Famed investor and author of the Gloom, Doom, Boom Report, Marc Faber, returns to the podcast this week to discuss the slowdown in the global economy, signs of which he claims are multiplying fast all around the world.
He predicts the next year is going to be an especially bruising one for investors, and recommends a combination of diversification and defense for those with financial capital to protect:
I do not believe that the global economy is healing. I believe that the global economy is heading into a slump once again.
We have a slowdown practically everywhere and if you take out the fudging of statistics, the economy for the median household everywhere in the world is not doing particularly well. If the global economy were doing so fantastically well, how would it be that commodities collapsed to the extent that they have declined? Or how would it be that the currencies of American markets and some of them have actually declined by more than 50 percent against the U.S. dollar in the last three years. How would this happen? So I do not believe that we have a healing of the global economy. On the contrary, I believe that the global economy is slowing down and that essentially equity markets are not particularly attractive.Preceding every bubble, you have a huge expansion of credit. That was the case in the period ’97 to 2000, and in the period 2003 to 2007, and on previous occasions in economic history. In the case of China, credit as a percent of the economy has grown by more than 50% over the last five years, which is essentially a world record. And in my view, its economy is slowing down rapidly. I had a drink with a friend of mine the other day who has car dealerships, luxury car dealerships, in China. He said sales have hit a brick wall. Not 'slowed down'; a brick wall. And indeed, exports were down and car sales were down in July. I think that this will then spill over again into other emerging economies because China is a large buyer of commodities and a large trading partner to other countries.I travel extensively. I can see roughly what is going on. So I really believe that the American market complex is not doing well at the present time. And everywhere, people basically are faced with rising costs of living and essentially declining currencies so that the persons in power goes down. So it's not a pretty picture.
Click the play button below to listen to Chris' interview with Marc Faber (37m:21s)
Chris Martenson: Hello and welcome to another Peak Prosperity Podcast. I am your host, Chris Martenson, with you today. Well, here it is. It is August of 2015 and typically not much happens in financial markets in August. Everybody is out on vacation or something. Except this year vacations are probably being ruined. Oil has replunged to new lows for the move. Dr. Copper has plunged through support to lows not seen since you guessed it, the fateful year of 2009. In fact, the entire commodity complex, including silver and gold, has entered profound bear territory.
China has been all over the news, notably because of its stock market bubble bursting and the official rescue efforts but less notably for a smart decline in both exports and imports. Central bankers the world over are saying that everything is fine and they have it all under control, but their actions say otherwise.
To help us make sense of all this, we welcome back one of my very favorite guests, Dr. Marc Faber. Dr. Faber was born in Zurich, Switzerland and now has an office in Hong Kong. He publishes a really very widely read monthly investment newsletter, The Gloom, Boom & Doom Report, which highlights unusual investment opportunities. And he is the author of several books, including Tomorrow’s Gold: Asia’s Age of Discovery published in 2002, right at the beginning of the age of discovery there. And speaking of timing, in 1987 he warned his clients to cash out before Black Monday on Wall Street. He made them handsome profits by forecasting the burst of the Japanese bubble in 1990, correctly predicted the collapse in the U.S. Gaming Stocks in 1993 and well, he has just been ahead of the curve every step of the way. Welcome, Marc.
Marc Faber: My pleasure and thank you very much for having me on your program.
Chris Martenson: Oh, my pleasure. Well, okay. Let us talk economy first, market second, central bank actions third, and then predictions fourth. So how do you see the global economy right now?
Marc Faber: Well, contrary to many observers, and strategists and economists, I do not believe that the global economy is healing but I believe that the global economy is heading into a slump once again. We have a slowdown practically everywhere and if you take out the fudging of statistics, the economy for the median household everywhere in the world is not doing particularly well. If the global economy was doing so fantastically well, how would it be that commodities collapsed to the extent that they have declined? Or how would it be that the currencies of emerging markets—and some of them have actually declined by more than 50 percent against the U.S. dollar in the last three years—how would this happen? So I do not believe that we have a healing of the global economy. On the contrary, I believe that the global economy is slowing down and that essentially equity markets are not particularly attractive.
