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.
Anthony Wile: Hello, Marc. The Dow industrials and other market averages recently saw the worst first week ever. Let’s start with your overview of what’s happening in the US markets and beyond right now.
Marc Faber: Basically, the US market is an expensive market. We’ve been going up since March 2009 very strongly. The orthodox top in the market was probably some time in late 2013 or somewhere in 2014 when the majority of stocks reached new 12-month highs. 2015 was a very weak advance in the sense that only very few stocks moved up, whereas the majority of stocks – in other words, the average stock, the median stock – was already in a bear market.
But this weakness under the surface, as we call it, was not obvious to the typical investor because he just looks at the S&P 500 or the Russell Index, which can be driven, as I said, by very few stocks whereas the majority are going down.
So the current selloff that we have experienced is an adjustment of the few strong stocks on the downside and also the realization by investors that the Federal Reserve monetary policies aside from lifting assets have basically failed to stimulate the real economy. We are in a cycle where it’s more likely that we will be or are already in recession than that we have this so-called global healing that the central banks have been telling us about all the time.
I think that Ms. Yellen will go down in history in the museum of failed central banking interventions as having increased interest rates precisely at the time when she shouldn’t have.
Anthony Wile: The media is focused on China. Why?
Marc Faber: Basically yes, because the strategists and the economists in the US and the media of course cannot accept the fact that they completely mispredicted economic activity in the US and so they have to blame something else for the decline in the stock market. Luckily, they’ve now found China. In fact, yes, China has numerous problems but they should not overlook that China has also been the contributing factor to growth post the financial crisis in 2008.
We have now this adjustment in China on the downside but if you buy US stocks, domestic shares, what do they have to do with China? Nothing at all.
The multinationals have something to do with China but actually, the business in China for the multinationals is not a disaster. It’s actually much better than in the US. So to blame China for all the decline is misplaced, in my opinion.
Not that I’m bullish on China. As I mentioned, and I’ve written about this numerous times for two years now, it’s very clear that for the last two years the Chinese economy was de-accelerating very badly. That is crystal clear.
But the bullish fund management industry and the strategies that the economists and of course the banks that do business in China, they don’t want to write anything negative about China, because that could impact their business. So of course they joined the cheerleaders, insisting that everything is fine.
Anthony Wile: Where will China go from here?
Marc Faber: Nobody knows precisely where it will go. In my view, it will continue to deteriorate and possibly badly. On the other hand, the longer-term outlook is still rather favorable. It’s just that in an expansion or in a long-term rise of a country you can have huge setbacks.
I’ve lived in Asia since 1973. We had the ’73/’74 recession, the Hong Kong Stock Market went down 90%. We had in ’81/’82 a recession and markets sold off, property markets sold off. Then in the crash in ’87 the Hong Kong Share Market was closed for four days after it had declined by 50% in one day. Then we had the peak in Japan in 1990 from where the market went down 70% and so forth and so on. Then we had the Asian crisis and we had a bear market in 2003 and again the bear market in 2009 but Asia continued to grow.
I think the growth will now slow down, but Asia’s a big region, as is China. So you can have, like in the US, maybe one state is contracting like in the mid-’90s we had a property crash in California but the other states were still expanding. We can have some sectors in China, like steel and copper and heavy industries that are all contracting. On the other hand, there may be other sectors that are still expanding.
Anthony Wile: What sources would you recommend for getting real, valid news on China and Asia?
Marc Faber: There’s a lot of research out there but some of it is quite expensive so it’s unsuitable for individuals. John Anderson of Emerging Market Advisers writes regularly about China. Then we have also banks that write regularly about China statistically. What they publish is probably correct except the GDP figures are not correct but the rest is probably correct. Jim Walker also has the Asianomics service that is very good about China and Asia in general. There are a lot of sources.
Anthony Wile: If China recovers, will world trading and market averages become more buoyant? Is Chinese weakness the proximate cause of problems worldwide?
