My Money Engine

The Daily Bell is pleased to present an exclusive interview with Dr. Marc Faber.

Introduction: Dr. Marc Faber was born in Zurich, Switzerland. He went to school in Geneva and Zurich and finished high school with the Matura. He studied Economics at the University of Zurich and, at the age of 24, obtained a Ph.D in Economics magna cum laude. Between 1970 and 1978, Dr. Faber worked for White Weld & Company Limited in New York, Zurich and Hong Kong. Since 1973, he has lived in Hong Kong. From 1978 to February 1990, he was the Managing Director of Drexel Burnham Lambert (HK) Ltd. In June 1990, he set up his own business, MARC FABER LIMITED, which acts as an investment advisor, fund manager and broker/dealer. Dr. Faber publishes a widely read monthly investment newsletter THE GLOOM, BOOM & DOOM report which highlights unusual investment opportunities. A regular speaker at various investment seminars, Dr. Faber is well known for his "contrarian" investment approach. He is also associated with a variety of funds.

Daily Bell: Thank you for sitting down with us today. Please give us some background. Where were you born? Where did you grow up?

Marc Faber: I grew up in Geneva and Zurich.

Daily Bell: You obtained, at the age of 24, a Ph.D. degree in Economics, magna cum laude. What drove you to accomplish such a feat?

Marc Faber: Well, I passed all my classes not because I was particularly bright but because you have to study what is most important to the work you are interested in doing. I also studied economics, and in those days you didn't have to study more than four years, so I was able to finish relatively early.

Daily Bell: For a while, you worked for the famous White Weld & Company Limited that caused the paper crunch.

Marc Faber: I started with White Weld in 1970 and then in 1978 they were taken over by Merrill Lynch and then I worked for Drexel Burnham.

Daily Bell: You worked in New York City, Zürich and Hong Kong. What was that like?

Marc Faber: In the early 70s, New York was the leading financial center. When I moved to Asia in 1973, Asia was still very poor. Countries like Taiwan, South Korea and Singapore had very poor infrastructure and were still essentially run by "Dictators.". I felt, based on the experience and the rise of Japan in the 50s and 60s, that other countries in Asia were going to grow very rapidly, so I stayed on, mostly in Hong Kong and throughout Asia.

Daily Bell: You moved to Hong Kong in 1973, and became a managing director at Drexel Burnham Lambert Ltd. Hong Kong. You were there throughout. Did Drexel get a bad rap? What about Mike Milken? What do you think of Drexel these days?

Marc Faber: Well I think Mike Milken was a financial genius. I have great admiration for him and his ability to work under enormous pressure. At the end, he had lawsuits, he was defending himself; Drexel Burnham had lawsuits and he was still trading bonds every day. He had unusual abilities to function under very heavy pressure but, obviously, the firm and his department did a few things that were not entirely above the board. I wouldn't think, when looking at what has happened in the last few years, he deserved to go to jail. There are many people that committed far larger financial fraud, or at least contributed to irregularities, that have never gone to jail in the last few years or up to this day. The penalty was disproportionate.

Daily Bell: In 1990 you set up your own business, Marc Faber Limited, now in Thailand. Why there?

Marc Faber: I moved to Thailand in 2000. I still keep an office in Hong Kong.

Daily Bell: Who gave you the title "Doctor Doom?"

Marc Faber: Well, I had predicted the 1987 crash and then it happened and then I was predicting in '88 and '89, the crash of Japan. The first person who gave me the name was Nury Vittachi. He was a journalist at the South China Post and an author of several books; he also had a very popular column in the Post, called "Lai See."

Daily Bell: A book written by Nury Vittachi was entitled Doctor Doom - Riding the Millennial Storm - Marc Faber's Path to Profit in the Financial Crisis. Do you still work with Vittachi? What was the book about?

Marc Faber: The book is a personal account of my life in Hong Kong in the 1980's, but I believe it was published in the early '90's.

Daily Bell: Your company, Marc Faber Limited, acts as an investment advisor, concentrating on value investments. Are there lots of value investments today? Would you elaborate on your investing philosophy?