Chris Martenson: Now on this global slowdown, obviously China has been the engine of growth, particularly with commodities, sucking up up to half or more of certain key commodities. Let us talk about where China is because I clearly think that is a key component of this whole story. Of course, certainly we have their currency devaluation, which has the potential to export deflation out of the world. But let us start with their economy. I read a statistic that says 50 percent of their GDP over the last five years was building things. So they went through an aggressive buildout phase and that is clearly coming to some sort of an end, as it must. Is that how you see it and if so, what does China do next?
Marc Faber: Well basically preceding every bubble, you have a huge expansion of credit. That was the case in the period ’97 to 2000, and in the period 2003 to 2007, and on previous occasions in economic history. In the case of China, credit as a percent of the economy has grown by more than 50 percent over the last five years, which is essentially a world record. And in my view, the economy is slowing down rapidly. I had a drink with a friend of mine the other day who has car dealerships, luxury car dealerships, in China. He said sales have hit a brick wall. Not slowed down—a brick wall. And indeed, exports were down and car sales were down in July. So I think that this will then spill over again in other emerging economies because China is a large buyer of commodities and a large trading partner to other countries. So I really believe that the emerging market complex is not doing well at the present time, and I travel extensively. I can see roughly what is going on. Everywhere people basically are faced with rising costs of living and essentially declining currencies so that the purchasing power goes down. So it is not a pretty picture.
Chris Martenson: Well if we look particularly at say some of the rim countries around there – Indonesia, Malaysia. Their currencies have taken huge hits. So even though commodities have come down, if you are importing those commodities and your currency goes down, you are still maybe spending more. Is that what you mean by rising prices for say people in those two countries?
Marc Faber: Well basically they, some of these countries, whether it is Malaysia or Thailand or Jakarta, are exporting large quantities of raw materials. Commodities such as agricultural commodities, copper, iron ore, coal and so forth. And when prices collapse, these countries’ revenues go down. At the same time, all these countries are large importers of goods, of manufactured goods. And so when the currency goes down and the manufactured goods are still coming in, these countries have to pay a higher price. So in my view—and we have seen that in Japan. Basically Abenomics was supposed to boost personal incomes but in fact, in real terms, disposable incomes in Japan on a per capita basis have been tumbling.
Chris Martenson: Well, monetary policy unfortunately picks winners and losers, so the exporters of Japan were anointed the winners in that story, I guess. Of course, the people have to be the losers on that front.
Marc Faber: Well they did well in yen terms but not in dollar terms. In dollar terms, exports are either flat or down. But in yen turns, yes, they are up.
Chris Martenson: Right. Okay so let us talk about oil, another key commodity here. I certainly did not see that huge tumble that began a little over a year ago now. It looks like it is staying down at this point in time. What do you think is driving that?
Marc Faber: Well I mean I believe the principal reason for the decline in oil price is a weakening global economy. The second reason is obviously the increased supply, mostly out of the U.S. coming from fracking and alternate sources of energy. So the price has adjusted on the downside. Will it stay here, go lower or higher? Nobody knows precisely. My sense is that an equilibrium price for oil is between $40 and $60 a barrel. But can oil revisit the lows of 2008, December 2008, which were $32 a barrel or even go lower? Yes, it is possible. But all this points to a global tightening of liquidity. And if global liquidity tightens, it is not good for equity prices in general.
Chris Martenson: Well now let us talk about that liquidity because I want to get to the role of central banks here in all of this because obviously they have done heroic efforts to just have liquidity sloshing out of every possible corner. I think we have seen a lot of that in a variety of markets. But the central banks would like us to believe that they have everything under control. What I am interested in is what is your view of what they have really managed to accomplish here?
Marc Faber: In my view, what central banks have done, notably the Federal Reserve, is A.) create the NASDAQ bubble and then the collapse, and then they superimposed on the NASDAQ bubble and housing bubble under the advice also of the Neo-Keynesians like Krugman and so forth. And we know how it ended. It ended very badly. And then during the crisis in 2007-2008, they began a massive money printing exercise, and in a way, it is true that they saved at that time the financial system. The question is: Was it worth saving and were the costs justifiable?
