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.
OR: In Asia, you’ve said you think Macau stocks are interesting.
Faber: I’ve been following Macau for quite some time. When oil was at $100 there were many analysts predicting it would go to $120 or $150. Now that it is down below $50, many analysts predict it to go down to $20. They move with the flow. In the case of Macau: when the market was hot in 2012, everybody thought that nothing could go wrong; now that casino stocks there are down 50 percent or 60 percent, everybody is bearish.
I happen to think that Macau is a big story fundamentally in terms of gamblers going to Macau for gambling but also for entertainment. Now in February gaming revenues compared to a year ago were down on the order of 50 percent. They may stay depressed for a while, but in a couple of months I think the figures will start to look better. The place is basically the Las Vegas of a region with close to four billion people.
At this level I would consider starting nibbling. I haven’t bought the casino stocks yet but I think in a few years time they’ll be higher than they are now.
OR: You mentioned Russia and Iraq. Are you investing now in Russia?
Faber: I have some Russian bonds of some Russian credits. I think they’ll pay the interest and repay the principal. Russia is a very complex situation and again the reporting by the media has been very biased. I’m not saying that Mr. Putin is a nice guy but I’m not saying that Mr. Obama or Mr. Bush were nice people either. America had the missile crisis in Cuba in 1962. They would not have accepted an American base in Cuba and they will never accept a Russian base or a Chinese base either in Mexico, the Caribbean, or Canada.
For the US, Crimea is irrelevant and Eastern Ukraine also irrelevant. But for Russia it has a huge strategic importance. And the one thing I guarantee you, they will not give it up, for sure. The Russians did not permit the aggression, the aggression came from the US. The Europeans went along and they wanted to establish basically NATO in Ukraine — which is not acceptable to Russia — and so now we have this standoff.
But I believe 90 percent of the European public understands the situation. I talk to lots of people in Europe, and everybody agrees. Crimea and Eastern Ukraine have to be controlled by Russia and there is no need for the current sanctions to be imposed on Russia.
OR: So you think the situation is more complicated and that the Ukrainians aren’t necessarily archangels either?
Faber: Yes. It was ridiculous of someone like Cameron to say that Putin is like Hitler. There’s no comparison. It was taken out of the air and broadcast to the people. Most people realize that the media in Russia may be lying but that the media in the Western world is also lying. Nobody believes anymore what governments are saying.
OR: Do you think the Russian market is now sufficiently discounting bad outcomes vis-à-vis Ukraine?
Faber: Let’s put it this way: I believe the Russian market and the currency went down more because the oil price collapsed then because of the standoff over Ukraine. I don’t necessarily believe that Putin is in a corner at all — yes, the Russian economy is not growing anymore but it hasn’t been growing much in the last 12 months regardless. Strategically, the U.S. makes a huge mistake because they’re driving Russia much closer to China. The Chinese in my opinion love this standoff.
OR: It’s probably not surprising the Iraqi market has gotten hit.
Faber: Iraqi stocks are selling at a very, very low valuation. There are significant risks there but I believe that the Iraqi government in Baghdad will stay in power. I don’t think the world will let ISIS take Baghdad and southern Iraq. The stock market at this level is probably reasonable. It’s inexpensive. There’s a risk. But when people say to me: “There’s a huge risk here and a huge risk there,” I say: if there’s no risk then the asset prices are already very high.
OR: You’re out in Asia. Do you see a big slowdown going on in China?
Faber: I’ve written about this for now essentially a year. The Chinese economy at the present time is growing nowhere as fast as the government would indicate. I think if we have growth over four percent, that’s about the maximum. There are many economic indicators that suggest that there’s actually no growth at the present time. That’s where they began to ease as well. But I’d like to just point out, China is actually not a country, it is an empire and it has a population twice of the US and the Eurozone combined. It’s a huge place.
Now, if you look at the economic history of the US since 1800, how many recessions and crises have beset it? The Civil War, World War One, the Depression, World War Two. The country continued to grow. That China can have a recession that I fully agree. It may be serious but in the long run I think it should be okay.
In economies the size of the US and China nowadays you can have some sectors of the economy and some regions that are contracting and other regions and other sectors that are still expanding. I do not dismiss the fact that China has a colossal credit bubble and that as a result we could have a serious recession in China. That is a possibility I’m not ruling out.
