Marc Faber on Gold, Inflation, War, and How to Invest

Jim Puplava: Marc, I want to begin our discussion with a topic you have addressed in several recent newsletters, which is the decline in morality and ethics within the financial system and within society. In your opinion, is this the result or consequence of cheap money and currency debasement.

Dr. Marc Faber: Well I think to some extent yes, because it’s created a tremendous wealth inequality and at the same time, it created tremendous power in the financial sector. So the combination of the two was certainly a contributing factor. And if you read about the history of hyperinflation in the world, in each case there was a tremendous decline in morality.

Jim Puplava: Marc, I have known you for several years now since we first met at the San Francisco Gold Show. And since I have known you, you have been very consistent on your views on inflation. Given the severity of the financial crisis, and the deflating asset prices that we have seen—for example, real estate in the United States, and now we have seen even the pull back and decline in a merging markets—have you altered your views or changed them in any way, given the recent downturn in many of the emerging markets.

Dr. Marc Faber: Well if we understand inflation as a monetary cause, in other words, you increase the quantity of money and of debt, then obviously, we have inflation in the system. Now Mr. Bernanke, he was under the impression that he could just drop dollar bills onto the United States and revise the housing bubble. But the problem with this view is that if you drop the dollar bills, in other words if you increase the quantity of money, it does not necessarily have to revive all asset prices, and all prices at the same time. So housing did not respond, but as you know since March 2009 equities have rebounded on the S&P from 666 to now 1200, and at the same time we have significant price increases in the system in insurance costs and in educational costs. There was a statistic recently published that the turkey this year for Thanksgiving would cost 13.4% more than a year ago. Nobody can tell me that they think there is deflation in the system. And I see that myself, because I travel a lot that there are leakages—when you print money in the U.S. it does not have to generate inflation in the U.S., it can generate inflation in India or China, or in Vietnam or in Hong Kong, or in Singapore. In that sense, there was a lot of inflation.

Jim Puplava: You know, as a believer in devaluation and currencies, I was recently reminded of this last Wednesday. Tuesday evening Marc, I read several well-known respected technicians like John Rokes, Stan Winestein, and Paul Desmond. And they were talking about the breakdown of the markets. And before I went to bed Tuesday night, the futures were down. Lo and behold, I wake up the next morning to the news of China lowering its bank reserve requirements, and then we got a love-fest to Central Bankers and new money printing. I thought of something I heard you say, that whenever markets fall, 20% or more, Central Bankers will immediately engage in a new round of money printing. And that’s exactly what happened.

Dr. Marc Faber: Yes, I mean the market keeps going up at the present time because of easing measures and today because of the rumors or the statements that the ECB is one way or the other, in one form or the other would essentially bailout Europe. So this has not really to do with economic fundamentals, which are not particularly good, but it has to do with money printing.

Jim Puplava: The consequences of all this money printing is, as you just mentioned, inflation. You recently wrote that highly expansionary monetary policies, increase income and wealth inequality. In fact you just mentioned as part of this morality that we see, they impoverished first time home buyers, for example, anybody that bought a home in mid 00 decade, or for that matter, first time investors in equities for example in the year 2000. The occupy Wall Street is directing their frustration obviously at Wall Street but should they be directing it at the fed and the government.

Dr. Marc Faber: Well basically, my view would be that they should direct it at the Federal Reserve, and not at Wall Street. Because you understand in every system, if you provide something for free, like free alcohol, then people will get drunk. You cannot blame them for that, it is free so they have a good time of course and essentially, the Federal Reserve encouraged all kinds of baubles and mispricing of assets, starting with essentially in combination with the Treasury, the bail out of LTCM. They gave the signal: you go and leverage up. So there was the Greenspan put and later, there was the Bernanke put, and when the NASDAQ collapsed in 2000 the Federal Reserve printed money like crazy, ahead of Y2K, with the NASDAQ doubling between August ’99 and March 2000 all because they went on to print more money and keep interest rates artificially low. And this is not only my view, this is pretty much the view of every economy that interest rates were kept artificially low between 2001, when they slashed interest rates from 6.5% on the Fed funds rate to 1% in 2003, and kept it at 1% until 2004—when actually the economic recovery had begun in November 2001. So three years into economic expansion, you have essentially the 1% Fed funds rate that led to a complete misallocation of capital and excessive credit growth. And the Federal Reserve never paid attention to this critical issue until 2008, when private credit growth tumbled and then they said they did it in combination with the treasury, to essentially revive credit growth through fiscal deficits and monetization. I would actually say the Fed is very much to blame. I am not saying 100% because obviously there was a wage arbitrage between the United States and Europe and Asia, because wages in Asia were much lower, but largely responsible for the U.S. having made no progress for the last eleven or twelve years.

