Marc Faber on Commodity Cycles, Monopoly Central Banking and the Wealth Redistribution Craze

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The Daily Bell is pleased to present this exclusive interview with Marc Faber

Daily Bell: Hello, again. Since last we spoke, in June 2011, things have grown worse in some cases and better in other ways. How do you see the world today? What pleases you the most economically and what are you most concerned about?

Marc Faber: Economically, there is not much that pleases me because I think we are in an economy that is on steroids – in other words, the money printing – and the money printing goes essentially to wealthy people. Of course, they spend and as a result of the asset bubbles, temporarily the economy improves worldwide but it’s not sustainable growth. We have to realize that. So economically, I’m actually more pessimistic today than I have been in a long time. That does not imply that asset markets cannot go higher. That is a possibility and, in fact, I hope the US market goes ballistic and creates a gigantic bubble, which will then embarrass the Federal Reserve because every bubble eventually gets deflated.

Daily Bell: What are you most concerned about in regard to the bubble, then – that it won’t happen?

Marc Faber: We have a two-tier economy. We have an economy of well-to-do people from which I have benefited because I’m in the financial sector. My asset value has gone up, I benefit from rising asset prices because I own shares and I’m on the board of companies that own shares, fund management companies and so forth, but I’m not happy about the fact that the typical household and the working class worldwide is not doing well. And what will eventually happen and has begun to happen – and I have written about this already five, six years ago – when you have rising wealth inequality, eventually you have politicians that will not assume personal responsibility for the rising wealth inequality that is largely fostered by monetary policies by central banks, notably the Federal Reserve. They will then go to the public, like Bill de Blasio, and say, “Look, if you are not doing well it’s the fault of the rich people. The rich people are ripping you off.”

The rich people aren’t ripping off anyone. They just took advantage of a situation that was given to them by the Federal Reserve. And so these politicians will go to the people and say, “What we have to do is to punish the rich and let’s introduce a massive wealth tax,” like this clown, Piketty, who has studied – and I do not disagree that he’s done serious work; it’s not exactly correct but he’s done serious work about wealth inequality. When wealth inequality grows too much you have either significant social reforms, social strife or revolutions. And in Europe and everywhere I hear more and more talk about taxing the rich and that is going to happen. It’s not going to help. Redistribution of wealth eventually ends up in redistributing poverty.

Daily Bell: This seems to be what we’re seeing with the recent resurgence of Occupy Wall Street-type resistance and the “1%” meme. What do you think of OWS, generally?

Marc Faber: Basically, I don’t think they should occupy Wall Street. They should go and burn down the Federal Reserve in Washington and hang up the ultra-dovish Fed governors that advocate even more money printing. That they should do.

Daily Bell: You are known as Dr. Doom because of your crash predictions. We think stock markets are being pushed higher and then will crash radically, giving rise to suggestions for a more global marketplace. Any truth to this?

Marc Faber: Well, all markets are correlated. If the S&P drops 20% I don’t see many markets going up. If you print money you will get symptoms of inflation and one of the symptoms of inflation is rising asset markets. It can also be rising consumer prices, rising wages and so on. Because we have an absence of foreign exchange controls and we have a globalized economy, the US may print money and there is more inflation in the US in terms of consumer price increases than what the Fed is suggesting. But at the same time, the larger inflation has been in emerging economies and even larger bubbles have occurred there. My view is that to boost economic activity by boosting asset prices is a horrendous – and I repeat, horrendous – mistake because it’s been established by numerous economies starting with Copernicus and David Hume and Irving Fisher that asset bubbles impoverished the majority to the benefit of the few.

Daily Bell: There are some exciting new investment prospects, specifically as regards cannabis. What do you think about the legalization of marijuana? Is it an investment opportunity?

Marc Faber: In general, I believe that any kind of drug should be legalized and there would be less crime and probably less usage. I’m all in favor of legalizing drugs because all I see, and I’ve looked at it very carefully when I was in Mexico – the drug business is so incredibly profitable that there is widespread corruption, at the CIA, at the FBI, at the police force, in the military, and that is not a very desirable outcome. If it was legalized, we would have far less crime and far less corruption. It’s like during the Prohibition time – alcohol consumption if anything rose and there was much more crime and much more corruption.