But the stock market in China went down between 2006 and 2014 enormously relative to the US and global markets. And about six months ago I started to write about Chinese stocks, that the economy is slowing down is crystal clear. But to what extent have stocks already discounted that because foreign investors were underweight Chinese stocks? All the money in China flowed into the property markets; nobody was interested in stocks. Now stocks have rallied 50 percent from the lows and I think they will correct. But I also think if you take a view over the next five to 10 years, probably you will make more money in Chinese stocks than in US stocks.
OR: If there’s a recession, isn’t a crucial difference between China and the U.S. that the former’s political structure is potentially more fragile?
Faber: On the contrary. In China at least there is a government that functions. That is the crucial difference.
I’m not saying it’s a nice government. But we have had in Asia governments — think Singapore, Taiwan, South Korea, Japan — that were not democratic and yet the economies under them expanded very strongly between 1950 or 1960 on into the 1990s. People have been brainwashed into believing that democracy is the best system because everyone can go and vote. But what is the value of voting in, say, the US if you are choosing between Mr. Jeb Bush and Mrs. Hillary Clinton? I have to laugh. I’d rather have a good dictator.
OR: Lee Kwan Yew for president?
Faber: Well, look, he took over Singapore when Singapore was very, very poor and he did a very good job at creating prosperity for most Singaporeans. Now some horses have raced ahead faster than others but in general I can say that nowadays Singapore is a very prosperous country, probably the richest country in the world. Equally Hong Kong has never been a democracy, but it was run by governors that were relatively laissez-faire. In other words they didn’t intervene too much in the economy and the place became very affluent. Not for everybody, but the typical standard of living today in Hong Kong is of course much higher than it was when I arrived in 1973. And the same goes for all the other Asian countries. In India we had democracy and it’s basically a country that has lagged behind badly in terms of economic development compared to other countries.
Now this may change. The world looks in my opinion relatively dire in terms of growth in the US, Europe maybe accelerated but not too much beyond one or two percent growth per annum. And in Asia there is a slow down everywhere. Because I travel regularly so I can see it with my own eyes. But in India there could be the acceleration of growth and an improvement in conditions. It has the potential but it may not be realized, because Mr. Modi — the current prime minister — faces a lot of opposition from the socialist camp. In general he has brought a more favorable tone to India and we have to give him the benefit of the doubt. Last year the Indian stock market was up 27 percent, it has continued to outperform the US this year. I’m the chairman of the India Capital Fund. Last year it was up 48 percent. I don’t think this will continue but I think the market may still go up somewhat.
OR: You’ve been in the market for 40 years. Did you ever think you would see the day when interest rates were negative in major markets?
Faber: No. We had negative interest rates for a while on bank deposits in Switzerland but it was for a relatively brief period of time. And the rates on government bonds in Switzerland never went negative. It’s not just about negative interest rates on government bonds: I lived through the 70s when bond yields went up. The US 10-year treasury note went from six percent in 1970 to over 15 percent in 1981. And I can assure you throughout the 1980s, throughout the 1990s, nobody would have dreamed that interest rates would be this low. Having said that, US treasury notes and bonds have a relatively high yield compared to European sovereigns.
We are in uncharted waters. You have to consider that in Europe, the insurance and pension fund industries must buy mostly government bonds. So now a pension fund that promised to pay out this much to the pensioner has no returns. It’s a bizarre situation. In my view these pension firms and the insurance companies will either have to cut benefits or increase participant contributions. The same happens in the US. Look at the pension systems of Illinois. They are grossly underfunded. They’re underfunded by 39 percent. Something doesn’t add up.
OR: Shouldn’t alarm bells be ringing on the magnitude of the money supply or are people just assuming they will continue to create liquidity for the market?
Faber: My impression is that the central banks around the world have not engaged in a currency war. They have passed the baton of money printing from one to the other; now you have a strong dollar and the economy in the US according to most recently published statistics is weakening rather than strengthening. The Fed will say “Oh, we can’t increase interest rates under these conditions. We have to launch another QE program.” I don’t believe that central banks in the current environment will increase rates at all.
The consequence will be that asset prices may still go up — but irregularly. Recently a Gauguin painting was sold for $300 million. In the 70s when I started to work, no Gauguin painting was ever sold for more than $10 million. I don’t know whether the highest price was three million or five million but 10 million was unheard of. And so the purchasing power of money under the current central banks’ policies will continue to depreciate. I don’t know where you live in New York but you know very well that an apartment 30 years ago was worth a fraction of what it is today.
OR: You bring up the Gauguin that was bought by the Qataris. Do you think there will be big ramifications from the collapse of the oil price given the amount of sovereign wealth and other liquidity tied to it?
