Dr. Marc Faber: Global Central Banks Are In The Money Printing Business−There Will Be More QE
Faber: Inflation will come first, then eventually deflation
Jim welcomes back Dr. Marc Faber of the Gloom, Boom & Doom Report this week. Dr. Faber believes shorting the markets can be a risky proposition when the global central banks will print money at the drop of a hat. He believes it is very important to stay diversified in this environment. Dr. Faber recommends dividend-paying stocks, gold, emerging market stocks and real estate.
JIM: Joining me as my special guest on the program today is Dr. Marc Faber, editor of the Gloom Boom & Doom Report.
Marc, we're at a point, it seems to me, in history where government debt imbalances are growing at such an alarming rate that it appears the only way out is to inflate. The imbalances — whether you're looking at the United States or Europe — are too large, and I don’t think this concept is totally understood by investors, especially wealthy individuals. What does this mean in terms of how governments are responding with their central banks to this problem?
MARC: Well, basically, it’s quite obvious that all central banks would like to reduce government debt as a percent of the economy by inflating. And over time you could do that. But obviously, it may not create a lot of prosperity, but rather problems down the line. And the question is not to what extent do you inflate because, say, in America, the Bureau of Labor Statistics will put, say, deflation at 2 to 3 percent per annum when, in fact, the cost of living increases for people is more like between 5 to 10 percent. So we have strongly negative real interest rates both on short term deposits and even on government bonds. So basically, there is a significant loss in the purchasing power of money. [2:16]
JIM: Hard assets are selling off on the day you and I are speaking as a result of a release of the Fed minutes and comments made by the Fed. I believe at least, we are more likely to see some form of QE3, maybe it’s in the summer, later on in the year, but it seems to me, Marc, the Fed is playing a confidence game with the markets; at the first sign of weakness in the economy, I think the Fed could blink like it did in 2010 when it was telling people — it was writing op-ed pieces in the Wall Street Journal describing an exit plan and then at Jackson Hole Bernanke announced QE2. So your thoughts on this? [2:58]
MARC: I find it quite funny this talk about an exit strategy or an exit point because that they don’t have. And I think there will be no exit, but continuation of money printing. But I have to give credit to Mr. Bernanke. If I were in his shoes in the current situation, with the S&P having risen to 1422 the other day, I wouldn’t have embarked on QE3. I would rather wait and announce there won’t be any QE3 for the time being or depending on market conditions or on economic conditions and wait what happens, and if the market sells off 100 points on the S&P or 200 points, say it dips down to 1200 on the S&P, then come up again as the big savior of the whole financial system by implementing QE3. [3:58]
JIM: You’ve made comments in the past that you’ve been reluctant to short stocks given all the money printing. And I remember, Marc, distinctively, last November, I was reading a lot of prominent technicians who were talking and making dire market predictions on what was about to happen to the market, and I can remember going to bed watching the futures market; the futures market was down. And I woke up the next morning, six central banks announced a currency swap, the market was up 500 points and it’s been up ever since. So as you just mentioned, I don’t believe they’re going to allow the markets to drift down too far, as you mentioned maybe 100 points, maybe 10 to 15 percent.
So doesn’t this make shorting the market a risky proposition when you have these kind of interventions? [4:54]
MARC: Yes. My view was that last October, November and December that sentiment was very negative, there were large short positions outstanding and most people were actually predicting a meltdown in markets because of Greece and the opposite happened. Because of Greece the market rallied, because of Greece they printed money. And in a money printing environment it’s just tough to be very short because in real terms asset prices may go down, but they go up in nominal terms and so I still feel that the risk is fairly high by being short the entire market.