Daily Bell: How do you see it from an investment perspective?

Marc Faber: I really have no idea. I’m not interested to invest in any kind of drugs because I don’t use them. I have smoked a joint from time to time and I may still do it once in a while but it’s not an investment destination that interests me.

Daily Bell: Let’s look at precious metals. Is the dollar due to drop against gold? How about silver?

Marc Faber: My inclination is to believe that the central banks eventually will have to make a choice. They have created asset bubbles. At the same time, the economy has hardly recovered. What will happen when the asset bubbles burst again, say the stock market goes down 20%, the property market goes down and so forth? What will be in the mind of the Federal Reserve and other central banks? What will be in their minds is more money printing will do less damage than no money printing. And so the asset purchases, the QE I, II, III, IV will go on to what I predicted in 2009: It will go to QE 99. And as a result of that, not only the US dollar but all currencies will lose in value against some assets, irregularly at times. Real estate will go up at times. At times commodities will go up at times. Stocks and bonds will go up at times. Buy my inclination is to think that when this all happens and even before – because the market is a discounting mechanism – is that gold and silver will again appreciate against the US dollar.

And don’t forget – and I have to stress this – the media is all over the fact that gold hasn’t performed well, in September of this year, for the past three years and silver equally. But they never mention that between ’99 and 2001, all precious metals significantly outperformed stocks and even today, precious metals between 2000 and today have significantly outperformed stocks. But the media paints people that own gold as kind of out of this world, out of touch. In my view, the recent gold rally has occurred amidst very negative sentiment. I get so many research reports from all over the world, from banks, investment advisers, gold bugs and so forth. By and large in this rally the mood has stayed negative. I think we made a major low over the last two years around $1180 to $1200 on the gold price and around $20 on the silver price, and I don’t recommend people to put all their money into gold – but maybe they should; the question is, where would they keep it? Certainly not in the US – but in general I would say now is probably quite a good time to buy some gold and silver, and I believe that from here on gold and silver will outperform the S&P 500, the Nasdaq and the Russell 2000. It’s my view.

Now, if we have a complete breakdown of the monetary system then maybe everything goes down and then stocks may go down 80% and gold only 40% or 50%. I’m just saying, relatively speaking in my view, gold and silver, platinum, palladium are quite attractive and I recommend people to have at least some exposure to precious metals in physical form.

Daily Bell: That is a question – where to store it.

Marc Faber: I wouldn’t store it in the US. I would rather store it in Singapore or in Hong Kong or maybe you bury it somewhere. But as I mentioned earlier, I think the tendency is going to be for politicians that have completely failed and utterly failed to essentially blame rich people for wealth inequality and then they will go to the people, to the masses, and say, “You know what? What we have to do is take away their gold. These are the people who damaged your economy. Let’s take away their gold.” And in the US they may do that, and in the ECB in Europe. The horrible politicians in Brussels and the US government are one in the same. They will go to the Europeans and say, “If we do it, why don’t you also do it?” and Draghi and all these characters will say, “Yeah, good idea.” And then they’ll knock on the door of the Swiss and the Swiss, who have no background anymore – except their soccer team, who consists of foreigners, not Swiss, all born overseas or children of foreigners in Switzerland – the politicians and the Greens and the Socialists will say, “Yeah, good idea. Take the gold from the rich people.” So my view is it’s probably best to hold gold in Asia and Singapore and Hong Kong where there is a culture of private poverty and a culture of gold.

Daily Bell: What’s going to happen to US Treasuries in the near future? You’ve been positive about them.

Marc Faber: Yes, I still hold 10-year Treasuries notes. I’m not of the view that it’s a good investment. They are yielding 2.6% at the present time for 10 years so the maximum you can earn is 2.6% for the next ten years. I think it’s a disastrous investment but maybe other investments like the S&P, the NASDAQ, the Russell 2000 are even worse and so I hold some 10-year Treasury notes as a hedge against the market decline. I’ve been predicting – wrongly so, I admit – a correction for a long time. But now I don’t believe there will be a correction. Next train station is a collapse.

Daily Bell: What will the collapse look like? Ron Paul suggested in an interview here a few weeks ago that it would not be gradual or gentle but sudden. Your thought?

