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The Hera Research Newsletter (HRN) is delighted to present the
following powerful interview with noted speaker and best selling author Dr.
Marc Faber, whose newsletter, The Gloom Boom & Doom Report, highlights
unusual investment opportunities. Dr. Faber is a popular speaker at
investment seminars and conferences around the world and is best known for
his contrarian investment approach.
Born
in Zurich, Switzerland, Dr. Faber 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 PhD in Economics magna
cum laude.
Between
1970 and 1978, Dr. Faber worked for White Weld & Company Limited in New
York, Zurich and Hong Kong and, since 1973, has lived in Hong Kong.
From 1978 to February 1990, he was the Managing Director of Drexel Burnham
Lambert (HK) Ltd.
Dr.
Faber’s best selling book Tomorrow’s Gold – Asia's Age of
Discovery has been translated into Japanese, Chinese, Korean, Thai and
German. Dr. Faber is a regular contributor to several leading financial
publications around the world.
Dr.
Faber, who is an investment adviser and fund manager associated with a
variety of funds, is a member of the Board of Directors of numerous companies
around the world.
Hera
Research Newsletter (HRN): Thank you for joining us
today. You’ve commented that the Federal Reserve’s policies
have been linked to past boom and bust cycles in the US economy. Why do
you believe that?
Dr.
Marc Faber: Booms and busts happen also under the
gold standard like we had in the 19th century various railroad and canal
booms, and we also had real estate booms, first on the east coast in Chicago,
then, at end of the century, in California. What the Federal Reserve
has really done is create a lot of economic volatility. If you look
back at the various crisis starting with the S&L crisis in 1990, then the
Tequila crisis [the Mexican Peso crisis] in 1994, then Long Term Capital
Management (LTCM), the NASDAQ bubble and at the current crisis, each crisis
actually became worse and worse and the bubbles became bigger and
bigger. The Federal Reserve did not pay any attention to excessive
credit growth. The reason I am so negative about the Federal
Reserve’s policies is that they only target core inflation and argue
that they can’t identify bubbles, but when each bubble bursts they
flood the system with liquidity that bring about unintended consequences.
HRN: What would be an example of that?
Dr.
Marc Faber: Commodity prices peaked in May 2006 and
after May 2006, especially in 2007, where there was actually a slowdown in
the global economy and so there was no reason for commodity prices to go
ballistic, but the Federal Reserve slashed interest rates after September
2007. In a global economy that was going into recession, the price of
oil went from $78 to $147 and that burdened the US consumer with additional
“tax” of five hundred billion dollars. I am not saying that
is the only reason but it helped push the US consumer into recession.
The fact is that without the Federal Reserve’s expansionary monetary
policy after 2001, we wouldn't have had a housing bubble to the same
extent. The Federal Reserve’s policies basically encouraged sub
prime lending; it’s not the case that they discouraged it.
HRN: Is there a relationship between monetary expansion and the fact
that the US economy depends so heavily on consumption?
Dr.
Marc Faber: Basically, if you look at consumption as
a percent of the economy and at housing activity, the excessive debt growth
began essentially after LTCM and, I have to say, it was a huge mistake of the
Treasury and Fed to bailout LTCM because it gave Market participants in the
financial sector a signal that there is a Greenspan put, and later on a
Bernanke put, with an even higher strike price and this resulted in excess
leverage. So, if you have problems, the Federal Reserve will bail you
out or the system will bail you out. That’s where I think the
Federal Reserve acted irresponsibly—irresponsibly—that has to be
said very clearly. They didn't pay attention to credit growth.
Every central banker in the world pays attention to credit growth, but not in
the US.
HRN: What would you recommend that the Federal Reserve do
differently?
Dr.