Now, if we talk about being short individual situations where there is deterioration in the business of one sector or one company, then yes. I mean there are people who can pair trade, in other words, they are short one group and long another group or short one group, or long one stock and short another stock and they do it quite successfully. But in general, I would say in this money printing environment, I would be careful to be heavily short stocks. [6:09]
JIM: You mention Europe and I want to move on to Europe next. We had this massive one trillion dollar LTRO program, which led to a relief rally. A lot of commentators thought Europe had dodged a bullet. But Europe still has a fiscal union problem. In your opinion, Marc, can Europe still come together in a fiscal union, and if not, how long before they face another crisis? Things aren’t going well in Greece. [6:37]
MARC: Yes. I think that another crisis is coming, whether it’s against Greece or Spain or Portugal or Italy — across the board — yes, I think another crisis is coming. But as an investor, you have to ask yourself: what are the investment implications? And I think it’s nice to be an academic and say the crisis is coming for this and that reason, but the investment implications are clearly that they will print more money.
But I’d like to make one observation; you know, this money printing business succeeds up to a point. It doesn't succeed forever. And money printing is essentially inflation; you increase the quantity of money in the system and you try to increase the quantity of debt. In other words, you try to avoid the deleveraging process, which actually would be important to happen; that they try to prevent.
And the difficulty is when you create monetary inflation, it doesn't touch everything at the same time. At certain times it may go into wages or it could go into commodities or it can go into consumer prices or it can go into real estate or it can go into equities or commodities or it can go into precious metals or art prices and so forth and so on — but not at the same time. And the Fed basically since 2008 has expanded its balance sheet with the intention to stabilize the housing market and boost housing prices, but that is precisely the asset that hasn’t gone up. To some extent they stabilized it in some areas where real estate, you know, is no longer declining, but basically it isn’t rising in value, except — and this is the anomaly we have in the marketplace — except in Aspen and from Madison Avenue and Park Avenue and so forth. In prestigious locations around the world, real estate has continued to go up in value. [8:45]
JIM: Right now, the sovereign debt markets seems to be behaving. We’ve seen yields come down on Spanish and Italian bonds, but I guess a question is for how long. They’re trying austerity combined with money printing. But how long, Marc, can government austerity work without incentives given to the private sector.
For example, the opposition candidate in France wants to raise taxes to 75 percent on individuals making a million dollars and I don’t know if that appeals to the private sector to expand; they’ve got a new carbon tax on airlines. So I don’t believe you can tax and print your way to prosperity. [9:28]
MARC: Well, certainly, you cannot tax your way to prosperity. I would say what ought to happen in terms of austerity is that it would reduce the involvement of government in the economy very substantially; say, in America, the tax laws now — I just read the other day, the explanation for you to fill out your tax return. It’s 86 pages long. You could simply that by just having a flat tax. Period. But of course, simplicity doesn't appeal to certain interest groups like the accountants and the tax consultants and the financial advisors and they would have to lay off people and so you make everything much more complicated.
But as you just pointed out, you have an expansionary monetary policy but a restricted regulatory environment where there are more and more regulations and actually [fatal] to any business expansion. I mean I know lots of small-business men; they have no appetite whatsoever to employ people. [10:43]
JIM: Is it possible given this kind of scenario, Marc, in the US, Europe and Japan with quantitative easing as the main policy tool, the result is you still get a weak economy or weak economic growth because of the structural impediments, but as a result of QE you get strong equity markets. In other words, the money has got to flow somewhere. Businesses, as you mention, aren’t keen to hire people or maybe build new plants, so the money goes into speculation, which is the stock market. [11:17]
MARC: Yes. That’s exactly what I tried to explain before. You know, the money flows somewhere and before year 2000, it flowed into NASDAQ stocks and it flowed into telecommunications stocks and media and then it flowed into the housing market and in 2008 we had a commodity bubble, and now it flows into equities. And the more money you print, the higher equity prices can go because in a money printing environment, eventually people wake up to the fact that to hold cash balances is a losing proposition due to the loss of purchasing power that occurs annually — at the rate at the present time of say 5 percent — because inflation, the cost of living increases are say 5 to 10 percent, you have low interest rates so you lose out. So people go and buy Andy Warhol paintings and all kinds of assets including equities.