Since then, the global economy has not done particularly well. It has done well because of a huge stimulus package in China and China contributed – I do not know, maybe 50 percent to global growth overall. But in general, in the U.S. the median household has not done well. But it saved the financial system. And in my view, now we have essentially six years of interest rates at zero percent and what has been achieved is preciously little. And as I said, in my view, the economy is slowing down so what we may have is a postponement of the problems. Do not forget. Global debts as a percent of the global economy are now 30 percent higher than they were prior to the crisis in 2007.
Chris Martenson: Was this not all predicated – so the central banks really, I think, they had their fingers double-crossed on this one. They were going to stimulate. They were going to provide liquidity. And then the global growth was supposed to come back to justify all their efforts. You are saying that growth is not here. It does not justify their efforts and now we have more debt than we had even in 2008.
Marc Faber: Correct. And I would add to this: Everybody in business and in economics and in the financial service sector agrees that basically free markets are the best for economic growth. But here you have a bunch of professors and academics that sit in central banks that think that they can plan the global economy. And there is no currency war. There is a coordinated effort by central banks to essentially print money. It is like in a relay race. The baton is passed from one central bank to another and they all talk to each other every day. And one does this for a while. The U.S. prints money. Then it goes to Japan. Then it goes to the ECB. Then it goes to China and so forth. I mean the whole thing is not going to work.
Chris Martenson: Well, devil’s advocate, why not? They have gotten away with it for six years now.
Marc Faber: Well, I want to tell you why not. Because an economy depends essentially for growth on productivity and it depends on capital spending. That produces sustainable economic growth. And with money printing, you do not achieve that. And we have plenty of examples of countries that printed money and what followed was a disaster, not strong and sustainable economic growth. It created bubbles and then the bubbles burst and impoverished the majority, like the housing bubble has impoverished the majority of participants, young people. They lost their homes because they were encouraged to borrow money to buy homes and then prices went down so they lost their homes. And now they have to rent and rents go up substantially. So they are struck actually not once but twice.
Chris Martenson: That is absolutely right. So as I look at what the central banks are doing, it looks like they are out of bullets. You know, they talk. They use words.
Marc Faber: No, they are criminals.
Chris Martenson: All right. Well, I agree they are not probably going to be held to account like good criminals, but what do you think they are going to do next here, thinking like a criminal?
Marc Faber: Well, look, that is a question I do not lose any sleep about but I am thinking about it a lot because in good English, being so deep in shit, I think they will have to continue to print money. It may not happen right away but who knows? Maybe the Fed was talking to the People’s Bank of China and told them "why do you not now ease massively and that gives us an excuse not to increase interest rates in September." Who knows?
Chris Martenson: Yeah, you are talking about a level of coordination and control. I mean, look. I traded for a long time and then trading became very difficult to do, starting around 2008. I now understand having looked at the work of Eric Hunsader out of Nanex and understanding how the high frequency trading machines work that there is a layer of control on this market that has nothing to do with fundamentals. It has to do with colocation of servers, microsecond timings, algorithms, all kinds of things. In my view, it seems to me that these computerized markets, they do provide really high liquidity. Apparently, they do provide really low cost execution. They also provide maybe a variety of other benefits. But we have seen these astonishing flash crashes, in everything, as large as the U.S. dollar, and the U.S. Treasury Market, oil market, gold. You name it. Do you have any concerns about market structure at this point?
Marc Faber: Well basically, on the upside, there is always plenty of liquidity. How much liquidity there is we will test when the markets go down. Now we tested that in emerging economies and there, there was not that much liquidity. The markets went down, both currencies and stocks, like a stone. So in the case of the U.S., this remains to be seen how much true liquidity there is. I do know in the U.S. junk bonds, or in other words high yield bonds, have declined quite substantially. And some stocks, on bad news, they just open 10-20 percent lower. So we will see how the liquidity really works.