Marc Faber: I was recently asked by some commentator, why would the market go down? And I was at a meeting of economists and, whereas in 2009 all of them were very bearish, S&P 400 and this and that – I have to say, at the time I said the market is so incredibly oversold, in my view it will go up. Then in 2012, March to June, when the European markets were at the low and the euro was very weak – some European markets in March to May 2012 were lower than they had been in March 2009. But between March 2009 and March 2012, the S&P had more than doubled but the European markets had gone up and then collapsed somewhere lower than in 2009, such as Portugal, Greece, Spain, Italy, France. I told them, now is the time to put some money in Europe. All of them were very bearish.

So this group of economists, very intelligent, all academics who know much more about economics – or at least the Keynesian economics theories – than I do, and now they’re suddenly all very bullish. That tells me something. I agree with Jeremy Grantham and John Hussman: Statistically seen and from an evaluation point of view, the market will have low returns over the next ten years.

Now, can the market go up another 30% before it falls 80%? Yes. Possible. But it can also start to go down relatively soon. I think the second half of this year will be a big disappointment for many people.

Daily Bell: Are we still in a bull market for commodities?

Marc Faber: This is a difficult question. In my view, the long commodities cycle, the so-called Kondratiev, lasts 45 to 60 years. There’s no precise date. Now, if we assume that the commodities cycle peaked out in 1980, then we had a bear market until ’99 – so in other words, an almost 20-years bear market. And after ”99 I think the Kondratiev cycle started to move up. We’re now 2014 so we’re essentially 14 years in the upward wave that usually on average lasts something like 22 years – sometimes more, sometimes a bit less. The commodities cycle from ’99 to 2007, 2008 was driven by incremental demand from China. That is a big factor. The demand from China may weaken somewhat and for sure it will not grow at the same rate but it will not collapse. It may not go up a lot and in the face of industrialization first commodities demand goes up a lot but then it starts to level off.

But in my view, what can also drive commodity prices, because I’m on the board of some mining companies, and I can tell you that nobody will drill for oil if oil is less than, say, $70 a barrel. Nobody. And the copper price in 1998 was 68 cents a pound, precisely 58 cents a pound at its low. Nobody will look for a new copper mine and produce below, say $2 a pound. The costs today of exploration and bringing the commodities to the markets are astronomical and you can also thank the Federal Reserve for that. So if people think that oil will be significantly lower than what oil is now, they’re dreaming. It may drop one day to $60 for a few months, but on a long-term basis, in my view, with all the geopolitical problems, with the problems of finding new oil, with many oil fields having less and less production, in my view, the risk for oil is rather on the upside than the downside.

Daily Bell: Is the era of king dollar over? Is the petrodollar finished?

Marc Faber: The dollar is still going to be for some time the most important currency because I can travel with $1000 in cash or as I do, usually $10,000, and I can go into any shop, nightclub, bar, anywhere in the world, and pay with dollars. So it’s still the accepted currency.

But increasingly, as world trade is more and more between emerging economies with each other. The world trade used to be, say 50 years ago, between the poor world, the emerging economies, the Europe and the US, and then it went up somewhere else. But nowadays more and more countries say – trade of China with Africa is now $200 billion. It’s twice the size of trade between Africa and America. So over time, all this trade will be carried in other currencies than the US dollar. And the US policy makers and the incompetent people at the State Department managed to antagonize Mr. Putin with the Ukrainian uprising, which they supported. Now, this has backfired. Mr. Putin went and made a gas pipeline deal with China and the payments will not be settled in US dollars.

So gradually, yes, the importance of the US dollar is going to diminish as gradually the importance of the US economy – and I’m stressing this, relative to the rest of the world – is diminishing. In the ’50s and the ’60s the US was the dominant economy. It is still, according to their accounting methods, the largest economy but say car sales in China are as large as in the US and you have, of course, many more Internet users in China than in the US and there are many more computers in China than the US and so on. So in many sectors the US economy is no longer the largest. But all I’m saying is relative to the rest of the world, the US, in terms of military power and in terms of economic power, has lost out.

Daily Bell: Is Janet Yellen a good replacement for Ben Bernanke? What will history say about Ben Bernanke?