Marc Faber: Well I think when we talk about value, there is value in the purchase of certain assets if they are depressed and neglected. I also suppose there is value in selling short if assets are way above what I would call an equilibrium price or way above the trend line price. So, value can be interpreted in many different ways. You cannot be too rigid. I don't think there is a clear-cut definition of what value is and each analyst has to decide for himself where he finds value.

In general, value will emerge when things look bad for a corporation or a country or an industry, because market prices will fluctuate more than the fundamentals. In other words, if you look at the price of gold and you look at gold shares, the gold shares will be more volatile than the gold price. Or look at the price of real estate; the price of real-estate related companies will overshoot and undershoot. Some unusual opportunities eventually arise, either on the short or on the long side.

Daily Bell: You also act as a fund manager to private wealthy clients. What do you recommend to them? Why do they come to you?

Marc Faber: The clients I have now, I have had for 20 years. I haven't taken new clients for 12 years. They come to me because they recognize that I have a slightly different investment strategy than most portfolio managers or funds managers. They are remunerated according to whether they beat the index or not. So, if the index is up 20% and the fund manager is up 22%, he's done a good job. Or if the index is down 30% and he's down only 29%, he's done a good job. My clients are different. They want to see a return every year, even if the return is modest.

Daily Bell: Your current – if eccentric – tag-line is: "buy a $100 US bond and frame it to teach your children about inflation by watching the US bond value diminish to almost nothing over the next 20 years." Why are you negative about US Treasuries?

Marc Faber: We have to distinguish the short term and the long term. I think about two months ago, I turned quite positive for US Treasuries. But obviously long term, at less than 3% yield on a ten year US Treasury, I don't see any value. I think that interest rates in time will be much higher because the fiscal deficit will stay very elevated or even increase and that will impair the ability of the government to pay the interest. If the ability to pay the interest is impaired, there's only one way out and that is for them to print money, and so eventually you will get higher interest rates.

Daily Bell: What caused the crash of 1987? Was it caused by a currency agreement between the Reagan White House and Japan? Please tell us about that.

Marc Faber: Well I am not sure what caused the crash but the market started to go down in August '87. The market had become immensely over bought and there was a lot of speculation and investor sentiment played on one side – the bullish side. So I think a correction was easy to predict and that the crash would happen. As I said, it was an accidental thing, but I had predicted it and then it happened one week later. In other cases, like the NASDAQ or the Japanese market crash, it took longer.

Daily Bell: You predicted the rise of oil, precious metals, other commodities, emerging markets and especially China in your book Tomorrow's Gold: Asia's Age of Discovery. How did you know?

Marc Faber: Basically, commodities move in long-term cycles and they had peaked out in 1980. After 1980, they had been in a downtrend, including oil and industrial commodities. When the incremental demand from China kicked in, it was an easy call to say, "eventually commodities will go up," given a 20-year bear market and they were extremely inexpensive compared to NASDAQ stocks.

Daily Bell: You also correctly predicted the slide of the U.S. dollar since 2002.

Marc Faber: The US has essentially one advantage and that is they issue their governments debt in US dollars. In other words, they have no mismatch of assets and liabilities. So, that's imperative to printing money. When you read the notes and the speeches from Mr. Bernanke, it's very clear that he would rather take the weaker dollar, than to have domestic style deflation. So, I think that there are several factors that point to a declining dollar, but I have to say the other currencies are not much better. I would also say the purchasing power of the Euro has gone down, along with the purchasing power of the Swiss franc, which has also dropped when we measure what kind of basket of goods we can buy in Switzerland today compared to 10 years ago.

Daily Bell: You said at one point there were no value investments left except for farmland and real estate in some emerging markets. Do you still believe this?

Marc Faber: I think that I was lucky because I kind of predicted the 2008 financial crisis; it took a while until it happened and I was worried about it for a number of years. If someone today would receive a billion dollars, it will be quite difficult to make a lot of money in the next 10 years. I am not saying if he puts the whole billion in gold, maybe gold will go up or if he puts the whole billion in silver, silver will go up. It would be quite risky for an investor to put the billion in one asset. Even if he diversifies, I don't think he will make a lot of money.

I think we had the collapse of the financial system in 2008; the failed institutions and failed system were bailed out by government. Ultimately governments will fail. The US and Europe will print money, and when everything fails, they'll go to war and then we have the complete collapse.