And I wanted to make one point very clear, if you print enough money the Dow Jones can go to 100,000 or 100 million or 100 trillion. You just go and look at what happened in Zimbabwe and Mr. Mugabe basically the economic mentor of Mr. Bernanke. [12:35]
JIM: Speaking of the economy, in the US economic conditions have improved since the third quarter of last year. The leading economic indicators are up and even the ECRI weekly leading index is up despite their recession forecast. Bernanke and the president have been quoted that they are pleased with the economic progress, but they were also pleased in the first half of 2010, the first half of 2011, only to be disappointed as growth slowed down abruptly after stimulus faded.
So Marc, are we likely to see or repeat a similar pattern again this year once the Fed, let’s say, Operation Twist ends and other stimulus ends. [13:23]
MARC: Well, let’s put it this way. The economy, that is correct, has stabilized, but I wouldn't rely too much on the publications of the [statistics due to] we are in an election year. And I think it’s a reasonable assumption that the Obama administration will try to make the statistics look better than they are. The fact is simply that if we look at the stock market action, cyclical stocks, economically sensitive stocks are performing miserably. So that tells you maybe something more reliable about the global economy than what the Obama administration tries to tell us. [14:00]
JIM: A couple of problems I see here developing here in the US, one is rising energy prices. Nationally, we're close to $4 a gallon; here in California we're approaching $5 a gallon. Housing, especially non-residential structures and personal income haven’t improved, although the job market is getting better, but a lot of the job market improvement has been temporary jobs. We have factory utilization at a point where in the past it would give way to rising inflation rates. I don’t know, Marc, if the Fed can handle this if the economy weakens at the same time prices rise as a result of energy or some form of commodity inflation.
Even though, you and I believe that these inflation statistics are understated, does it put the Fed in the bind, if as a result of rising energy prices, inflation starts to rise, consumers are hit because they have to pay more for gasoline? What would happen in the case where you have rising commodity prices as we're seeing, for example, in agriculture or energy, and the economy begins to weaken? Does that Fed put the Fed in a bind? [15:15]
MARC: It should, but it won’t. Let’s say hypothetically, the oil price goes to $150 for whatever reason and the economy weakens as a result of that. Mr. Bernanke will come out and he will implement QE3 on the basis that the energy price increase is temporary. That’s what he said about price increases for the last 15 years: it’s temporary. And I think that if the oil price really went up, and don’t forget, the oil industry is very simple. For the producers of oil, whether it’s Venezuela or Iran or Saudi Arabia or North Dakota, rising prices are revenue increase and for the consumer it is a tax. Now, there are far fewer oil producers than users, so basically there is a huge tax on the consumer in the world when oil prices go up. And if oil prices go up, gasoline prices go up and heating prices go up and people have less money to spend on discretionary items. They spend it on the necessities, namely, they have to drive to work, they have to heat their homes and they have to air condition them and so on and so forth. And the Fed would step in in my opinion and print.
And this is precisely the danger point we're at at the present time. What we could get is actually a weakening economy but a price increase. [16:49]
JIM: We’re in what we call in the US the “silly season.” You’ve made reference it’s a presidential election cycle where politicians are kissing babies and promising voters free lunches. The administration, Marc, has the advantage because they can direct spending towards key interest groups. I would imagine one of the president’s best friends is Ben Bernanke right now. I’ve interviewed a lot of experts recently who feel that 2012 is going to be an okay year because politicians will keep the market and the economy pumped all the way up to the elections.
But a lot of people have pointed out, in 2013 and 2014 we face some real headwinds. With fiscal drag kicks in: we have the massive tax hikes that will go into effect with the repeal of the Bush tax hikes plus the Obamacare tax hikes; then we also have the fiscal spending cuts that were agreed upon in August of 2011.