Marc Faber: I think that in general, future historians will have a very negative view about the great experiment to boost economic activity with monetary measures via creating asset inflation. I think this view will be very badly discredited. Now, we have to understand it will take some time for this to happen because you have the neo-Keynesians, these are the people like Martin Wolf at the Financial Times and Mr. Paul Krugman at the New York Times and Mr. Rosengren at the Boston Fed and Larry Summers, who, if there is a failure in the asset markets or in the economy and so forth, will say the reason the policies didn’t work is because we didn’t do enough. That may go on for quite some time but I can tell you that I see more and more people, young people, who no longer consider the Austrian economic theory to be heresy. And it isn’t heresy. It’s essentially common sense, a historical approach to economics. I think that eventually, future economic history books will condemn Mr. Greenspan, Mr. Bernanke and Ms. Yellen very badly.

And I will make sure it will happen during my lifetime. I’m not saying this because of any animosity in terms of my having suffered from their system. As I told you, I’m in the financial system. I’m an asset owner. I would never have had the assets I have today without money printing. I just look at the world as an economist and from the point of view of fairness, and I don’t think the present system is in the long run desirable. We have a new aristocracy, largely a smart aristocracy – the hedge fund managers and so forth – but in terms of culture, a lot to be desired.

Daily Bell: The BIS warned about coming asset bubbles. Did they have a point?

Marc Faber: Yes but understand, in 1927, ’28 a lot of people, including Paul Warburg and Bernard Baruch, warned of a bubble and it went on another two years. It can go on for quite some time. When I compare the prices people paid for homes for Rothko,  Warhol and Picassos in the 1970s and early 1980s, for Hampton properties, for Greenwich Village in New York properties and what they pay today, there has been colossal asset inflation. Now, for the people that inherit these things it’s all well and good, and for the people who own them. But if you are 20 years old and you went to college and you have student debt, I think a lot of these things are less affordable than when I was a trainee in 1970 at White Weld in New York.

So I think this has contributed to a lot of misgivings. I just read a report that a very high proportion of New York high-end properties are empty 70% of the time. So the foreigners that come here can loan their money because through the property market and through the arts market you can get a loan for anything you want – not through bank accounts where you have to as a client prove that you’re honest – which is a joke because the banks should prove to you that they are honest, which would be very difficult, as we have seen from the many fines they’ve had to pay. But anyway, a lot of the properties are empty. So the people who live in London and New York who have been driven out by high prices now have to go and live somewhere else and have to travel a long way to work, pay the transportation costs and so forth. For the majority of people the standards of living are going down not up.

Daily Bell: What do you think of frontier market investing, specifically in Africa? Is Africa the new China?

Marc Faber: Africa has no chance to be the new China, not in a million years. You just have to look at how Chinese work, and their work ethics and the work ethics of black people. This is not a racist observation; it’s a common sense observation. I love Africa. It’s the most beautiful continent and the fact that people are easy-going is rather a plus than a negative. But I wouldn’t want to live in Africa for security reasons. There’s a lot of crime and theft and so forth, and number two, wealth that comes from resources usually – there are exceptions – usually does not lead to lasting wealth. And the upturn in Africa is largely from the resource price increase.

So whereas I believe that there is some value in some African markets and whereas I believe that what I called in the late ’70s and early ’80s, along with other people like Barton Biggs and Antoine van Agtmael, what we call emerging markets now, many emerging markets are no longer emerging; they’re advanced economies, like South Korea, Taiwan, Hong Kong, Singapore. Now we have new emerging economies like Kazakhstan, parts of the former Soviet Union, African countries, Mongolia, Myanmar, Cambodia, Laos and so forth. So I’m sure there is some merit of investing in these regions. There is also what I have experienced, a significant execution risk. In other words, people go in there and they buy stuff and then they don’t take much money because they’re being cheated out or promoters of the projects make the money and not the investors. But in general, the concept appeals to me.

I would also say, we have to broaden the concept of emerging markets to emerging industries. You make much more money in investing in biotech and in the Internet and social media stocks in the last few years. It’s not a recommendation to do it at the current level of stock prices. But I’m saying in the last three or four years you made much more money in emerging sectors of the economy than investing in Laos and Cambodia and Mongolia.

Daily Bell: What emerging industries do you recommend people watch?

