Transcript
Sprott Money News (SMN): Thank you, listeners, for
joining us today on “Ask the Expert”. My name is Nathan McDonald of
Sprott Money News, and we are very excited to have the pleasure of
speaking with Marc Faber this morning.
Marc Faber is a leading investment adviser and Director of Marc Faber
Ltd. He is known notably for his monthly investment newsletter, the
“Gloom, Boom and Doom Report”, which highlights unusual investment
opportunities. He is also an author of several books, including
Amazon.com bestseller, “Tomorrow’s Gold”, and a regular contributor of
leading financial publications worldwide. A regular speaker at various
investment seminars, Dr. Faber is well-known for his contrarian
investment approach. With this, I am pleased to welcome Marc Faber this
morning. Hello, Marc.
Marc: Hi.
SMN: Great, Marc. There’s quite a bit of news going
on right now, especially with the speech from Ben Bernanke yesterday.
Marc, the Fed’s FOMC meeting minutes for June have just been released,
and it appears that there’s a division amongst Fed members. There are
those who believe that the Fed should begin to taper quantitative
easing. Bernanke announced in his speech yesterday that QE will not be
tapered at this time. Do you believe that the Federal Reserve will end
QE in the future? If so, what would happen to our financial system if
they did so?
Marc: First of all, I don’t think they will end QE.
I rather think they will have to increase it because as you print money
or as you purchase assets, from a central banking point of view, it
loses its impact over time. In order to keep the impact going, you have
to essentially increase it. I believe that the Dovish members of the Fed
will print more money. Especially after the resignation of Mr. Bernanke
early next year, when he will be replaced, there will be even more
Dovish members.
SMN: You think it’s going to get even worse, and money printing is just going to continue indefinitely?
Marc: Yes, for now. Yes, until the system breaks
down. My view would be that there will be money printing, and the
problem with money printing is always that you don’t control where it
goes to. Ideally, it would go into higher incomes of the middle class
and of the working class, but this hasn’t really happened. The real wait
is for the typical household or the medium household, they are going
down. What is going up is basically selected asset markets, like the
real estate market has recovered. In some areas, we’ve hit new highs.
The stock market has gone up. But as you know, only very few people own
stocks in the United States, so it doesn’t impact the wealth of the
majority of people.
SMN: Do you think the Federal Reserve is naive enough to think that they can control where this money flows?
Marc: I think that the Fed is completely clueless.
It is composed by a group of academics. Most of them, or I would say 95
percent, have never worked in a regular job in their lives. They all
went to universities and then they went to the Fed or other financial
institutions. They have no clue what makes an economy move.
Having printed this much money, and we are essentially in QE4 and QE
unlimited, the results have been very dismal. I think the Fed is
scratching their head at the present time and can’t believe that when
their objective was actually to lower interest rates from July 25 of
last year, the ten year Treasury note yield has gone up from roughly
1.4% to, a few days ago, 2.7%. We have an almost doubling of the
interest rate because of their QE programs. I think that really makes
them scratch their heads and wonder, “What did we do wrong? What do we
need to do? Do we taper, or do we have to increase asset purchases?”
SMN: That seems to be the division amongst the Fed
members right now. They don’t seem to really know which direction they
need to go.
Marc: As I said, in my view, they’re clueless.
SMN: I have to agree with that. It seems to be that way.
Marc: I have to point out another thing. I don’t
pay much attention to what the Fed publishes. When you read their
statements, they are completely confused and very vague. In other words,
all is data-driven. If the stock market dropped ten, 20 percent, for
sure there would be more QE programs.
On the other hand, if the economy is very strong, they may taper off
somewhat. You get the picture. The worse the situation is in the US,
whether regarding asset markets or the economy, the more QE there will
be. The Fed doesn’t know anything else.
SMN: Exactly. They’re just money printers. Do you
think that the United States is still the world’s dominant financial
power, or do you believe that China is now running the show behind the
scenes?
Marc: No. This is a point I wanted to make. I think
that for now, the US is still the dominant financial market and the
dominant financial power. I think we have numerous problems in China,
and I personally pay more attention to what is happening in China and in
other emerging economies than to what Mr. Bernanke is saying.
SMN: Because really, at this point, you can’t really believe what they’re saying.