Chris Martenson: All right. Well this is something that is really fascinating to me and moving on to this market idea then. Because currently it looks like global equity, well at least Western equity and bond markets, they have made entirely different bets on the future. Sovereign yields representing safety have plunged. High yield credit, as you just mentioned, has spiked in yields. Every dip, however, in the U.S., Europe and Japanese stock markets gets bought. One of these two markets, equities and bonds, seems to have it dead wrong. Where do you place your money?
Marc Faber: Well I wished I knew precisely where to place my money. You understand, there are different asset classes in a system that is not rigged, and where money supply and credit is tight, cash is a safe investment. Basically, cash either in Treasury Bills or with the banks. But in today’s environment, where essentially cash does not give you any return, I am not sure that over the next ten years, cash will be a desirable investment. That, as we discussed before, will depend very much on central banks’ monetary policies. My sense is that cash, except for short periods of time, will not be a very desirable investment. And beyond that, we would have to decide well how do we keep cash – in Euros, in yen, in dollars? At the present time, as you know, the bullish consensus about the dollar is very high and everybody is very positive. But this has not always been the case. And the dollar at this level leads to U.S. industries being uncompetitive. So I am not sure that the dollar will remain a strong currency forever, so cash is not safe.
Bonds, I own U.S. government bonds. And by the way, I also own cash because I think that the global economy is slowing down. And so here I see U.S. ten year Treasuries yielding 2.17 percent. But at the same time, ten year French government bonds yield less than half as much. Or even Italian government bonds yield less than U.S. Treasuries. Or Spanish government bonds yield less than U.S. bonds. So I am saying to myself maybe U.S. Treasuries is not the worst investment. I do not like it because say you buy a ten-year Treasury here; the maximum you can earn for the next ten years is annually 2.18 percent. It is not a desirable return. But maybe it is better than many other things that will go down or go bankrupt.
I also own some shares, mostly in Asia. And obviously, this year because of depreciation of the currencies and the relatively poor performances of markets, they have not done well this year. But over the longer term, they were a good investment and the valuations now are reasonable. They are not as low as at the drop of the market in 2009 or 2003, but they have come to a reasonable level where the expected return over the next ten years in dollar terms may be around four or five percent.
Then I own some real estate and I own obviously some precious metals because I want to be diversified in an environment where I have no clue where the world will be in five years’ time.
Chris Martenson: Well, let us talk about those precious metals for a minute. If you had said to me five years ago, Chris, here is some data. And you showed me the amount of gold that is going into China particularly, India second, the rest of Asia third. And noting that that is well over 100 percent of global mine output at this point, I would have lost the bet because I would have thought that fundamental data would have certainly been price supportive. Obviously, it has not been. I would like to get your views on what is happening with the price of gold. Whether that is just a paper market artifact or it is real and how gold is really viewed in China. You being over in Hong Kong and also in the Thailand area, how is Asia viewing gold? I know in the West, I cannot crack the newspaper without somebody telling me it is a paperweight, a barbarous relic or a pet rock.
Marc Faber: Well in general, whether it is Indonesia, India, or China or any other Asian country, gold has always been a kind of a safe haven. And gold has always been bought because Asian currencies over the very long term have been relatively weak. So the culture of gold in Asia is probably more pronounced than say in the United States. But there are differences. In Korea, hardly anyone owns gold. In Japan, very few people own gold. But in China and in India and Vietnam and so forth, Indonesia, Malaysia and even Hong Kong, they own a lot of gold. And they will continue to buy as well as other people in emerging economies. And I think if you ask me why the price of gold declined, well, along with other commodities and along with a tightening global liquidity, and along with the dollar strength, and also because between 2000, specifically 1999, and 2011, gold performed superbly, as well as silver. And so a meaningful correction is not extraordinary. We had it in stocks in the ‘80s, in ’87, a meaningful correction, 40 percent from peak to trough. And the bull market continued. So I am not so concerned about this correction. And I am always telling people if gold indeed goes to $700, $800 as some experts seem to predict, I would like to see where the Dow Jones is and the S&P.
Chris Martenson: With your prediction being?