Marc Faber: It seems to me, all of them are valued at very high levels so I’m not recommending to go into any of these sectors at the present time.

Daily Bell: Are there other emerging industries that you do think may be interesting?

Marc Faber: I think there is an opportunity in real estate in some emerging markets because they are depressed and so forth. But in terms of industries, I tend to stay away from the new industries until they’ve gone through a bubble stage and then the bubble bursts and then they become cheap. At the present time, I want to be rather in liquid investments than in these kind of sectors. I think an underappreciated sector is probably water and food. I think this will be a big issue in the future.

Daily Bell: Why is it taking so long for unemployment to go down in the US? What about in Britain and Europe?

Marc Faber: This is a very good question and different economists have different views about this. My opinion is that the more unemployment benefits and disability benefits you give to people, the more people will make a choice between working and actually collecting benefits. And say a family, a husband and wife, two children – if one of the couple loses the job, he or she will become eligible for benefits and she or he can then take care of the children and the household and garden and this and that and get the benefits. So for him to actually go back into the workforce is only an option if the salary he will get is very high. Otherwise, by going back into the labor force he loses all the benefits, has to hire someone to look after the children or the house and so forth, so it may be actually a benefit for him not to work.

I think we have today in the world an entire generation who no longer wants to wake up at 7:00 in the morning and go to work at 8:00 or 9:00 in the morning and then come home at 5:00 or 6:00 in the evening and be pushed around by a boss. There’s a generation of people who would rather do relatively little. They may opt to live with their parents in the basement or wherever that may be, so they have no responsibility to pay the rent for a house or to buy a house. They may drive around daddy or mommy’s car and so forth. So I believe we have a structural change where people actually prefer to not do very much.

It’s interesting. I just read today a survey of the army. Apparently, 70% of the people who apply to join the army in the US are rejected because they’re useless. They’re useless. You can imagine – the army doesn’t have the highest standards, they’re not the standards of Goldman Sachs. If 70% of the people there are rejected you can imagine how many useless people there are. I’m not singling out the US in this respect; this also happens in other countries.

We have an entitlement society. Milton Friedman wrote about this – the more you give to people, essentially the more poverty you create.

Daily Bell: Do you have a vision of how that could turn around?

Marc Faber: I believe that the idea of democracy that came up, say, more prevalently in the 18th century and then was implemented with the American Constitution and so forth – I think that in 500 years or so people will look back and say, how could people have been so stupid to think that a democracy would work? Because everybody wants to take as much as he can from the cake and through the voting machine and through all kinds of tricks and so forth, the politicians always promise more than they can deliver. If they tell the people the truth they’re not going to be elected. So I’m very pessimistic about the present system.

Daily Bell: Is the Internet still a great sociopolitical and economic force or is it being lessened by government censorship?

Marc Faber: I’m not so worried about government censorship but I believe that the media, in other words, texting and the Internet, has opened the eyes of many people because the media basically is controlled by powerful groups like News Corp and the Wall Street Journal, etc., and I think that blogs and so forth, and also people like Julian Assange and Snowden, have done a great service to the world by essentially exposing the viciousness of governments, like George Orwell described in 1984. I don’t think this will go away, but we have to realize that if a government is really obnoxious they can just switch off the Internet and they can block sites, like in China you can’t watch YouTube. It can be controlled.

And then in the space of the Internet there is also a lot of disinformation. If I was a vicious government I would hire some people to attack me without any reason and then I would go after these people to show that I’m actually the good person. So there’s a lot of information and disinformation.

Daily Bell: Any other thoughts, in closing?

Marc Faber: My final thought is we are in a world that is driven by money printing and, in general, I believe the standards of living for many people in the Western world will continue to decline as they have declined over the last 20 years, if we look at median income in real terms. How the world will look in 5 or 10 you and I and nobody knows, although some people think they know. So my advice is to be diversified. Hold some real estate, stocks, bonds and gold and you have to also diversify your assets geographically – don’t hold everything in the US. Hold some outside the US as well; hold some outside Germany, outside Switzerland. You have to be diversified. Then you have to hope for the best.

Daily Bell: Thanks for sitting down with us again.

Marc Faber: It was my pleasure.

Reprinted with permission from The Daily Bell.

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