TranscriptSprott 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.