Jim Puplava: You know at the same time that governments, such as my own government in the United States, are running large budget deficits, there is a growing movement within society, especially young households calling for more entitlements. We have seen in Greece, and in our own state of Wisconsin and Illinois, austerity measures Marc, are not popular with voters so are we likely to see more bread and circuses given to the public that are paid for with more money printing.

Dr. Marc Faber: So basically, entitlements and subsidies to households and do not forget, 49% of households in the U.S. have someone who received some entitlement. This amounts to vote buying. And basically, what you can do in a democracy in order to gain popularity is to go after a minority group. So you go off to the 10% highest income earner or wealth earner owners. And they tell the electorate vote, we are going to tax these people. If 90% of the people in the U.S. belong to the 90% that do not have the 10% highest income and wealth, they will vote of course for sure, to tax these people. And that will not be very good for let us say capital spending, because normally the decision makers for capital spending are higher income earner and not workers on the factory floor.

Jim Puplava: If you take the last 60 years—and this will be my last question regarding inflation—there have been only two instances of what I call real deflation, where we have actually seen declining prices—in ‘54 under Eisenhower, and we had a brief moment, for a few months in the fall of 2008—otherwise, Marc, we have experienced continuous inflation, in fact Central Bankers are now talking openly about creating it. For example, as part of monetary policy targeting inflation of maybe two to three percent. So why is it, and I know that you have some friends, and I have interviewed many of them, some very fine people, like Gary Shilling, David Rosenburg, that still believe in deflation. What is it they are missing?

Dr. Marc Faber: Yes, I am aware of that because they focus say on one sector of the economy, which is the housing market or so, or they focus on the debt deflation that we have at the present time to some extent because the household sector has been reducing its debt on credit cards, and we have also some de-leveraging in other sectors of the economy. But that is offset by the government fiscal deficit and at the same time also by monetization on a massive scale. So I do not really see any deflation in the system at the present time.

Jim Puplava: I want to move on to something that some people are concerned about. And that is China. You are in the camp Marc, that believes that China could experience a hard landing. There are other prominent investors like Jim Chanos and Hugh Hendry, who also believe in this possibility of a hard landing. And recently, if you look at China’s PMIs, they have been contracting, Can they, or is there a possibility they could be successful and engineer a soft landing or in your opinion, is a hard landing more probable.

Dr. Marc Faber: Actually Jim, before we move to that, I just want to give you some statistics. When Mr. Bernanke became Fed Chairman, oil was at $58 a barrel. It is now over $100. The S&P was at 1264, it is now at about the same level. Gold was at $480, it is now $1,700 and something. And the civilian employed in 2000 were 220,000,000 and then now 130,000,000. The unemployment rate was 4%, it is now 8.6%. Unemployment among teenagers was 12%, it is now 24%. The average duration of unemployment was at the time 15 weeks, it is now 40 weeks. What a great job the Fed’s Chairman has done.

Jim Puplava: Hmm, I guess money printing does not buy as much as it used to.

Dr. Marc Faber: China, coming back to China, I am not saying that it is necessarily his fault that this has happened but then you should not claim that with monetary policies, you can influence economic expansions and avoid recessions. In other words, what’s the case he’s always maintained: through our interventions, we can smoothen out the business cycle. But actually if you look at the record, you have higher booms and busts and you have higher financial volatility. This year we never, ever had before a year when you had so many nine to one advance days and nine to one decline days. In other words, volatility has been incredibly high the end result is that the S&P is basically unchanged. I mean I just argue the best is not to intervene into a free market. One intervention leads to another one. And at the end, you have a socially communist system like we had in the Soviet Union and in China. And we all know what the economic results were of those experiences.