Marc Faber: The first action Mr. Bernanke should
take is to resign. If I had messed up the system so badly, as he has
done, I would have to resign. He has talked constantly about the Great
Depression and what caused the depression but the problem is that he really
doesn't understand what caused the depression, which was also excessive
leverage at that time. I have to stress that in 1929 the debt to GDP
ratio was of course minuscule in comparison what it is today. It was
186% of GDP but you didn't have Social security, Medicare and Medicaid and
unfunded liabilities for Social Security and so forth. So, debt today,
as a percent of GDP, is 379% and if you add the unfunded liabilities we are
at over 800%. The Federal Reserve should pay attention to that.
HRN: With debt levels and liabilities so high, what solution is
there for the United States?
Dr.
Marc Faber: The solution is, basically, for the
government to move out and not intervene in the economy. There are
economists who will dispute that the Federal Reserve is partially responsible
for the crisis and there are economists that will still tell you that debt
doesn’t matter, that deficits don't matter and they want to continue to
intervene in the free market constantly. To these economists I respond:
What about Fanny Mae and Freddy Mac? It was an intervention by the
government into the housing market and into the mortgage market and the
biggest bankruptcies—bigger than Citigroup and all the banks—are
Fanny Mae and Freddy Mac—government-sponsored enterprises. The
same economists will tell you that the government has to intervene and to
these economists I say: Well, you have made so many mistakes already with
interventions do you think that in the future your interventions will improve
anything? Einstein defined insanity as doing the same thing over and
over and expecting different results, but these economists and the Federal
Reserve think that by more interventions with fiscal measures and more money
printing they will improve things. No, they won’t. They
will make things worse.
HRN: It seems the US is moving towards more government intervention
into the free market rather than less.
Dr.
Marc Faber: Yes. That’s why I’m
very negative about economic growth in the US. It just won’t
happen. Can the US economy grow at 2% per annum or, in the best case
scenario, at 3% per annum with current policies? Yes, but it will
create a lot of distortions. The best case for an economy that goes
into a boom phase, in other words over consumption, is to bring it back into
the trend line as quickly as possible. So when you have an excursion
into a boom, what you need is a cleansing of the system and that may take a
few years to happen in the US because the excesses were built up not just in
the last 7 years between 2000 and 2007 but, over the last 25 years. So,
to really bring the US back into sanity—into a healthy mode where the
economy can grow—might take 5 to 10 years, but it won’t happen
under the Obama administration.
HRN: Given the poor prospects for US economic growth, do you foresee
a flight of capital from the United States?
Dr.
Marc Faber: You would be out of your mind, with
health care reforms and with the government interventions and the uncertainty
about future taxes in the US, to even consider expanding in the US and this
is a problem. I mean people say that loan demand is down because banks
are not lending, but maybe nobody wants to borrow any money in the US and
nobody wants to expand in the US but they are expanding in China, India,
Vietnam, Bangladesh, Africa and Brazil. The business world is an
international place today, and if you run a corporation, whether you employee
50 people or 10,000, you can choose where you invest your money in terms of
capital spending. Where do you want to expand factories? If I
employed people in the US, I would rather think of reducing the 50 employees
maybe to only 20.
HRN: Where should American investors put their money?
Dr.
Marc Faber: Different people have different
investment objectives but I made a presentation recently where I showed, that
in terms of goods markets, the emerging world is now larger than the
developed world and so I think people should have at least 50% of their money
in emerging economies. With interest rates at zero and with the
prospect that they will stay at zero, or below zero in real terms for a long
time, I think cash is not particularly attractive. I think US
government bonds are unattractive in the long run, although they may be
attractive for the next three months. I would recommend to people to
accumulate precious metals and invest in a basket of shares in emerging
economies.
HRN: Are you saying you would consider buying gold even at
today’s prices?
Dr.
Marc Faber: Yes, I keep accumulating gold although
in the next three months it may go down and not up, but maybe it won’t
go down. To me, it doesn’t really matter if it goes down by 10%
or 20% or whether it stays where it is. I think if in case gold came
down 20% it would be because tightening of global liquidity and, in that
scenario, equities wouldn’t do particularly well either.
HRN: You mentioned that cash is not attractive. What are the
prospects for the US dollar?