Marc Faber: Well my sense would be that equities would be down very substantially because then we are talking really about extreme tight global liquidity and a slump in economic activity. It would probably be good for Treasuries for a while, not forever, but for a while. And negative for equity price, especially if you look at equity prices around the world. Emerging market equities are now reasonably priced. As I said, they are not cheap. Europe is reasonably priced. Not quite as cheap as I would like to invest in Europe, but I have investments in Europe in equities. And the U.S. is in la la land because everybody says it is the least ugly sister in the room. And yes, that may be the case but because of that, the U.S., dollar adjusted, is also much more expensive than all the other markets.
Chris Martenson: Well, it also seems to be a bulletproof market. I used to say a double top was bad. A triple top was certainly something to catch your attention. But what are we on, a septuple top, an octuple top now in the S&P 500? It is just stuck.
Marc Faber: Well, I do not know. The one thing I know is that essentially 50 percent of shares, depending on the day, are now down below the 200-day moving average. In other words, they are lower than they were a year ago. And if I look at the list of new highs and new lows every day on the New York Stock Exchange—and the NASDAQ by the way—recently, like in the last two trading days, Friday and Monday, the market went up but the number of 12-month new lows on the New York Stock Exchange vastly exceeded the number of new highs. That tells you not all is well in the market. It is just being supported by very few shares.
Chris Martenson: And extremely low volume so yes, the internals are ugly. The volume is not good. There is not a lot to really love in this right now so it does not seem like there is a lot of conviction.
Marc Faber: There is not a lot of value.
Chris Martenson: Well, that has probably been true for a while.
Marc Faber: And look. You take a share like General Motors. It is down almost 20 percent from its recent high with record sales. Partly because 35 percent of the sales are in China and almost 50 percent of the profits come from China. You look at Walmart. It is also down more than 20 percent of its high. It is now less than $70. It was at $90. Well, this is an economic indicator that tells you something about the economy.
Chris Martenson: Well a lot. At least the bottom end of the economy is doing poorly for all the reasons you have mentioned. Median household income is weak. In fact, this has been a recovery of the numbers, by the numbers and for the rich mostly, at least in the U.S.
Marc Faber: Yeah, sure. The wealthy people, the asset owners, the stockowners, property owners, especially apartment house owners, apartment building owners. They have done very well financially. But you have to ask yourself how long can it last? When your customers are not doing well, your wealth eventually will also be called upon.
Chris Martenson: And so if I follow this thread through, we had a small corporate bond issue in ’95. Greenspan opened up the floodgates, gave us a NASDAQ bubble. That burst. Then we opened up the floodgates even more. We got a housing bubble. That burst. Floodgates got opened up even more. But aren't all of these actually just symptoms of a credit bubble that started a long time ago? Isn't this really something that started –
Marc Faber: Yes, of course, we have a credit bubble, a gigantic credit bubble and it is getting worse and worse. But you understand, if you print money you can postpone things for a long time. You cannot postpone it forever. Eventually the system collapses. But will it collapse this year, next year or in three years? We do not know for sure.
Chris Martenson: So spread your bets.
Marc Faber: My bet is that basically it is not a time to play hero and the long assets on a leveraged basis. As I said, my bet is you and I and everybody else has no clue how the world will look like in five years’ time. So in my opinion, the best is probably to be diversified. It will not protect you 100 percent but it will give you some safety net.
Chris Martenson: Well there is a lot to diversify. Again, so I do not know how to diversify all of it. A while ago, geopolitically, a very tense time with Russia, Ukraine, all of the –
Marc Faber: Yeah, sure, I agree with you. And also in the Western world, there is an increasing move towards socialism and towards the belief that maybe a wealth tax would be a very good idea. At first, the central banks through money printing fattened the pigs. In other words, fattened rich people, including yourself and myself. And then they will not accept the blame for this wealth inequality increase. They will then turn around and say "well, well, well. The reason why the economy is doing so badly is that we have this zero, not 0.1 percent, not 1 percent, but 0.01 percent of people that have a hell of a lot of money. They are billionaires. And as a percent of their income, they do not spend much. So what we have to do is to take money from all these people and give it to the poor who have a high propensity to spend."