Do you see the future playing out okay, let’s say this year, but maybe problems next year. [18:00]
MARC: Well, I think the problems may already start this year because the market is a discounting mechanism and you know, the governments have limited power steering the economy. They may wish to make it look good and so forth, but it may not succeed. But incidentally, I don’t believe that the Bush tax cut will be repealed. In other words, I think they will continue because most likely we will have a Republican Congress and so the deficits will stay very large in the US. [18:31]
JIM: Marc, you live in Asia and it seems like every three months here in the US we get the China bears that come out and talk about a hard landing. From your perch where you live in Asia, and what you observe, how do you see China’s economy going forward? Is a hard landing a likely scenario from your perspective or is China likely and if it is a hard landing, is this the next big bubble that’s to burst or is it possible they could dodge a bullet and perhaps get away with a soft landing? [19:00]
MARC: Well, my sense is that the hard landing is unavoidable, but the question is will it be this year or next year or 2014 because as in the case in the US, you can postpone problems for a while but not forever.
And the principal macroeconomic problem I see for China is that its economy was largely driven by capital spending and 2008 by huge government stimulus and expansionary monetary policies. And if you have overcapacity, you can essentially continue to build capacity, but the end result will then be even worse. So I think they may be able to kind of postpone the hard landing, but I don’t think they can avoid it. It’s just a question will it happen say six month’s time or will it happen in two or three years or one year. But I’m quite convinced the Chinese economy will have a hard landing. [20:09]
JIM: I want to move on to the topic of gold. You’ve been a strong believer in gold since as long as I’ve known you, Marc. With all of the money printing, I imagine you still feel strongly about gold ownership. Do you feel the same way, say, towards gold equities which have been underperforming? [20:26]
MARC: Well, by the way, I want to revert to your earlier question about China. If you look say at the industrial commodity prices, whether it’s nickel or aluminum or copper or so forth, they are not acting well, so that in my view would signal a more significant slow down in the Chinese economy. But coming now to the question of gold, yes, I still like gold but, you know, I have argued since last September that we reached intermediate peak on September 6th when the gold price went to $1,921 per ounce and then we collapsed down to 1,522 on December 29 of 2011. And then as you know, we rebounded and then now more recently we sell again. I think we may test the lows of December around 1520 and possibly we could even break them on the downside.
But you know, we have a big move in gold compared to equities since 2000, and incidentally, even today, year over year the gold price is up I think 9 or 10 percent and the S&P on May 2nd, 2011, at 1,370 and we’re now at 1,397. It’s not a big deal; we’re hardly up one percent. So gold actually over time has done very well. Probably some people bought it obviously at $1900 and they are sitting on large losses and so forth, but I am confident in the current environment investors should own some gold; they should as an insurance.
And in fact, if you have a diversified portfolio of say cash, real estate, bonds, equities and gold, you should actually wish that gold doesn't perform well because that would be a symptom that we are returning to sound money. Now, I don’t believe that we will return to sound money. I’m just saying that basically as an investor if gold performs badly, the other assets including the purchasing power of money will do well.
The gold shares have performed miserably and there are several reasons. First of all, usually a mining company, a Newmont or a Barrick and so forth, they do not exclusively produce gold. Gold comes as a byproduct or in combination with some other industrial commodities such as copper, and industrial commodity components is obviously weak as I just mentioned.
Secondly, globally, there is a trend to asking for higher royalties or a higher percentage ownership by governments in the projects and so forth, and so the profitability of these mines is under kind of a threat. The third, probably, you have a lot of exploration companies. I’m on the board of some of these exploration companies. I can tell you, 90 percent will not get financing in my opinion. And an exploration company is not like a food company or a cigarette company that has an established cash flow and relatively low capital expenditures. An exploration company has zero cash flow, zero, but huge capital expenses. Huge. [24:05]
JIM: You’ve been a strong advocate of diversification because you believe it’s very difficult to predict the future with any certainty, especially at a time when governments are intervening. I know, for example, my own case, Marc, I’m diversified in gold, energy, dividend-paying stocks and real estate and therefore, even though gold or gold stocks have not done as well, recently dividend stocks are doing well, rents on real estate have picked up. So I wonder if we might just spend a few minutes and talk about the importance of diversification in a market where I see a tendency even in the gold camp, for example, I see individuals that put all their money in gold and then they worry when we get a correction or their gold stocks don’t go up. [24:57]
MARC: Well, you see, I’m an advocate of investments that generate free cash flow. In other words, you invest in something and every year you get, after all expenditures, some money in the form of interest payments or in the form of dividends. And that allows you a lot of flexibility because if you have all your money in physical gold or in exploration companies the problem is you have no cash flow. So if let’s say your portfolio drops by 50 percent, you don’t have any money to add to your positions, whereas if you have cash flow, every year some money comes in and you have purchasing power to buy the assets that during that year fell the most or where you think some value is emerging.