Marc: The Chinese are not completely dishonest, but
if you read between the lines of the hard-core statistics in China, in
my view, they don’t match with the public statistics about GDP growth.
The economy is growing at say, maximum 4 percent per annum, not 7.5
percent or 7.7 or 7.6 percent.
SMN: It’s true. It doesn’t seem like you can believe much of central bank numbers anywhere, including the Fed.
Marc: Worldwide, you shouldn’t believe governments,
period. I think you should believe market action. When markets go up,
they give you a message, and when the markets go down, they give you a
message. The only problem nowadays is that the messages from markets
have been distorted by very significant government intervention into the
free market, so you can’t rely on the information provided by the
market participants any longer.
SMN: The numbers just can’t be believed, I believe.
We’ve often asked our guest experts about which asset classes our
listeners should invest in, and what percentage of their portfolios
should be in precious metals versus other investments. One of our
listeners, who is a small businessman, has been following the experts’
advice and purchases precious metals as a store of value. He’d like to
ask how he would know when it’s time to exit precious metals and what
the best exit strategy is.
Marc: I think that’s a very good question. By the
way, I would say maybe in the fall of 2011, when gold prices reached
$1,921 an ounce in September 2011, I should have issued a sell
recommendation and said, “Get out of gold and get into cash or the SNP.”
In general, I think that we are still in massive money printing and the
worse the economy becomes, the more money printing there will be. I’m
holding onto my gold. As I explained before, I bought some gold at
$1,300 an ounce and I bought some more gold at $1,200 an ounce.
SMN: Your gold is more of an insurance policy against government manipulation and/or a collapse?
Marc: I’m aware of some people, including Eric
Sprott, that believe that there is manipulation in the system. Where I
tend to agree with him is that maybe central banks don’t have all the
gold they claim they have, because something must be funny. The Germans
have asked for the gold to be returned to Germany. Why would it take
eight years to do that? There’s no reason. You can do it in three
months.
As I said, I don’t know, but one of the reasons I would be inclined
to believe in some manipulation would be, let’s say you’re a central
bank, like the Fed. You don’t have the gold that you declared and you
know that you have to buy it back at some point. Then, you may wish to
manipulate the price down until you can cover your short position in
gold at a reasonable cost. There will still be losses, but you can cover
them at a reasonable cost. That is really the only reason I could see
why a central bank would want to depress the price of gold.
SMN: Do you believe that the attack that began in April is part of that, what you were just speaking of?
Marc: Not really. As I said, I wouldn’t trust
central bank’s intellect very much. I don’t really think that they would
see a connection.
SMN: You just don’t give them enough faith to be that thoughtful.
Marc: No. I have actually a very low opinion of most central bankers.
SMN: Governments around the world are laying down
the pieces for bail-in plans. A lot of our audience is worried that
their precious metals will be taken away from them, even if they’re
stored outside of the banking system. Do you think physical gold and
silver are protected from confiscation if they’re held outside the
banking system and stored at a respected facility, like Brink’s?
Marc: Yes, that’s a good question. I wonder what
will happen one day. Let’s take the worst-case scenario. We have either a
social unrest, a revolution, or war. Governments decide, “Oh, the price
of gold is going up substantially, let’s take it away from people.” In
other words, you expropriate it. I think it will, at that stage, not
matter very much where you hold your gold, except it may matter where
you hold your gold in terms of sovereign state. My sense is that the
Asian countries are less likely to take the gold away than Western
countries.
SMN: You think they can be more trusted, say, than the United States?
Marc: I wouldn’t say that I would trust them much
more. I don’t trust any government, period. But if there are significant
problems, I think they would come from over-indexness. In other words,
the debts are too burdensome for the system, and then it leads to all
kinds of symptoms.
In other words, if you can’t pay your debts, you may print money, or
you default, or you increase taxation, or you take things away from the
well-to-do people, the evil people that make so much money. Well, the
Federal Reserve enables them to make so much money. That is a key
difference. They didn’t abuse the system; they just took advantage of a
situation of money printing so their wealth increased more than the
wealth of the middle class and the lower classes.
In the Western world, they’ll go after these well-to-do people and
people that own gold. In Asia, I’m not so sure this will happen because
Asia is increasingly coming under the umbrella, our own umbrella of
China. The Chinese government has actually encouraged people to
accumulate gold, and themselves, they are accumulating gold.