Coming back to China, look nobody knows precisely what the outcome in China will be. But all I can tell you is from living in Asia there has been a slow down in the growth in Asia. And in most countries, corporations have begun to report disappointing earnings. There is a reason why stocks in the world are down between 20% and 30%. The S&P this year as I expected, has out preformed the emerging economies. But there is a reason why stocks went down this much, and I think for monetary reasons they will rebound now, the way the S&P is rebounding, but it does not change the fact that something is not quite right.

Jim Puplava: There are others out there and I guess some of them are more optimistic, Jim Rogers, Steve Leeb. Rogers believes China could experience a bust but it will be less severe than other countries because their economy is so vast. In other words, there would be other sectors within the Chinese economy that could offset a downturn. On the other hand, Steven Leeb believes that China’s over capacity is intentional, designed to prepare for mass migration from the country to the city. Is that a possibility?

Dr. Marc Faber: Well we have already mass migration from the countryside to the city and undoubtedly, it will continue. But keep in mind, every rapidly growing economy has from time to time huge setbacks. And if you look at the history of the U.S., that was undoubtably in economic history the world’s most successful economy in terms of growth rate, between 1800 and say the year 2000. Then how many recessions did we have? How many bumps did we have? There was the Civil War, then we had World War 1, then we had the Great Depression, and World War 2, and so forth and so on. I mean just to assume that a country like China of its size, that has been driven in the last two years largely by fiscal deficits and huge credit growth, will continue to grow at this rate, I think it is just overly optimistic and to some extent, naïve. I am not saying China will crash, but even if it crashes, it crashes for two years, and it does not change the long-term fundamentals. But then there is another issue coming up, the geo-political tensions in the world have increased and it will be very interesting to see where it leads to.

Jim Puplava: This brings me to a question along those lines because you have frequently commented that during tough economic times, or periods of resource scarcity, nations tend to go to war. Now aside from America’s perpetual war on terrorism, are you expecting additional wars in the near future would be my first question, and if so, do you think these will be regional conflicts, or do you fear something much bigger, like a world conflict?

Dr. Marc Faber: Well who knows and it is very difficult to invest according to world conflict, but the fact is simply that the Middle East is going up in flames, that tensions have increased very substantially as well as in the states. And I think the Chinese must have scratched their heads when they stalled the invasion of Libya. And they would not be as stupid as to believe that if the Western World controls the Middle East, it would be very helpful to them, because if the Western World including the U.S. and Britain, France, Germany controlled the Middle East, then the Western World can switch on the tap of oil or switch it off. And this must really be very unsettling for the Chinese. And therefore, I think instead the Western World attacked Iran today, I think some counter measures would be taken and believe me, the recent trip of Hillary Clinton to Asia, to essentially reassert the American influence in the Pacific, would be viewed by the Chinese as a hostile move. There is no question about this. Like if the Chinese went to the Caribbean and essentially tried to reassert their power over the Caribbean or establish bases in Mexico or in Canada or in Venezuela, it would be looked upon as an aggression by the U.S. and you have to look at the world from different perspectives: from the perspective of the U.S., the perspective of Western Europe, from Russia, China, and of course also from Latin America.

Jim Puplava: So, would you say Marc that the investment world is more dangerous today because of…or the world is more dangerous than it was when let us say, you and I were children?

Dr. Marc Faber: Well my main concern is that the world, especially the Western World, Europe and the U.S. is far less free than when we were children. I mean I talk to my friends all the time about this. When I grew up in the 50’s and 60’s, we had enormous freedom. Now, everything is controlled, every move you make is controlled. And the recent legislation in the U.S., whereby Americans can be detained by the military and put in jail without trial, is a very dangerous legislation. And my view is that the cold war was good at the time, you had super powered that opposed each other, and they were very careful what they did. Now you have fragmented world and most dangerously, you have a superpower that is from a secular point of view, long-term point of view in a relative decline compared to the rest of the world. And that superpower, has elements in the military and the conservatives, that are rather aggressive. At the same time, you have China rising, you have India rising, there is a rivalry between the two countries, and you have essentially in Russia a system where this is how far the Western World will go and not beyond. And so yes, to some extent, the tensions have increased dramatically. And what has also changed is when I grew up, China was oil self-sufficient. Now they import nine million barrels of oil a day. They are dependent on Middle Eastern oil. And believe me, this is the number one concern of the Chinese leadership: how do we get access to resources without interruption?

