On the Precipice: Marc Faber and the Central Banking Fiasco

An interview with Marc Faber

For over forty years, Dr. Marc Faber has been one of the most brilliant observers of and participants in markets globally, never afraid of speaking his often contrarian mind clearly and with great humor. After receiving his PhD at the age of twenty-seven, the Swiss economist moved to Asia but remains a globe-trotting citizen of the world. In an exclusive interview with The Octavian Report, the editor of The Gloom, Boom, and Doom Report shared his views on global markets, the central banking bubble, value in gold, Russia and Iraq, and his concerns about the system.

Faber Header

Octavian Report: Marc, you’ve been outspoken that you’d love to short central banks if you could. When do you think we will see a turning point in people’s confidence in them, as you have predicted?

Dr. Marc Faber: It surprises me that people have maintained that much confidence in a bunch of academics and professors that basically print money. I’m asking myself: how will it all end? I can’t imagine that it will end well. But it could last for some more time, largely because the fund management industry benefits from money printing. If there hadn’t been any money printing, the markets would be way below the 2007 level. Now the markets are up and Bernanke is a hero and everybody supports Yellen: as markets go up the fees for funds management go up.

I have to say I’m of two minds. On one hand, I’m an asset holder. So my assets over the last few years have gone up meaningfully in price. On the other hand, I’m an economist and I can see that it doesn’t add up and that it will end very badly. But as you say the question is: when will it end so badly? And there I just don’t know. My sense is it will not last that much longer.

OR: Were you surprised by the Swiss National Bank’s move to de-peg from the euro?

Faber: Under the previous chairman of the Swiss National Bank, they introduced the peg to the euro in 2011. At the time there was pressure on the Swiss franc to go up and the idea was to peg the Swiss franc to no longer have an appreciating currency. But the markets saw through it and eventually there was so much pressure on the Swiss franc from the marketplace that the SNB would have lost a ton of money protecting the peg. They had, in fact, already a lost a ton of money to the tune of something like $60 billion -- about $10,000 per Swiss citizen. I’m not surprised by the fact that they lifted the peg, I’m surprised that they kept the peg for so long against a euro that is inherently a relatively weak currency.

OR: Central banks seem to be reacting to events more than controlling them. You’ve said you feel the markets may soon wake up to this.

Faber: Yes. Financial people like central banks because they boost asset prices, notably stocks and bonds, so they all make money through performance fees and management fees. I don’t think that ordinary people have a high respect for central banks: they do not benefit much from rising asset prices because they do not have assets to start with. So we have to be very careful with the statement that people have confidence in central banks. Yes, the financial sector loves central banks because asset prices go up and then they get more money in terms of fees and performance fees. But ordinary people have a different view. They actually don’t even know what central banks are.

OR: You’ve said many times the obvious thing to do if you are right about a central bank bubble is to buy gold and gold stocks. So why have people been so hostile to gold?

Faber: To a large extent, the financial sector and strategists and analysts missed out on the gold bull market which began in 1999 at less than $255 and went to $1921 in September 2011. Then we had a correction that we have been running until we have reached around $1200 per ounce. The bulk of market strategists kept on telling people to buy stocks in 2007 and then there was a disaster and now they’re riding high again because the NASDAQ is finally above 5000. But they, basically, did not own a single ounce of gold during this entire bull market. They love to talk gold down. They’d love to have gold collapsing because if gold went up strongly here, they would be even more discredited than they have already been. The financial sector is very good at interpreting statistics the way they like to interpret them.

OR: People who follow you closely know that while you have been a fan of gold for a while, you at one point a few years ago were actually somewhat concerned about the gold stocks. In the last four or five months you’ve become much more constructive. Why?

Faber: You and I and your subscribers don’t know what the world will look like in five or 10 years. So I have advocated for years now a diversified investment strategy. Stocks, bonds, cash, real estate, and precious metals. After the correction we had in gold from $1921 to below $1200, and after having seen the very, very negative sentiments by investors about precious metals and gold when gold shares had declined by more than 80% from the top, I think they are reaching a relatively attractive level.

I’m not suggesting that they can’t go down anymore. But I’m suggesting I believe that in the long run gold will be an attractive asset provided the central banks and the governments do not take it away from you. I buy gold all the time because of my asset allocation. I have to maintain a certain weight in gold, because I have a disciplined asset allocation. I would say among the various asset classes where the NASDAQ is relatively high and stocks are highly valued in the US, gold and gold shares are relatively low.

In terms of stock markets I believe that European stock markets are more attractive than the US. It’s not about the economy, it’s about the valuation of stocks. And I believe that stocks in emerging economies are from a longer-term perspective more attractive than stocks in the US.

OR: Do you believe that those stock markets are relatively attractive or absolutely attractive?

Faber: Very few are truly depressed. The Iraqi stock market is very depressed. It’s been down this year something like 25 percent. The Russian stock market is very depressed in absolute terms. The Asian markets are only relatively depressed, not absolutely.