And I think it is very important to have always cash flow to invest in opportunities. And so I also advocate essentially a diversification.
You know, a few weeks ago Mr. Buffett came out and said that gold is unattractive and so forth and several studies will show that stocks over the long run have performed better than gold. I fully agree with this study. It should be clear that the company that generates and pays out dividends over time will perform better than a dead asset like gold.
However — and this is a big “However” — I once talked to Jeremy Siegel, he’s written many books about the performance of stocks, in 1800 and so forth. I [said], Jeremy, you start your book on the performance at 1800, are you actually aware that by 1841, the poor man’s recession, most of the canal companies and most of the banks were bankrupt. So if you invested your money in 1800, by 1841 most of it was gone.
And this is the point, in equities you have to rebalance your portfolio and in gold you don’t have to do that. It’s a totally different type of asset. You can’t compare it.
And the other day, you know, Kodak went bankrupt. I remember in ’72 and ’73 among the 10 most popular stocks among institutions you had Polaroid and Eastman Kodak and both went bust over time and they were disastrous investments. So it’s nice to say the market is going up in the long run by this and that, that I agree, but you have to rebalance the portfolio. And in gold you don’t have to do that. Gold is basically cash that doesn't pay any interest. [27:44]
JIM: Recently, Marc, I was at a party with some very wealthy individuals. Most of them I would say were retired, their homes were paid for. What I found alarming in talking to individuals, outside of their homes, very few of these people talked or owned inflation hedges. No one I spoke with owned gold; one gentleman said, why would I buy gold? He said it pays no interest or dividends.
I wonder if you might talk about the risk that wealthy people face in an age of inflation. Many of these people are unaware, despite their wealth, that in an inflationary age, they could see their wealth decimated through either taxes or inflation or in a worse case, civil unrest as we’re seeing in many countries in Europe. [28:37]
MARC: Yes. That is correct. I’m not sure that gold would help you a lot in the case of civil unrest. But the point is this. If someone that you meet who is well-to-do and says gold doesn't pay any interest, tell him at the present time your deposits are not paying you any interest either. And in real terms, inflation adjusted, you are penalized. You are losing out by say 5 percent per annum because your cost of living increase are going up by say 5 percent and the interest is zero. So in this environment, you have actually an advantage to own a sound currency like gold vis-à-vis paper currencies where the quantity can be increased.
And by the way, you ask your well-to-do people once, when did you travel overseas the last time? Haven’t you noticed how expensive Australia and Canada have become relative to the United States or Switzerland? And if they say, yes, Canada is now very expensive. And you say yes, that is a symptom of US monetary inflation that depresses the value of the purchasing power of the dollar. [29:53]
JIM: Marc, as long as I’ve known you, you’ve been a world traveler. You travel quite a bit each month. If you were looking at your travels, what is the most important insight that you’ve learned from traveling around the globe that you’ve been able to apply in managing your own money? [30:13]
MARC: Well, the first insight I can give you is that first-class tickets have essentially doubled in price over the last six, seven years, and that hotel prices have also gone up very substantially and that traveling has become very expensive.
If you tell me, yeah, but there are lots of airlines where you can get cheap seats and so forth. Yes, if you have time, you can do that, but as a businessman, say, I have to be at a certain place, I can’t take the risk that I’m late. And so I have to travel essentially on a normal airline; that has become much more expensive.
And the insight I have essentially from traveling around the world, the world is a huge place. And we just have to realize someone living in the south of the world, say, the South Pole, he sees the world from a different perspective than someone who lives on the North Pole. And so people who live in the Middle East have a different perspective on the world than an American; and Chinese have a different perspective than Americans and Europeans and so forth.