Jim Puplava: Marc, I do not know if you are aware of this, but due to changes in the law here, a few years ago, U.S. students can no longer use bankruptcy to rid themselves of their education debts. The upshot is that many young people now hold rather useless degrees, degrees in an area that cannot get them a job and they have become financial burdens; but certainly not for the bankers or the colleges to whom they owe these massive loans. Recently you have been writing about this. What advice would you give today’s youth before pursuing a costly degree?

Dr. Marc Faber: Very difficult to get anyone to work hard and this we have to pay off the opportunity to study. When you say study, they should study in such a way that it guarantees them a higher income then than if they have not studied. And just to study English or philosophy may not help them very much in life. So I think one of the problems of course, we are the baby boomers. And their parents, they have gone through hardships, through the depression years, through the war and so forth, they wanted to give to their children the best. And the baby boomers were also relatively spoiled because between 1950 and in the 70’s wages went up and the dollar was almighty. So they also spoiled their children and the view was simply oh, my child is too good to be an electrician, to be a carpenter, to be working in a restaurant. He has to go to university. I am not picking on the U.S., the same has happened in Europe. So what you have is an army of people that have studied, that are not really equipped for life. I mean my advice to many young people is if you have an academic interest by all means study. It is wonderful to know about history, it is wonderful to know about geography, wonderful to know about philosophy. Do not do it because you think you will earn more than if you had become an electrician or a carpenter. And so every person in life has to decide what is the best life for me, what is my life. If it is to make money, then join Goldman Sachs. Or be an entrepreneur. If you are interested in a fascinating life, that shows you many aspects of the world and of different subjects, then by all means go and study. But it does not guarantee you to earn money. That is a fallacy of most young people or the parents of young people. They think oh my child, I am going to send him to university, and because of that he will earn much more money. That is a fallacy.

Jim Puplava: I know that you continue to urge your readers to accumulate gold and especially in an environment of massive global money printing. But one thing that I like to do as an investment Marc is when I make an investment, I want to quantify both its upside and its downside potential. In your opinion, what is the potential upside and downside for gold over the next five years.

Dr. Marc Faber: Well I mean, if I could show you a picture of Mr. Ben Bernanke and Mr. Obama, then I would have to say the upside is unlimited. The downside, if I could show you the picture of all the people that are on Wall Street, that have really been very dishonest, then the upside is unlimited, but you understand there is also downside as you point out. In my view the downside exists if the money strengthened by government is insufficient to revise or maintain credit close at this level, and you have a credit collapse. There are some economists and some strategists that think the S&P is headed straight down to 400. I agree with them that one day there will be a credit collapse. But I think we are not yet there. Before it happens they are going to print. And when printing, as it has been done in the last twelve years in the U.S., leads to the discontent of the population—because when you print money, there are only a few players in the economy that benefit. The majority of households like the middle class and the lower classes, they are hurt. Because as I just explained to you, the price of oil, since Mr. Bernanke, is up from $58 to over a hundred and real wages are down. So when discontent becomes more pronounced, then usually countries go to war. And the U.S., nor the European countries, have any money to finance the war, so they will print money. So I think, to put a figure on it, my suspicion is that the downside risk of gold, is say, we had the high of $1,921.00 on September 21st of this year, and a 30% correction or a 40% correction cannot be ruled out. But as I maintain again and again, I am not going to go and sell my gold. I am happy with it, because believe me, if gold tumbles other assets will eventually also tumble and more so.

But I have to find out, I have one concern about gold, I was recently in Taiwan and South Korea at two large conferences. Nobody owns any gold. Gold is owned by a minority, even in the U.S. Most people in the U.S. have no clue what an ounce of gold is or looks like in the vault. The same in Europe. And in a democracy, it is very popular to take away from a minority. Like in Switzerland we now have a new state law that is being voted about in a few months that anyone who has assets of over $2,000,000, who dies and passes on these assets to his children, he will have an estate duty of 20%. Now most people in Switzerland, they do not have assets of $2,000,000 or $2,000,000 Swiss Francs, so they say yeah, good idea, we tax the rich. Then next year, I can come and introduce the referendum that says, everyone who has assets of say over $50,000,000 we tax him 50%. I know people who will say who has $50,000,000 dollars in assets, very few, the people will accept and vote for it. Now next year I can come back and have another referendum, everybody who has assets of over $900,000,000, we tax them 90%. And this is what the tyranny of the masses can do. You can make it appetizing to the masses, by just taking away from a few people. But I am worried most about, in the case of gold—not the price, that I am not worried—but I am about government taking it away.