Faber: The sovereign wealth funds industry had assets of three trillion dollars in 2007. We’re now at over seven trillion. And most of the sovereign wealth funds depend basically on oil. Oil revenues boosted it from Norway to the Middle East. Now that oil prices are down, their cash flow will be lower. Maybe they don’t need to sell assets because the portfolio may still generate some cash flow and capital gains, but they’re no longer going to be a huge buyer of financial assets around the world.
In the meantime, as you know, stock buybacks have been the driving force of stocks around the world. If a corporation keeps on buying back the shares and does not invest in capital expenditures, what do you think would be the outlook for earnings?
I’m very reluctant to recommend to sell short because I’ve seen money-printing environments where stocks can go up 1000 times in local currencies before the currency collapses. Now in the case of these professors at central banks who all talk to each other maybe the currencies will not collapse against each other — perhaps they’ll all collapse jointly against Gauguin paintings, stocks, precious metals, and hard assets like real estate and commodities.
OR: What’s your view on industrial commodities?
Faber: The outlook for industrial commodities is not good at the present time because the Chinese economy is slowing down. China was driving the demand for commodities between 1999 until just recently. Commodities are volatile. The stocks of commodity producers are all very depressed. Even agricultural commodities are depressed. So I would say maybe a small part of your assets should be allocated to commodities and commodity-related stocks.
OR: You like palm oil, correct?
Faber: Yes. I think palm oil is attractive but not near-term. And I believe mining companies at this level that will survive are also attractive.
OR: Like BHP and Rio Tinto?
Faber: Well, I think BHP and Rio will survive but they may not move up. I equally think that oil has collapsed so much it has the potential to rebound. I think the equilibrium price could be in the next two or three years between $40 and $60. Now can it drop temporarily down like it did when in December 2008 crude oil had fallen from the July 2008 peak from $147 to $32. I think this time around we’ll not see a huge rebound, but we’ll see a trading range for a while.
OR: The consensus also seems to be bearish on the euro against the dollar.
Faber: That is true. But if you look at the performance of stock markets in Europe, they’ve all outperformed the US this year. And I could see an environment where people say the US economy is slowing down and will mildly disappoint or grossly disappoint whereas Europe will mildly surprise in terms of the economy. I would say if you look at the markets the most expensive is the US. Europe is not cheap but it’s reasonably priced, and the cheapest are emerging economies’ stock markets.
OR: Do you think that the euro will survive? Do you think it’s more likely that Greece leaves it or one of the core countries leaves?
Faber: A very good question. Yes, I think the euro will survive. I believe that we might have a scenario where the peripheral countries leave, and that this may actually lead to a stronger euro because the core will be less burdened by the weak countries.
By the way, I should add one point. A German charitable institution sent 100,000 pairs of shoes to Greece. They were straight away sent back because they were working shoes. [Laughs]
OR: Do you think we’re likely to see a breakup of the euro in the next year?
Faber: In my view people don’t focus on the right issue. They focus on the economic issue. Economically, I think that Germany and other leaders would have kicked out Greece a long time ago, given their druthers. But of course some European countries — notably France and the southern countries like Portugal, Spain, and Italy — have also sinned very badly.
But look at the map of the region and you’ll see how important Greece could be as a strategic pathway into the Mediterranean for Russia. And the issue here is that the US and the hardliners in Europe know very well the last thing they want is Russian rapprochement with or military bases in Greece, because strategically Greece would be a very important point. This is why I’m not that negative about Russia: I think eventually reason will emerge and that the US will say, “Okay, Russia keeps its influence in Eastern Ukraine including the Crimea but they leave us in peace in Greece.”
I personally think they should not have let Greece into the euro to start with. And when Greece had its first problems in 2010, they should have kicked the country out right away. Instead, the Greeks kept on receiving bailouts, including from the IMF, with the result that today Greece owes money that in a million years it cannot repay. It can’t even pay the interest on its debt.
Insanity is doing the same thing over and over and expecting different results. That’s what central bankers around the world have done with Greece.
OR: Is there a way out for the central banks?
Faber: We had in the nineteenth century money that was backed by gold. It wasn’t 100 percent backed. There was always paper money aside from gold. In the twentieth century we had currencies that were largely backed by gold until Mr. Nixon went off the gold standard in 1971. That really opened the door for massive money printing. If this massive money printing would have lifted economic growth and the standards of living of people of the typical household meaningfully, I would say “Hey, maybe these neo-Keynesian interventionists with their fiscal and monetary policies have a point!”
But it has been amply demonstrated that the way the central banks ran their monetary policies allowed governments to become bigger and bigger and bigger. The bigger the government the less economic growth — it’s very simple.