Daily Bell: You said in 2007 there was going to be a crash, but you also said US equities were only moderately overvalued. Would you tell us more about that?

Marc Faber: The market based on price earnings was not incredibly over valued. What concerned me was the over-valuation in real estate and in financial stocks. The overall market wasn't selling at 80 times earnings, like Japan in '89 or the NASDAQ in March 2000. From that point of view, there wasn't a tremendous over-valuation. What was happening in 2008 was that there was an earnings collapse in the financial sector.

The financial sector accounted at the peak in 2007 for over 40% of S&P earnings and obviously the S&P earnings collapsed. 2008 was not really a financial crisis and we have come out of it. In 2007, there wasn't a huge over-valuation, but there was a concentration of money in the financial sector.

Daily Bell: Do you still expect hyperinflation?

Marc Faber: In my view, the debt level, especially in the US, if we include the unfunded liabilities of Medicare, Medicaid, Social Security and these entitlement programs, is beyond repair. And this will necessitate printing more money. Also, in my view, there is no real political will to address the issues, because who ever would cut entitlements, will not be re-elected. So we have a tyranny of the masses.

Daily Bell: Did you miss the stock market rally of the last two years?

Marc Faber: No, as I said, I felt positive in March 2009. Starting about a year ago, I became more cautious. Since February of this year, I am kind of concerned that the market is building something more significant than just a short downturn correction. This is a distribution phase and for the market to make a new high, above the recent high, will be difficult.

Daily Bell: What has been your position on gold and silver? Do you expect the purchasing power of either or both to go higher?

Marc Faber: Well I basically focus more on gold than silver, although I am on the board of a company, Sprott Inc., that is identified with a very bullish view of silver. I prefer gold. My view is, yes, I have been positive for gold for the past 10 or 12 years and I could make a case that gold today is cheaper than it was in 1999 when it was at $252. Cheaper in the sense that if I compare gold to international reserves or to the increase in the credit markets in the world, I don't think it's expensive. And yes, I think it will go higher or, expressed differently, that paper currencies will go lower against the value of gold. But this will be an irregular process, and along with this move into US Treasuries and away from risky assets, I wouldn't be surprised if the price of gold went down $200. It's not necessarily a prediction, it just wouldn't surprise me.

Daily Bell: Tell us about your report. Why you named it what you did and how people can get it.

Marc Faber: I have two reports, the written, printed report called the Gloom, Boom and Doom report, which is relatively detailed and focuses on monetary issues. Then I have a website report which is sent out by email and people can inquire about it on the website, www.gloomboomdoom.com.

Daily Bell: Here is a famous quote: "The federal government is sending each of us a $600 rebate. If we spend that money at Wal-Mart, the money goes to China. If we spend it on gasoline it goes to the Arabs. If we buy a computer it will go to India. If we purchase fruit and vegetables it will go to Mexico, Honduras and Guatemala. If we purchase a good car it will go to Germany. If we purchase useless crap it will go to Taiwan and none of it will help the American economy. The only way to keep that money here at home is to spend it on prostitutes and beer, since these are the only products still produced in US. I've been doing my part." Is this really true?

Marc Faber: Well, actually beer is now mostly owned by foreign companies. In reality, America still has a very large manufacturing base and we shouldn't underestimate that; there are some very good companies in America. At the moment, it's meant as a joke. But it is true that the problem of America is consumerism. By encouraging this leverage on the consumer level, particularly in the housing market and on credit cards, which is the worst, America has lent to a consumer economy and an economy that doesn't spend enough on investment.

Investments are infrastructure expenditures. They are expenditures for education, research and development, and plants and equipment. A lot of money has been channeled into wasteful government administrations. The smaller a government is, the more dynamic the economy will be and the larger the government is, the more stagnant the economy will become.

There are exceptions to this rule. The Nordic countries of Norway, Sweden, Finland and Denmark, have very large governments but I suppose in small countries, you can run the country like a country club where people essentially develop solidarity and say OK, we pay high taxes – but we have very good health care; OK, we pay high taxes but we have very good schools for our children. So let's say in Norway and Finland you don't need to send your children to private schools, but in America it would be difficult to send your children to government schools because essentially they are inefficient.