Jim Puplava: So just as Roosevelt confiscated gold in the 30’s, and since very few—that brings up a question Marc, because you speak at Investment Conferences around the globe. And certainly if you look at the price of gold, this year being the 11th year that gold prices are up, have you found that surprising that we’re talking about an asset class that has gone up 11 years in a row, and is still so widely under owned around the globe.

Dr. Marc Faber: Yeah, I mean this is quite amazing to me because if you look at the NASDAQ bubble, it began essentially in 1991, when tech stocks were very inexpensive. And then when it went up and then at the end, as I mentioned between August ’99 and March 2000, the NASDAQ doubled and everybody was involved in NASDAQ stock. I went at the time, in the year 2000, to San Moritz for Christmas, and I was invited to a party and I very seldom go to parties but I went that year. And the lady told me, a housewife, I am trading in and out of tech stocks. And you want to know something, I do not hear about gold. And I lived through the last gold bubble between ’78 and January 1980. The whole world, whether you were in the Middle East or in Asia or in Europe, or in America, was trading London Gold, buying and selling everyday. This has not happened yet, and it has not happened because your friend’s, the deflationists, have been telling people that gold will collapse to $200 an ounce for the last ten years. They said it was in a bubble at $500, they said it at $600, they’re still maintaining it. But a lot of people, they do not own it, the bought it and sold it again. But in the meantime, gold has moved into solid hands, it is like, in my case, I am not going to sell my gold unless I have to. In other words, everything else is bankrupt. The bonds market, stock market, cash and real estate.

Jim Puplava: You know something that I learned early on from reading your newsletters Marc is that investors, during their lifetime, need to make very few investment decisions because of long-term bull markets in different asset classes. For example, stocks maybe in the 60’s, commodities in the 70’s, Japan in the 80’s and then tech stocks in the 90’s. So the key is to get onboard early and stay with the trend until the trend completes itself. What do you believe, in your opinion, is the main trend today.

Dr. Marc Faber: Let me put it this way, of course it is a concern to me, if an asset class like gold and silver has been the best asset class over the last ten years, maybe copper was even better or a Warhol Painting and so forth. That concerns me. But I can turn around and say look, if I consider the price of gold, an average price in the mid 1980’s, say we take $400 or $450 or whatever it is, and we take the monetary base at that time, we take the international reserve. We take into consideration that China has not really in earnest begun to open up, and we happen to have the wealth expansion in emerging economies and so forth and so on. I can maintain, well actually the gold prices is not up, it is just a price of money or the value of money that has declined so much against the stable anchor. And so I do not think that we are in a bubble stage. But I mean I tell everyone, unless you buy gold it can easily go down 20% - 30%. This is not a prediction of mine, I am just telling people do not buy it on leverage, buy it as an insurance. If have health insurance, you also hope not to get sick, but just in case you get sick you have something. In the case of gold, as I said, my only concern with the gold insurance is the government will take it away. That is my only concern. I am not concerned about the price.

Jim Puplava: The final question if I may, we have seen this over and over throughout this year as you pointed out earlier. We have never had so many 90% down days in a single year and we have this thing called the risk-on and the risk-off trade where markets seem to be highly correlated, unlike any other time, at least that I can remember, how does one protect oneself when markets are this volatile and correlated. Because I know that you more regularly advise your readers today to allocate their investments across various asset classes and by geography. What is it about today’s economic and political environment that compels you to offer such advice?

Dr. Marc Faber: Well basically we have unprecedented intervention in the free market. So fiscal measures, in other words, fiscal deficits and regulatory intervention, and we have unprecedented monetary intervention with artificial low interest rates that created an environment of negative real interest rates. Every citizen in the world has to realize that if he deposits money with the bank, after one year, the money has lost purchasing power; because the cost of living has increased, and the return on each deposit is basically 0% after paying the deposit fee to the bank and all the other fees, he has got a negative interest rate. And in this environment, you force people to speculate. And they speculate, they will go into one asset class for a while, and then into the next one and then most people will lose money by speculating. But it creates enormous volatility. And my advice is look, you and I, we do not know how the world will look in five years time if we are realistic. Okay we may get paid as financial commentator and so forth, but we do not know how the world will look like and we have to kind of invest in such a way that we do not lose everything. And so my advice is to have say 25% in gold, 25% in cash and bonds, 25% in equity, and 25% in real estate.

