remain low and the U.S. will not be able to narrow fiscal deficits for many years. In turn, too much money in the economy will raise costs of everything, including healthcare and education, giving rise to hyperinflation,'' Faber said.

He added that U.S.-led hyperinflation will spread to the rest of the world, advising investors to put money into inflation-hedging assets, such as stocks and gold bars.

Patience Is a Virtue for Short-Term Investors

But Faber prescribed different medicine for short-term investors, saying now is not a good time to buy stocks and commodities because the markets will undergo corrections in the second half of the year.

``Now, risks are too high, compared to expected returns. Investors should increase their cash positions. I would rather take a long vacation and wait until the market moves either upward or downward. Given a list of unfavorable factors, I bet on a market downturn. It won't be too late for investors to act after the market sends visible signs of its direction,'' he said.

Korean stocks were oversold in November last year through March this year, which was the right investment timing, the investment advisor said. ``But since March, shares here have been overbought and the main KOSPI has jumped by 50 percent. I think the investment sentiment has improved and now the whole country is speculating on equity futures. Now is not the right time to put money into stocks. Investors should wait,'' Faber stressed.

He then said the local bourse will likely go down by 20 percent in the near future, but also said he could be wrong because the central bank is printing too much money. ``Ample liquidity has helped raise equity and real estate prices here but I do not think it has helped improve the real economy. One thing for sure is that the KOSPI will not go below 900 for the next 10 to 20 years. If you buy stocks now, regardless of short-term market corrections, your investment will be profitable in five years.''

As for investors interested in commodities, the Swiss-born investment advisor said natural gas would be his best pick, adding crude oil prices will undergo corrections in the coming months. ``Natural gas is cheap, compared to crude oil. I would buy natural gas. Oil was traded as low as $32 per barrel late last year but has jumped to $72. From a pure demand and supply perspective, the demand from both advanced and emerging economies is not strong. But in the long-term, prices will be much higher than now,'' he said.

Shifting of Power From West to East

Faber then said the shifting of power from the U.S. and Europe to Asia has been accelerating since the global financial market turmoil over the past year, saying Asia's emerging economies will continue to outperform Western advanced economies.

``From 2002 to 2007, Asia's rapidly growing economies outperformed the U.S. but they have been hit hard by the ongoing economic slump because of their outward-oriented and export-dependent structure. But Asia will continue to outshine the West and I am bearish about the future of the Western world in the long term,'' he said.

The investment advisor said the standard of living in Asia has improved but Europe has stayed around the same since the 1970s, adding South Korea's standard of living will not go up as much as Vietnam or other rapidly growing Asian economies.

``Korea posted a relatively high expansion from 2002 to 2007. But since September last year through March 2009, it experienced the worst contraction since the 1997-98 Asian financial crisis. Even though Asia's fourth largest economy is expected to recover in 2010, it will not expand at a pre-crisis level for many years,'' Faber said.

Korean Won to Strengthen Against Dollar

The local currency is projected to gain ground against the greenback down the road, but over the time taken for the global market to fully recover, the dollar may remain strong, the investment advisor said.

``I am bearish about the dollar in the long term. I think its value peaked in November 2008 at the height of the global credit crunch, but since then it has declined. I think the dollar will continue to head south, and along the way it will cause severe inflationary pressure,'' he said, projecting the won will strengthen in the future.

The Korean won strengthened from 2002 to 2007, but from September 2008 through March 2009 its value plunged to the lowest level since the currency crisis a decade ago. But since March, along with the easing of the global financial market turmoil, it has gained some strength.

Besides the globally weak dollar, the value of the local currency will be determined by the movements of the Chinese yuan and other Asian currencies, Faber said. ``The Korean won will move in line with the yuan and the yen, which have gained ground against the greenback. When these currencies appreciate, the won will likely follow suit.''

Korea's Financial Hub Plan Unlikely

Faber was pessimistic about Korea's ambitious goal to transform itself into a financial hub for Northeast Asia, citing its low English proficiency, unfavorable geographical location, heavy regulation and poor residential and educational environment.

``Compared to Hong Kong and Singapore, Korea has highly skilled and educated manpower. But they do not speak English well, which is the greatest handicap for the nation to become an international financial and business center. Korea also cannot compete with other major Asian cities because of its unfavorable location, situated in the Northeastern corner of Asia,'' he said.

Faber then said Korea needs to improve its transportation infrastructure, reduce traffic congestion, upgrade schools and qualify of life. ``I think London is the sole financial hub in the world. Hong Kong and some others have become a relatively good place for doing business. Every country wants to become a financial hub but it is highly unlikely for Korea to become one.''

Who Is Marc Faber?

Faber was born in Zurich, Switzerland. He went to school in Geneva and Zurich and finished high school with Matura. He studied economics at the University of Zurich, and at the age of 24 obtained a Ph.D. in economics magna cum laude.

Between 1970 and 1978, he worked for White Weld & Company in New York, Zurich and Hong Kong. He has lived in Hong Kong since 1973. From 1978 to February 1990, he was the managing director of Drexel Burnham Lambert there.

In June 1990, Faber set up his own business, Marc Faber Limited, which acts as an investment advisor, fund manager, broker and dealer. He publishes a widely read monthly investment newsletter, ``The Gloom, Boom & Doom'' report, which highlights unusual investment opportunities, and is the author of several books, including ``Tomorrow's Gold ? Asia's Age of Discovery,'' which was first published in 2002 and highlights future investment opportunities around the world.

Tomorrow's Gold was for several weeks on Amazon's bestseller list and has been translated into Japanese, Korean, Thai and German. He is also a regular contributor to several leading financial publications around the world.

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