OR: Do you see this expansion as likely to continue?
Faber: You have all these characters who say austerity is a disaster and damages the economy. In fact, recent studies show that countries that went into austerity programs grew thereafter at a faster pace. According to McKinsey, using figures more or less confirmed by the BIS, the debt level today in the world is $57 trillion larger than it was in 2007. And most of it is actually additional government debt.
OR: So with that kind of debt it would be the first time in history if they get it just right.
Faber: Look, if everything works out as the neo-Keynesians plan, I will write a letter of apology to Mr. Krugman, Mr. Martin Wolf of the Financial Times, and Mr. Roubini and all these neo-Keynesians. I will write another letter of apology to all the central banks: “You saved the system and you made us all much, much wealthier and thanks to you the economy is now growing at a much higher pace than in the last 40 years.”
But I’m not going to go out and buy writing paper. The chance that this will happen is very, very small.
OR: It sounds as though you think precious metals and hard assets will dramatically outperform in the case of economic disaster. Can you expand on that?
Faber: Yes — but I was recently at a presentation over dinner and there were some intelligent people there, and one said: please explain to us where to hide when things go bad. And I said: probably precious metals will be okay, but it depends where there is a safe custody.
My future scenario that I see happening, inside my heart, is this: suppose our all-knowing central banks mess up everything very badly. Suppose the democratically elected governments do the same. Then the first thing politicians will do is go and blame the rich people. They’ll lobby for higher taxation — even though their terrible policies led to asset inflation and made the rich so vastly rich to begin with. Your tax rate will go up in New York. It’s already high in New York City, but it will go up further. Don’t worry about that.
But higher taxes won’t work. Well-to-do people know how to hide assets. And wealth taxes have a very negative impact on the economy, as we’ve seen in Europe in times of socialism in Britain and Russia.
Their next step will be to say: one of the problems is that people don’t spend money. They hoard. This they already addressed to some extent via negative interest rates: you deposit money in the bank and after a year you get less back. It’s a form of expropriation. Who’s left to grab from? The evil gold bugs, the Tom Kaplans of this world, the Richard and Marcs of this world: let’s take their gold away.
They will pay something for it. But after they have collected all the gold they will then revalue the gold price substantially upwards. You and Tom and I and everyone else will miss out on the appreciation.
So I suggest not only diversification between real estate stocks, bonds, and precious metals, but also a geographical diversification. You have to have money outside the sovereignty of countries like the US and also outside of the sovereignty of Europe.
OR: What’s your view on the gold mines in that scenario?
Faber: I don’t know. I think to take away mining companies and physical precious metals is not going to be that easy. But the government or the Fed can declare an emergency under some kind of excuse or otherwise will find a way. They went as far as printing money so that they could do anything that they please. The best hope for the gold owners is that it doesn’t go up 10 times. Ideally it goes up by, say, five percent or 10 percent per annum. The government is then less likely to take it away than if it really goes through the roof. That is the point to consider. I really don’t know. I don’t run central banks and the government will do everything to protect the bureaucracy before the system goes bust. The central banks will do the same.
OR: Do you think that the gold miners will outperform gold on the way up?
Faber: Yes. If gold goes up 10 percent, gold miners will move between 20 percent and 30 percent. I think they will outperform on the upside. But obviously if all these visionaries who never owned an ounce of gold are right, and the price of gold drops to $700, then quite a few companies will no longer be in business.
OR: Which may, longer-term, squeeze the price back up.
OR: Are there particular gold companies you like?
Faber: You could just buy an index. I don’t want to mention individual names but there are some quality companies. For most investors probably the best they can do is buy a diversified portfolio either though GDX or GDXJ or through the Sprott Gold ETF.
OR: Marc, everyone calls you Doctor Doom. I don’t necessarily think that’s fair: at various points in time you’ve been very bullish on a lot of things. I think you’ve had a long term concern about the decline of the system in general both from a moral and a financial standpoint.
OR: Looking out over the next six to 12 months, do you see anything really shouting “Stay away” or “Buy”?
Faber: I wouldn’t buy US stocks here. I’m not going as far as to say I would short them. But if you put a gun to my head and said choose long or short, I would rather take the short side. I don’t think over the next five to 10 years US stocks will give a satisfactory return.
So I would as an investor be diversified. In Europe, commercial properties have a very wide yield spread vis-a-vis government bonds and cash. I would own some properties, I prefer properties in Asia rather than in the US or Europe.
OR: Thank you, Marc. Appreciate it.
Faber: It’s my pleasure.
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