Now when I tell people in America that real estate is now relatively inexpensive, relatively compared to other asset classes, they look at me as if I am coming from the moon. But four years ago they were buying real estate like crazy and if you told them that real estate is in a bubble, they would not have believed it. I think now that time is coming to allocate some money to real estate and with the 25% cash you just wait until there is a great big break either in stock or in gold. And then you add to positions. And I am also recommending to have allocations to income producing investments in the sense that if you have dividend paying stocks and in the U.S. stocks do not have a high yield, but say in Asia, I can still provide you a portfolio that have equities that will yield between 5% and 7%. But with that kind of a yield, you have a cash flow and you can reinvest your dividends. So in the long run you should be okay. But then again, not only about gold do I have a concern, I also have a concern, generally speaking, about our capitalistic system. For sure, people with assets, they will be taxed more heavily, that is for sure.

Jim Puplava: Here is, you brought up an idea, given our conversation today when you talk about the idea in a democracy where a majority can always go after the assets of a minority. And Marc, when you have markets that operate the way ours do today, where you have constant intervention. I would argue that we do not operate in free markets because of what the government is doing. When we went through a similar period in the 30’s, in England you got a Churchill, in the United States you got an FDR, but in Germany you got a Hitler and Russia you got a Stalin and a Mussolini in Italy. One of the dangers I see is when you go through these interventions and these inflations, the chaos that it creates, you never know what is going to come out on the other side.

Dr. Marc Faber: Right, the problem with government intervention both fiscally and monetary, is that there are always unintended consequences. And all I am saying is basically, through the Fed’s intervention—monetary intervention—the U.S. has not progressed in 12 years. Now someone will tell you oh, we have Google and this and that. Yes correct, in that sense, some sectors of the economy have done well, but these sectors belong to say 3% or 1% of the population. If someone wins the lottery in ten years he can say, look I have a method how to win the lottery, once or even twice and so forth, but the majority eventually loses out. But the big winners of this monetary policy were essentially China and other emerging economies because the capital spending and the industrial production shifted to these countries and lifted commodity prices and so on balance, it actually damaged the U.S. and the entire Western World dramatically.

Jim Puplava: Well I know there is a saying in Asia, may we live in interesting times, and I would describe today as one of those times. Marc, I know it is late in Thailand, so I want to thank you for joining us here on the Financial Sense Newshour. I once again would like to emphasize how much I enjoy reading your newsletters. They are always thought provoking.

Dr. Marc Faber: That is very kind of you to say. We live in very volatile times and you know, if you asked me today, well in a year’s time will the Dow Jones be high or low. What could happen is that it first goes higher and then lower, or it first goes lower and then higher. This year, as I explained, we had very high volatility and as you pointed out, we have very highly correlated markets. And to find really a sensible diversification is not that easy. Because if I said okay, I am going to diversify so I buy stocks all around the world, well if you did that, this year it seems essentially all stocks went down with the exception, with the exception, of the U.S. market, which is essentially flat. Basically you did not have much diversification in terms of hiding in India or hiding in China, or hiding in Hong Kong, we all went down.

Jim Puplava: Well, once again, we have been speaking with Dr. Marc Faber, and if you would like to find out more about Marc’s work I would recommend going to Marc’s website which that is Marc, I want to thank you for being so generous of your time.

Dr. Marc Faber: It was my pleasure and also I want to wish you and of course all your listeners very joyful festive season, Happy New Year and a Merry Christmas and good health. I mean we talk about money all the time, it is not the most important in life. What is the most important is that you can live the life you really want to that you have freedom, and that you have good health.

Jim Puplava: Well I want to wish a Happy Holiday Season for you and your family and also the best of the health in the New Year. Marc, thanks for joining us on the program.

Dr. Marc Faber: Thanks a lot Jim, thank you for the interview.