SMN: Exactly. It seems like China is encouraging
their citizens to invest in honest, real money, and in the United States
and other Western countries in general, I should say, they’re
encouraging their citizens to invest in debt.
Marc: In the Western world, the central banks and
the academics hate gold because they personally never owned it.
Especially since 1999, despite the recent setback, gold has
significantly outperformed equities. The central bankers and the
academics at universities that are neo-Keynesian, in other words, the
idea of more and more government intervention and more and more
expansionary fiscal and monetary measures, these people hate gold. If
they have the opportunity to take it away, especially if, as Eric Sprott
maintains, that the gold is not even there, they would have an
incentive to buy the gold at the low level, once they collect all the
gold, reevaluate by ten times.
SMN: You think that their eventual end-game could be confiscation.
Marc: They won’t confiscate it and not pay
anything. That would be, I guess, completely against the law. But say
the price today, say around $1,200-something, then what they can do is
they could essentially say, “Okay. We collect all the gold and pay
$800.” More likely is that they would first try to depress it to $800
and then do it, then they’ll pay $800. Once they collect all the gold,
like in 1933, they reevaluate to say, $10,000.
SMN: Marc, what’s to stop the money printers, such
as the United States and Japan, who seem to be printing unlimited
amounts of money? What will prevent them from printing many more
billions and simply buy gold bullion as their final act if they get
desperate enough?
Marc: I think that is a very good question. Like
the aristocracy in Europe in the 18th Century, they didn’t give up just
the power. They kept that power, same as the aristocracy in Russia in
the 19th Century. They didn’t give up the power. Eventually, they were
slaughtered. I believe what will eventually happen is that you have a
financial collapse of dimensions so bankers can’t do anything.
SMN: You think it’s just going to end and the people are basically going to take back their roots?
Marc: I’m not thinking. I’m convinced. It will end
very badly. It doesn’t mean it has to be tomorrow, you understand. I’m a
car mechanic and I tell you, “Look, your car has several problems.” In a
week’s time, you’re telling me, “Look, I’ve been driving and it still
works perfectly fine.” The car may still work for another year, or two
years, or three years, and one day, you have a crash. And then, you will
think back, “Maybe back then I should have repaired my car.”
SMN: They just don’t want to. They’re saving the nickels and dimes and just driving it over the cliff, basically.
Marc: The problem is the car mechanic. He’s not
completely stupid like a central banker. He knows how to repair a car,
but the central bankers don’t know how to repair the complex financial
system we have today.
SMN: Do you think that’s because of a lack of real-world experience that they have?
Marc: Partly, because, you see, for investors,
Bernanke comes out very well as the man who saved the financial system.
Why did we have a financial crisis in the first place? Because the
central bankers, mostly the Fed in the US but also the Bank of England
and incidentally, also in Canada and Australia, they paid no attention
to excessive credit growth, and so you end up with an over-leveraged
system and with boundless speculation in financial assets.
Then the crisis happens and they print money, and everybody applauds.
Of course, they applaud the funds manager because the water level in
the bathtub has increased by money printing. The asset values of
portfolios go up and the fees fund managers earn also go up. So they’re
all very happy.
But the man on the street, he’s a little bit less happy because his
wage is going up less than the cost of living increases. In real terms,
he’s losing out. That’s why, if you look at, say, corporate profits,
they are extremely elevated in the United States as a percent of the
economy.
On the other hand, wages and salaries as a percent of the economy are
at record lows. So you have, essentially, through money printing,
created financial wealth and impoverished the working class, like you
and me.
SMN: The rich get richer, basically.
Marc: Yes. I’m not complaining about it, because
I’m also benefiting from it. I’m just saying you’re not going to build
sustainable, permanent economic growth with these kinds of policies.
Something will give one day.
SMN: That’s right. Marc, do you think that gold is
going to continue with losses in this year? It seems to be stabilizing a
bit, the same as silver, based, basically, on Ben Bernanke’s QE to
infinity statement just yesterday. Or do you think the losses are going
to keep going into 2014 and gold is going to be stagnant and going
sideways?
Marc: You mean that gold would go down further?
SMN: Yes.