Chris Martenson: Well I actually think that is coming and a couple of ways to do it. One is with socialist redistribution policies. The second would be for the Federal Reserve in cahoots with my U.S. government to, I do not know, cut me a tax rebate check for the last two years of taxes I paid. Or in some way get money back. I think that is coming, personally, and my advice to people is to run. Do not walk. Run to spend that money as fast as you can because it just – I do not know how that is different from what Venezuela has been doing.
Marc Faber: Yeah, sure, I agree with you. But as I said, we do not know how far they will go because politically there is now increasing criticism of the Fed and in my view, increasingly central banks are losing their credibility. So to what extent they can really do that, I am not sure. That would also be my concern about owning gold. It is not unlikely that at some point, Western central banks – because they all talk to each other. And the ECB is basically an ally of the U.S. Federal Reserve. The EU basically follows the instructions of the U.S. That if the U.S. moves to confiscate gold, and they will pay something for it but they will take it away, then the EU will do the same, including the Swiss I may add.
Chris Martenson: Well yeah, that has been my concern seeing all the bail-in provisions that have swept across the G20, which says "okay. We want everybody in the banks and we want you to be our captive audience here." And then secondarily, the war on cash.
Marc Faber: Yeah, sure.
Chris Martenson: You know, wanting everybody to –
Marc Faber: It is an assault on people’s freedom.
Chris Martenson: So it looks to me like, Marc, what they have done is they want everybody to share in whatever losses are coming and they do not want any escape hatches. It sounds like you are saying that your concern is that gold will be viewed as an escape hatch. That door needs to be nailed shut.
Marc Faber: Well, the point is that we had a colossal asset bull market, which began basically for equities and bonds. For bonds 1981, September ’81, with Treasuries over 15 percent yield. And for equities, August 1982, with Dow Jones below 800. And at the same time, we have a huge bull market in all asset classes, whether it is our vintage cars, or art prices, or collectibles, or real estate and so forth. I think this huge asset inflation is going to come to an end, and all asset owners will be affected to a lesser or to a larger extent.
Chris Martenson: And so the safer assets in this course, since this is basically a credit bubble that we are not willing to voluntarily abandon. Then you have to worry, in the words of von Mises, that there is a final catastrophe of the currency systems involved potentially.
Marc Faber: Yes. I mean the safest asset in my opinion is gold, provided you can hold onto it and it is not taken away from you because before, central banks and the Neo-Keynesians who have hijacked economics away from the free market and think that they are now the central planners. Before they admit defeat, they will move on and will argue "oh. The problem is we have not done enough. We have to do more." And I have just written about this. The problem with larger governments, more government spending, is you also get more regulations. And regulations stifle business. So under the Neo-Keynesian policies and under the policies of the Fed, in my opinion, economic growth cannot pick up. It cannot pick up. But as long as it does not pick up, they will think they have to do more and more and more because they cannot admit defeat.
Chris Martenson: Of course not.
Marc Faber: Have you ever encountered an academic who will admit that he is wrong? Never.
Chris Martenson: Well, Paul Krugman does not leap to mind. No, and unfortunately, they are academics. When I look at the FOMC Committee, we have Janet Yellen, a professor, and we have some –
Marc Faber: Well they are either academics or they come out of Goldman Sachs.
Chris Martenson: Or lawyers. A bunch of them have JD degrees and they served on various committees. So you get, yeah, either investment bankers, lawyers or academics. What could go wrong?
Marc Faber: Yes.
Chris Martenson: Of course. Well thank you so much for your time today, Marc. It is a pleasure as always.
Marc Faber: Well, it is my pleasure. Thank you very much.
Chris Martenson: And until next time, people can follow you on marcfabersblog.com, on the news channels, of course. So again, thank you a lot.
Marc Faber: Well basically, I have a website, gloomboomdoom.com.
Chris Martenson: Gloomboomdoom.com.
Marc Faber: Yes.
Chris Martenson: We will link to that at the bottom of this with the transcript. Again, Marc, thank you so much for your time today.
Marc Faber: My pleasure. Bye bye.