And I think it’s very important for world peace for people to really understand that different people have different perspectives and different opinions. And I see it and I notice it, sadly, I don’t know whether it’s because of the social media or because of the internet, you have today far more polarized views than before. You have blogs, and blogs are for the gold stocks and all the gold bugs are together in these blogs. Then you have blogs for the super stock market bears and all the bears are there. Then you have newsletters that are oriented to mining stocks and all the mining stock owners are there.
And there is actually very little cross-interaction in the sense that if I were convinced of my views that gold is a desirable investment, I would wish to hear the views of people who are anti-gold. In other words, you want to have interactions with people that have precisely a different opinion than you and not with people that have the same opinion as you have. This is very important. That is an insight I’ve kind of learned from traveling and seeing the world. You know, people in Brazil look at the world from a different perspective than an American. [32:55]
JIM: Speaking of insights, one of the features of your monthly newsletter, you often print articles written by other money managers and peers in your industry. Is there any interesting insight that you have gained from reading or talking to some of investment peers. As you just mentioned, you like to read — if you are in a sector that you think is favorable, you like to read people who don’t think it’s favorable to give you a contrary view from your own. But are there any insights in particular that you have gained from the work of others that you would like to share. [33:37]
MARC: Well, I mean, you know, I’ve learned that what I know I obviously learned from someone. I didn’t invent it. So I worked at White Weld with Gary Schilling and he’s a friend of mine; I see him occasionally at the conferences and so forth. And I disagree with him about that we have deflation. He lives in New Jersey. I went to New York airport the other and day and then I drove to New York City and the Lincoln Tunnel fee has just increased from $8 to $14. Well, I’m sorry, that is a 50 percent increase. And so there is no deflation in the system today. But if you say there is deflation in the housing market, yeah, there has been deflation in the housing market and if you ask me will there be one day a deflationary collapse, yes, one day there will be a deflationary collapse, but you understand, as an investor it’s nice to say there will be a deflationary collapse, but it could happen from Dow Jones 100,000 or gold price 20,000 or from home prices that are much higher than today and from a dollar that has depreciated much more than is the case today.
So the difficulty for the investor is actually to navigate between today and the time of collapse that I think is inevitable. But how do you protect your wealth in the meantime and in the time of collapse? Investors, and I think they have to begin to think about this already today and say, okay, what does it mean if there is a global kind of deflationary collapse.
In a deflationary collapse, everything essentially goes down in value, but obviously, like in an inflationary boom, in an inflationary boom you have different assets that go up at different times with different intensity. So let’s say if you look at 2000 to today, you were better off in gold and commodities than in equities. Now, in a deflationary collapse, the key is to say, okay, I’m only going to lose 50 percent when everybody else will lose 90 percent. So relatively speaking, I will be much better off. And that is the strategy that investors should consider: How to position themselves to lose less in the deflationary collapse in the final crisis than the majority of people. Then relatively to other people, their position will improve. [36:11]
JIM: Well, Marc, it’s always interesting speaking to you because I know the advice you have just given on this program is advice that you follow in your newsletter because in addition to your own thoughts you feature every month somebody else in the industry who may give an opposing view or an interesting view on the markets, which is why I so much enjoy your monthly newsletter.
Marc, as we close, why don’t you give out your website and tell people about your newsletter. In my opinion, it’s one of the best that I read. [36:46]
MARC: Well, it’s very kind of you to say so. Basically, I have two newsletters. One is a printed report, the Gloom Boom & Doom Report and one is a website report that is sent out by email every month and both —essentially the information is on the website www.gloomboomdoom.com. [37:10]
JIM: All right, Marc. Well, listen, I want to thank you for taking time out of your busy schedule. I know it’s pretty late where you are at, but always appreciate speaking with you.
MARC: It’s my pleasure.
JIM: Once again, if you’d like to follow Marc’s work, you can go to his website, www.gloomboomdoom.com. Marc, I wish you well and hope to talk to you again.
MARC: Yes. I wish you and your listeners the same. Thank you very much.