Marc Faber: I’m not sure but I think it’s not like we will recover any time soon. I think the news out of China will not improve much. I rather think that what could result is a bear market rally that can be quite powerful because we’re very oversold.
Last Friday [Jan. 15] we had I think 900 daily new 12-month lows. This is indicative of an extremely, extremely oversold condition. But the oversold condition follows a period during which the market was continuously over-bold. So it doesn’t mean that the market will make a new high from this oversold position. I rather think, and I’ve written about this in my newsletter, that between around 1980 at the present time on the S&P and the high 2,134 of last May, there is huge resistance now. It will be very difficult for the market to go through.
But it will depend on how much money the Fed decides to print, so that we don’t know. I think they will print, or they will cut rates. We just don’t know. And in the case of China, growth, which averaged, say, between 8% and 12% for the last 15 years, in my view will slow down to a pattern of, say, around 4% to 6% per annum maximum. Maybe trend line growth will be just 4% – maybe the government will show 6% but maybe just 4%.
So the demand increase, the incremental demand that china had for commodities is not going to come back. It’s not going to collapse but it won’t increase at the same rate. Because we had huge investments in the resource sector there is at the present time sufficient supplies whereby particularly in agricultural commodities there may be shortages developing in one or the other commodity because of natural disasters like floods or droughts and so forth.
Anthony Wile: What’s your take on agricultural land as an investment now?
Marc Faber: I think we had the big move on the upside in agricultural land in the last few years, and it’s begun to ease a bit. The farmers, unless they’re subsidized, hardly make any money anywhere. So I don’t think it will go up a lot but we may be in an environment for investments where the question should be, “In what will I lose least?”
You could say, “I want to have some money in properties.” You can choose between Manhattan, 5th Avenue best location, Madison Avenue best location, or you can choose the Hamptons or Newport Beach or Huntington Beach or Manhattan Beach and so forth, or city centers like the center of Los Angeles or Denver or Detroit, or you can choose countryside properties. In general, I think countryside properties have some appeal from a security point of view, also.
Anthony Wile: We’ve suggested for some time that people be taking action now to secure their wealth and their families. As things continue to worsen, many are trying to make decisions about purchasing property that is more secure and that they can use to ensure food production, water access, etc.
Marc Faber: Yes, I think it may become important but it’s not a guaranteed security because, like in Europe, if you have a farm maybe the government will come and tell you, you have to accept on your farm 200 Muslims, that they will stay with you. Maybe they’re all nice. It’s not a judgment about whether they’re nice or not nice; you may not like it regardless.
But in the US, people are lucky. They only have to endure Mr. Obama for another year … though then it’s maybe even worse.
Anthony Wile: As has gained notice in the news lately, US ranchers have been experiencing this in the US for some time, the government’s ever increasing encroachment on their land often with notice that ‘the Bureau of Land Management owns this land … get off and take your cattle with you.’
Marc Faber: Yes. In particular the encroachment is the government agencies that come and tell the farmers how to farm. They say you can’t do this, you can’t do that, you have to use these fertilizers and so forth, so I can understand that there is a lot of discontent among some farmers.
Anthony Wile: Let’s talk about oil. Are the Saudis strapped for cash? Is that why they are thinking of a public offering for Saudi Aramco?
Marc Faber: They still have money but if the oil price stays here for another three years the country’s basically bankrupt. In my opinion, the whole Middle East will go back to where they came from, deserts. The oil price for the Middle East, considering the huge population increase they had since 1970, it would have to be around $80 a barrel for them to sell. But maybe for world peace it’s better if the oil prices are like $30, $40 and the Saudis can’t finance ISIS and they can’t finance other adventures that may not be very desirable.
But at $40 they have a huge problem. Their reserves will come down substantially. Now instead of drawing down their reserves they can borrow money. The question is, I wouldn’t necessarily lend money to Saudi Arabia personally. But maybe some governments will do so. I don’t think the Iranians will lend them any money.
Anthony Wile: Do you think oil will fall farther? (continue reading)