Marc: To tell you the truth, I was expecting gold
to be in a correcting mode after 2011, but I didn’t expect the price to
come down this much because had I expected it to happen and had I been
sure about it happening, I probably would have sold my gold and bought
it back more recently. Equally, I have an asset allocation and I don’t
feel comfortable holding cash with banks. I don’t feel comfortable with
any paper currencies, so at all times, I want to have some of my money
in metals.
Whether it will go lower or not, that I don’t know. Actually, my
physical gold, I don’t even value. I know that I have it, and whether it
goes up or not, it doesn’t change the fact of my decision to own it or
to sell it. My decision is to at all times hold gold.
SMN: Has the Cyprus confiscation got you worried about paper money and the banking system in general?
Marc: I was just now writing about the 1970s,
because I started to work in 1970. At that time, I can tell you
precisely, the US Stock Market capitalization was slightly in excess of
$800 billion. The total bonds market at that time was slightly below
$800 billion. These are total global bonds. Over the last 40 years, we
had a huge expansion of the financial sector as a percent of the real
economy. There has been GDP growth and some countries opened up, like
China and the former communist countries, that I concede. But still, on
top of a real economy that is say 100, we’ve built financial sector
liabilities of something like 1,000. In other words, the financial
markets completely dwarf the real economy.
I believe in reverting to the mean. In other words, at some stage,
every inflation leads to deflation in that particular sector, whether
it’s housing, the NASDAQ, the NIKKEI, or whatever it is. I believe one
day, paper money and financial assets will be destroyed, but I’m not
saying tomorrow. Maybe it happens from a market capitalization that is
much higher. Someone said to me, “The DOW Jones will go to 100,000.”
Yeah, it’s possible. If you print money, everything is possible.
SMN: But do you think that will be worth anything?
Marc: I don’t know what the end game will be, and
whether we’ll still be alive or whether we’ll be in wars or in
revolutions as the worst. That’s why I want to hold some physical gold.
There’s no point to hold physical gold somewhere in the sky. I would
hold some physical gold in my proximity. In other words, I own some in
Thailand and some in Hong Kong. I still have too much in Europe, but
over time, I will move it to Asia.
SMN: How do you see it all ending, Marc? Do you see
the money printers just continuing to go off the cliff, or do you see
them come to their senses at one point?
Marc: I don’t think they will come to their senses
for the simple reason that insane people don’t realize that they are
insane. They think they’re doing a great job. I talk to these people
from time to time, and I know some of them. If you have a serious
discussion with them, they lean towards the view, “Had we not
implemented the QE programs, we would be in the greatest depression
ever, so we’ve done a fantastic job.” The view is also, “If anything, we
need to do more, not less.”
SMN: That seems like complete insanity to me,
because it seems like they were the ones that got us into this problem
in the first place.
Marc: Look, we know what the result was of Stalin’s
economic policies and so forth. The planning economy is a complete
failure. But now, recently, they announced that they would also
implement some macroeconomic policy decisions in structuring interest
rates and monetary policies. They really think that they can steer the
economy and that they can steer markets. Milton Friedman has written
about this extensively. He thinks the introduction of essentially the
Federal Reserve and with fiscal measures, the economic volatility in the
US in the 20th Century was much higher than in the 19th Century, and
this is correct.
One of the goals of so-called Keynesian policies would be to
stabilize economic activity. In other words, you don’t have huge
business cycle fluctuations and you have relative price stability. But
please, tell me, where is economic stability nowadays, and where is
price stability? Oil prices move up and down like crazy, home prices
move up and down like crazy, and the stock market does the same. There’s
far less stability than there ever was before, complementary of the
Federal Reserve and essentially of the US Treasuries fiscal policies.
SMN: It just seems to be bubble after bubble. In
conclusion, Marc, could you tell us about your newsletter and any
upcoming speaking engagements that you may have? I think our audience
would be very interested to hear about those.
Marc: I have two newsletters. One is a printed
report which goes out by mail. It’s called “The Gloom, Boom and Doom
Report”. The other one is a website report that is emailed out. For
further Information, you can go to www.gloomboomdoom.com, all in one
word.
SMN: Thank you very much for joining us today,
Marc. It was an interesting interview, to say the least, and I hope that
you will come back and join us one day.
Marc: Thanks a lot. Bye bye.
SMN: Thank you, Marc. Bye bye.