Daily Bell: You serve as director or advisor of a number of investment funds that focus on emerging and frontier markets, including Leopard Capital's Leopard Cambodia Fund and Leopard Sri Lanka Fund. You seem to believe a lot in emerging markets. True?

Marc Faber: Yes. I think the world is in a gigantic transition. The growth will be in new economies, countries like India and China. This trend I think, will be with us for a very long time. It will be a contributing factor to geopolitical tensions because obviously the West will not be very happy to see its super power status diminish relative to the rest of the world.

Daily Bell: Would you say you are an Austrian when it comes to economics?

Marc Faber: Yes, but I think we can't be overly dogmatic in economics because certain things may work for one system and other things may not work in another system and so forth. Economics is a very complex system and is essentially human life and the behavior of humans. So to build one theory around it is probably wrong. Sure I am leaning more to the Austrian school, particularly when it comes to debt cycles. But I have sympathy for the Keynesian approach if, and this is a big question, IF it is implemented properly.

In other words, the business cycles will lead to excursions of prosperity and during these excursions into prosperity the system should build up reserves. Then when the excursion in depressions occurs below the trend line, use these reserves. But the problem with Keynesian economics has been that in the excursions into depression the reserves were always used but were never accumulated in the periods of prosperity, and so you build up larger and larger government debt and print more money; that is the problem. It's the problem of democracy.

Daily Bell: What do you think of Ludwig von Mises?

Marc Faber: I have a high regard for all the Austrian economists, but I also have a high regard for other economists. They made many contributions to the understanding of economics. I have little understanding when it comes to Ben Bernanke because he disregards the entire importance of credit and is obsessive about credit growth. Also Alan Greenspan, I mean, credit expanded much more rapidly in the past 30 years. This is not sustainable. Maybe for 10 years, but not in the long run. That they completely disregard the danger of leverage will always remain a mystery to me.

Daily Bell: Is there a cartel of wealthy banking families that runs the world? Are they located in the City of London? Do they by any chance seek one world government?

Marc Faber: I don't know. I think there are some very important banking dynasties for sure. People sometimes refer to them as the Rothschilds and that they have benefitted from wars – so I am not sure I would want a one-world government. When I compare my life today to the life I had in the 50s and 60s, we have much less freedom. Everything is regulated as the governments have become like a cancer; they keep expanding and regulating and dictating everything. In my opinion, this creates not a very favorable environment in the Western world.

Daily Bell: Is the EU going to collapse? Just the euro?

Marc Faber: This is a political question and it will depend on the political will. The euro in my opinion will weaken against the US dollar in the next couple of months and along with the dollar it will weaken against the price of gold in the long run.

Daily Bell: Is the dollar finished as the world's reserve currency?

Marc Faber: It's not finished as the world's reserve currency; it will continue to exist for a while. But obviously there will be competition and there will be currencies people trust more than the US dollar. I think the US dollar has lost prestige. When I think of the 50s or 60s, the US dollar was worth a lot of money and people trusted the US dollar and also the United States. At that time, it was by far the leading economy in the world; that prestige will continue to be eroded.

Daily Bell: What will take its place?

Marc Faber: That I don't know, but I think in Asia we will have currencies that will be important. I don't think we can have united currencies the way we have the Euro because there are numerous political disagreements from the expansion of the influence of China. Obviously, the Chinese currency will be an important currency in Asia.

Daily Bell: Do you have any thoughts on Real Bills? How about free banking?

Marc Faber: I think the idea that you have different banks issuing their own currencies is not a bad idea. The bank that has a very conservative balance sheet will have a strong paper currency and the ones with a weak balance sheet will have a weak currency. There is some merit between having competition this way, and we have that with currency issued by different governments. Some are more desirable than others, like Canadian dollars, Australian dollars, the Swiss Franc ... but that hasn't always been the case. In the US, because of the political process, I have my reservations, I think it's already too late.

Daily Bell: Are you hopeful about the world's economic future in the long term?

Marc Faber: I suppose the world will always develop but that we will always have periods where we have wars and tremendous wealth destruction, or where we have plague and where the population shrinks. I am optimistic about certain issues and pessimistic about others.

Daily Bell: What are you working on now?

