The average investor comes home from work at the end of a busy day and turns on the news and tries to make sense of the sound-bites of global economic information. But even financial experts are confounded by today's global economic situation.

At the recent New Orleans Investment Conference, economic expert and investment advisor Dr. Marc Faber helped to shed light on the economic situation and discussed the bigger financial picture.

Dr. Faber has been working in the investment world since the mid-1970's. In 1990, he started Marc Faber Limited, an investment advisory service. He also started the GloomBoomDoom Report, a newsletter that highlights unusual investment opportunities around the world.

We have summarized Dr. Faber's speech in the report below. Where possible, Dr. Faber's quotations are direct quotes from his speech (although some quotations have been modified for readability).

Dr. Faber spoke about American monetary policy and the global impact of the commodities boom.

On American monetary policy, he said: "I'd like to demonstrate how fiscal and monetary policy in the United States has increased economic and financial volatility and has brought out unintended consequences that were rather destructive for the US."

Policies have always addressed short-term situations instead of long-term ones, he told conference attendees, and this short-term, reactionary thinking has resulted in boom-bust economies. "In September 2007, the Federal Reserve downplayed the seriousness of the sub-prime lending crisis but when they dropped the interest rates, it had unintended negative consequences that are still felt today."

Although our interest rates are near zero, the real interest rate is negative because of the cost of living increases. These negative real interest rates hurt retired people who do not earn an income on their money. Another unintended consequence is that people turn to speculative investing to try and earn an income and this has led to higher market volatility.

Dr. Faber added: "On the one hand, monetary policy wanted to stimulate consumption, but on the other hand, by pushing up commodity levels to a higher level than they would otherwise have been, it [forced] the consumer to pay higher energy prices."

Then Dr. Faber warned: Commodity prices go up during shortages so people become concerned. This leads to higher geo-political tensions, which can lead to war. However, when commodity prices go down, the lower costs drive innovation. "We are in an up cycle right now."

Dr. Faber also touched on GDP, debt, and its impact on the economy. He pointed out that we have higher GDP today (compared to the period just before the Great Depression) but there are now huge unfunded liabilities in the US and in Europe that didn't exist in the 1920's.

"We were at $5 trillion in debt in 2000 and now we are at over $15 trillion in debt…” said Dr. Faber, and then he added that the $15 trillion doesn't take into account the unfunded liabilities! If it did, the government debt would be four times higher.

Then Dr. Faber illustrated yet another challenge of short-term monetary policies: "In the US, 49% of households have a member that receives some kind of a handout from the government. This is very difficult to cut… your chances of re-election won't be very good. So spending will stay at an elevated rate but tax revenue is down because of the poor economy."

Dr. Faber mentioned another unintended consequence of monetary policies on commodity prices: "If commodity prices go up substantially, it has very little impact on people who earn more $1 million [or more] because the expenditure on energy and food annually is very low. But it's very high for incomes that are lower."

So, when commodity prices go up, the real earnings of most people diminish. "So average hourly earnings are lower today than they were in 1973… As a result of expansionary monetary policies that favor the wealthy, there is rising social tension because the majority of people are being hurt economically… so they become powerful and the result is either redistribution of wealth by taxation or revolution."

Dr. Faber's talk then bridged into a discussion about commodities.

"Expansionary monetary policies were always designed to stimulate consumption because 70% of the US GDP is consumption." But, he pointed out, if the US is a consumption economy, someone has to "feed" that consumption. "So, in the US, there's consumption," Dr. Faber explained. "But in China there's industrial production, employment gains, rising wages, rising capital spending. As a result of that, commodities go up substantially."

That has a greater impact on commodity prices than people realize: Dr. Faber explained to the conference attendees that if someone doubles their income from $1 million to $2 million, it's unlikely that there will be a meaningful increase in consumption of oil and of food. But, in the case of the Chinese, Vietnamese, or Indian, an increase in income from $1,000 to $2,000 has a huge impact on the demand for food and energy. Each household will upgrade from bicycles to motorcycles to cars. Therefore, Dr. Faber concluded, any increase in income among the lower income levels stimulates an increase in global commodity prices.

Developed nations saw this rise in income as an opportunity. As communism fell apart, industrial companies of the west saw it as an opportunity to sell American products in China. So they set up companies in emerging markets. But something unexpected happened, as Dr. Faber explained: "The G7 countries' share of global trade has been going down every year while emerging markets has been going up. China has a trade surplus only with the US… they buy goods from other emerging economies. It's a meaningful change in the balance of economic power. Suddenly the G7 countries are being marginalized while the emerging economies are growing at a faster pace."

"It's unprecedented in the history of capitalism that a country [like China] goes from approximately 10% of global aluminum-copper-zinc consumption to between 30% and 40% in ten years."

Then Dr. Faber warned attendees that there is a capital-spending boom in China which could continue or it could slow down. And oil has gone up but it could go back down. "There is reason to believe that China is in a bubble," he said. He went on to say that the Chinese have pursued highly expansionary monetary policies which could lead to a crash. An economy that is driven by capital expenditures, it is much more vulnerable to an economy that is driven by consumption.

"China's progress since I was there in the 1980's is mindboggling but investors cannot assume it will continue," Dr. Faber warned.

Then, Dr. Faber talked about the economic implications of oil, specifically: "The Chinese, the Japanese, and the Koreans get 95% of their oil from the middle east. The Chinese are aware of their vulnerability. The safest way to 'contain' China is to control the oil in the Middle East. I think the western powers have figured this out. If you were China and you have 1.4 billion people then oil and resource access is a top priority. But each time the Chinese take measures to secure access to resources, the world is very quick to label China as an aggressor when actually it's only defending its own interests." Tensions are heating up between different countries because of this.

Dr. Faber concluded: "The geo-political situation could have a huge impact on resources around the world and I believe that oil prices will likely go up… I think oil could lead to war."

Lastly, Dr. Faber briefly shared some of his own ideas about investing.

"So how can we invest in this volatile world?" he asked. "We need to start every day by saying 'I don't know'."

Then he provided some specific ideas: "I would diversify and hope that some assets would keep some value and not everything go down the drain."

He paused briefly to humorously note: "I would hold 25% in cash, 25% in bonds, 25% in real estate, 25% in equities, and 25% in precious metals."

And then he wrapped up by saying that he would be heavily weighted in precious metals for the short term.

REFERENCES

Dr. Mark Faber's website: http://new.gloomboomdoom.com/portalgbd/homegbd.cfm

New Orleans Investment Conference: http://www.neworleansconference.com/