Dr.
Marc Faber: The dollar has been relatively weak in
the last few years. It’s just that the other currencies are not
much better. There has been a tendency for the dollar to weaken and
certainly it has weakened against the price of oil, against the price of
precious metals and raw materials and it's lost its purchasing power.
There is no question about the fact that, today, if you have $100,000 you can
buy less than 10 years ago or 20 years ago. Just look at the housing
market. It has come down somewhat but a house is much more expensive
than in 1980.
HRN: Can you comment on inflation versus deflation?
Dr.
Marc Faber: In this whole inflation and deflation
debate investors have to realize that in a system—say you have a room
like this and then the money is dropped from helicopters into this room, it
can flow into real estate; it can flow into equities; it can flow into
precious metals; it can flow into the art market or it can flow out into
other currencies or into commodities that the Federal Reserve doesn’t
control. They only control essentially how much money they will drop
from the helicopters.
HRN: Is this an example of why central planning of the economy by
the Federal Reserve isn’t effective?
Dr.
Marc Faber: Yes. Exactly.
HRN: Do you think hyperinflation in the US is possible?
Dr.
Marc Faber: The Federal Reserve doesn’t want
to create a hyperinflation. I mean Mr. Bernanke may be incompetent, but
he’s not an evil person per se. He just doesn’t have
sufficient knowledge to be a central banker, in my opinion, and has misguided
economic theories, but he’s not evil in the sense that he would not
wish to debase the currency entirely. Clearly, if the US economy moves
into a double dip recession and you have deflationary pressures reappearing,
in the housing market, for example, and if the S&P drops from roughly
1,100 down to say 900, then I think further monetization will happen. I
believe that because of the unfunded liabilities and the deficits of the US
government, which will stay high for a long time; sooner or later there will
be more monetization anyway.
It’s
more a question of when it will happen rather than if it will happen.
For sure it will happen but will it happen right away, say in September, or
maybe only in two years time? Eventually, before everything collapses
we’ll have an inflationary bout which may not be so strongly felt in
consumer prices, as in stocks or housing or precious metals prices or in
commodities like oil; or inflation could occur mostly in foreign currencies,
in other words, in Asia where the currencies could appreciate.
HRN: Thank you for being so generous with your time.
Dr.
Marc Faber: Thank you.
After
Words
Dr.
Marc Faber is not only one of the world’s most outspoken critics of the
Federal Reserve and of its monetary policy, but is quite possibly the Federal
Reserve’s most credible critic. Dr. Faber’s detailed,
evidence-based arguments, linking Federal Reserve policy decisions, such as
interest rate changes, to economic developments like the US housing bubble
and oil price changes are supported by thorough research. Dr.
Faber’s research raises serious questions about the results of central
economic planning in the form of central bank monetary policy and about the
wisdom of intervention into the economy by governments. The evidence
suggests that centralized manipulation of money and credit has a
destabilizing influence on the economy overall—it increases economic
volatility—and has unintended consequences totally outside the control
of so-called monetary authorities. History shows that well-intentioned
lawmakers and their economic advisers cannot predict the outcomes and
unintended consequences of economic interventions. Neither central
bankers nor governments have been successful in substituting centrally
planned economic agendas for the decentralized decisions of millions of
entrepreneurs and owners of private capital, but they persist nonetheless
with ever more centralized control and ever larger interventions. Dr.
Faber confidently predicts that greater government control over the economy
will hamper economic growth rather than stimulate it, and that interventions
into the free market, no matter how large or well meaning, will continue to
fail as they consistently have in the past.
Ron Hera
Hera Research
Visit his website
Send him mail
Ron Hera is the
founder of Hera Research, LLC, and the principal
author of the Hera Research Monthly newsletter. Hera Research provides deeply
researched analysis to help investors profit from changing economic and
market conditions
About
Hera Research
Hera Research,
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Research Monthly newsletter covers
key economic data, trends and analysis including reviews of companies with
extraordinary value and upside potential
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