Marc Faber: Every month I am writing my report, so I am always working on something. But I am not working on anything new or writing any books because I don't have the time. I will again in the future.

Daily Bell: Thank you for your time and a very interesting interview.

By Anthony Wile

A “perfect storm” of fiscal woe in the U.S., a slowdown in China, European debt restructuring and stagnation in Japan may converge on the global economy, New York University professor Nouriel Roubini said.

There’s a one-in-three chance the factors will combine to stunt growth from 2013, Roubini said in a June 11 interview in Singapore. Other possible outcomes are “anemic but OK” global growth or an “optimistic” scenario in which the expansion improves.

“There are already elements of fragility,” he said. “Everybody’s kicking the can down the road of too much public and private debt. The can is becoming heavier and heavier, and bigger on debt, and all these problems may come to a head by 2013 at the latest.”

Elevated U.S. unemployment, a surge in oil and food prices, rising interest rates in Asia and trade disruption from Japan’s record earthquake threaten to sap the world economy. Stocks worldwide have lost more than $3.3 trillion since the beginning of May, and Roubini said financial markets by the middle of next year could start worrying about a convergence of risks in 2013.

The MSCI AC World Index has tumbled 4.9 percent this month on concern recent data, including an increase in the U.S. unemployment rate to 9.1 percent in May, signal the global economy is losing steam. U.S. Treasuries rose last week, pushing two-year note yields down for a ninth week in the longest stretch of decreases since February 2008, on bets the Federal Reserve will maintain monetary stimulus.

Bond Market ‘Revolt’

World expansion may slow in the second half of 2011 as “the deleveraging process continues,” fiscal stimulus is withdrawn and confidence ebbs, Roubini also said.

Easing growth may spur demand for dollar assets as a “safe haven,” he said in response to questions after a speech in Singapore today. The Dollar Index, which gauges the U.S. currency’s value against a basket of six counterparts including the euro, yen and British pound, rose 0.1 percent as of 11:35 a.m. in Singapore, bound for a fourth straight daily increase.

Roubini is among analysts who predicted the global financial crisis of 2007-2009 that was triggered by a collapse in the value of U.S. mortgage securities.

Some of his other predictions haven’t panned out, including his call on July 4, 2010, for “market surprises on the downside” in ensuing months and a weakening in economic growth. The MSCI World Index rallied 23 percent in the second half of last year, while U.S. gross domestic product gains accelerated to 2.6 percent in the third quarter and 3.1 percent in the fourth quarter from 1.7 percent in the April-to-June period.

U.S. Bonds

Roubini said two days ago that in the U.S., a failure to address the budget deficit risks a bond market “revolt.” President Barack Obama’s administration has been negotiating with Republicans, who control the House of Representatives, over cutting the federal government’s long-term shortfall and raising the debt ceiling.

“We’re still running over a trillion-dollar budget deficit this year, next year and most likely in 2013,” Roubini said in a speech in Singapore on June 11. “The risk is at some point, the bond market vigilantes are going to wake up in the U.S., like they did in Europe, pushing interest rates higher and crowding out the recovery.”

In Europe, officials need to restructure the debt of Greece, Ireland and Portugal, and waiting too long may result in a “more disorderly” process, Roubini also said.

European officials are racing to find a plan to stem Greece’s debt crisis by June 24 while sharing the cost of a new rescue with bondholders. Saddled with the euro area’s heaviest debt load, Greece is seeking additional loans after last year’s 110 billion-euro ($159 billion) bailout.

Japan’s Contraction

Japan’s economy, the world’s third-largest, slid into a recession last quarter, using the textbook definition of consecutive quarterly declines in GDP, after the March 11 earthquake and tsunami and ensuing nuclear crisis. The government is spending an initial 4 trillion yen ($50 billion) to clean up from the disaster, which is estimated to have caused as much as 25 trillion yen in economic damage.

Bank of Japan Governor Masaaki Shirakawa said on June 1 that supply constraints are easing faster than expected as companies rush to repair their facilities. The risk in Japan is “if growth fizzles out after a short-term reconstruction stimulus,” leading to a renewed struggle to maintain expansion around 2013, Roubini said.

China’s economy may face a “hard landing” after 2013 as government efforts to boost growth through investment cause excess capacity, Roubini told reporters after his June 11 speech.

‘Overcapacity’ in China

“China is now relying increasingly not just on net exports but on fixed investment” which has climbed to about 50 percent of GDP, he said. “Down the line, you are going to have two problems: a massive non-performing loan problem in the banking system and a massive amount of overcapacity is going to lead to a hard landing.”

A record $2.7 trillion of loans were extended in China over two years, pushing property prices to all-time highs even as authorities set price ceilings, demanded higher deposits and limited second-home purchases.

The nation’s current challenge is to maintain growth and curb price gains ahead of a leadership change next year, Roubini said. Officials may use administrative steps and price controls, as well as raising rates further and allowing currency appreciation, if inflation becomes a bigger problem, he said.

Political Transition

“The policy challenge through next year, where you have a delicate political transition of the leadership, is to maintain growth in the 8 to 9 percent range while pushing inflation below what it is right now,” said Roubini, the co-founder and chairman of New York-based Roubini Global Economics LLC.

After next year, the bigger challenge in China is “to reduce fixed investment and savings and increase consumption. Otherwise after 2013, there will be a hard landing,” he said.

The risk of “outright” deflation and the probability of another recession in the U.S. are lower now than a year ago, and output in Japan could rebound in the second half of the year, Roubini said two days ago. “High-grade” corporations have “very strong” balance sheets, he said.

Roubini in July 2006 predicted a “catastrophic” global financial meltdown that central bankers would be unable to prevent. The collapse of Lehman Brothers Holdings Inc. in 2008 sparked turmoil that led to the worst financial crisis since the 1930s.

By Shamim Adam - Jun 12, 2011 11:55 PM ET

Steven Leuthold says he thinks the market has hit its high point for the year, but he also says it’s no time to sell, as he thinks we’re nearing a significant rally. Leuthold tells Bloomberg that he thinks the S&P 500 is “very close to median valuations levels”, and that he’s probably going to soon be lifting some of the hedges he’s had in his portfolios. But he’s really focused overseas, he says, on companies in foreign countries with strong currencies.

Click here for the video.

May 26, 2011

Marc Faber of the "Gloom, Boom & Doom" report spoke at the Ira Sohn Conference yesterday, and talked about the destructive nature of U.S. monetary and fiscal policy, and a way to play it.

Faber said that U.S. monetary and fiscal policy has created more volatility, and we can expect more of that going forward. Faber mentioned the Long Term Capital bailout, the liquidity that rushed in during Y2K, and the end result. The NASDAQ crashed, falling some 50%, and it still has not come close to those levels.

Faber said that not all growth in the country has occurred during inflationary environments, despite what the Federal Reserve wants you to believe. The U.S. grew from 4 million to 80 million people, and new industries were created during a deflationary environment. He mentioned industries such as railroads that prospered during the deflationary environment, and even mentioned that incomes rose during this time.

He is not confident that the Federal Reserve will be able to get it right this time, as it has not gotten it right before. The Fed missed raising rates by 3 years after the NASDAQ crash. The economy started to grow in November 2001, and the Fed started raising in June 2004, despite the need for it three years prior. The Fed is also slow to realize problems of containment, specifically in subprime, which obviously was not contained.

The Federal Reserve created excessive growth in the system, as evidenced by the debt to GDP ratio, which has increased rapidly over the past few years. To get out of this, the Fed has two options: tight monetary policy, or print and print. Faber says the Fed will not pursue tight monetary policy, so the printing press will just keep running.

Of course, the Fed can't control what we do with the money, which is why bubbles continue to form. Both Alan Greenspan and Ben Bernanke have created massive bubbles, including equities, commodities, bonds, wages, and sometimes currencies. From 2002-2008, Greenspan and Bernanke have created massive bubbles.

To play this, Faber said that cash and bonds are undesirable in this environment, and you should not own U.S. debt. One way to play this is to own ProShares UltraShort 20+ Year Trea ETF (NYSE: TBT). He said that even if the deflationists are right, you should not own government debt.

Faber concluded by saying that he thinks we should prepare for the next war time, and gold might go ballistic. He said having gold all over the world is a safe hedge from potential confiscation.

By Jonathan Chen Benzinga Staff Writer