global gold talks to marc faber - july 2014

5/21/2018 Global Gold Talks to Marc Faber - July 2014

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GLOBAL GOLD TALKS

TO DR. MARC FABER

INTERVIEW WITH MR. MARC FABER, JULY 2014

Dr. Marc Faber, or Dr. Doom, is the worldwide renowned Swiss investmentadvisor and fund manager. After obtaining a PhD in Economics at the ageof 24, Faber worked in New York, Zrich and Hong Kong, and has settled inHong Kong since 1973. In June 1990, he set up his own business, MARC FABERLIMITED. The Gloom Boom & Doom Report is Dr. Fabers famous monthlynewsletter which highlights unusual investment opportunities. He wroteseveral books, including TOMORROWS GOLD Asias Age of Discovery thatappeared in 2002.

Dr. Faber is well-known for his contrarian investment approach and is

internationally famous for a number of bold investment decisions and correctpredictions such as in 1987 when he warned his clients to cash out beforeBlack Monday in Wall Street, or 1990 when he expected the burst in the

Japanese bubble, or 1993 in the case of the collapse in US gaming stocks aswell as warning about the nancial crises of 1997/98 and 2008.

I was recently at the Gottfried Haberler Conference in Vaduz andhad the pleasure of listening to a speech by Hans-Adam II, Prince ofLiechtenstein. In his speech, he talked about his book The Statein the Third Millennium where he propagates the importance ofdecentralization to the level of the municipality, the right to secessionand the privatization of the school system. What are your thoughts onthe topic, and would you like to live in such a state?

What are your thoughts on the privatization of schools? Do you thinkits a good idea?

I strongly agree with decentralization. Generally, in small societies, democracyis more successful than in large societies. In countries like India or the United

States, the federal government has become so large that they take decisionsthat are not necessarily in the interest of the individual. This is dierentfrom Switzerland, where we have municipalities, Gemeinden, and states,Cantons, with a lot of decentralized power, which I nd very desirable.

Well, I think that the privatization of the school system is by and large a goodidea, but not necessarily everywhere. In some societies, schools that arerun by the government are actually quite good, like in Switzerland, Finland,South Korea, Japan, Norway, Sweden and Denmark. However, in others

they are a complete failure like in the United States where everyone with ahigher income sends his children to private schools. That is very dierent inSwitzerland. Overall, I think in some cases a public school system that is runby the government can be successful, but in most cases, it is a failure.

Claudio Grass,

Global Gold:

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So what about the right to secession? Do you support it? Should, forexample, a Swiss Canton have the right to secede peacefully fromSwitzerland?

Lets talk about the ongoing power shift from the West to the East.

I fully agree with you. The conference I attended was organized by theEuropean Center of Austrian Economics Foundation and was propagatingthe importance of the individual in economic decision-making versuscentral planning. You often quote Hayek and Mises. So, we would liketo know how your Austrian thinking impacts how you look at the world.

Yes, if a jurisdiction nds that it is advantageous to secede, in other words,to have autonomy like in the case of the United Kingdom now with Scotland,then yes, they should have the right to do so. And obviously it would have to

be a right that is exercised by the majority of the people in that jurisdiction.It doesnt mean that if Scotland secedes from the Empire that they wouldbecome enemies. I support secession, because I believe the individualsfreedom is better protected in a small society rather than in a large one.

Well, basically, everything is connected and interrelated. We had a colonialsystem until the end of the Second World War, followed by the rise ofindividual countries. And over the last twenty-ve to thirty years what we hadwas the rise of China with 1.3 billion people. Because of Chinas rapid growthand resource dependence (iron ore, copper from Australia, Brazil and Africa,and oil principally from the Middle East), the Chinese have obviously become

a very important economic force.

Take Africa twelve years ago: trade between Africa and the US was twice thesize of trade between Africa and China. But today, the situation is reversed.As a result, China has gained large geopolitical inuence due to its growingeconomic relations. This helped shift alliances from the US to the East, whichhas led to tensions. China has many provinces that are larger than a Europeancountry and as an economic block, China is huge! It dwarfs everything elsein Asia. But now China is surrounded by military bases in Asia, by Americanaircraft carriers and by the signed defense treaties between the US and Japan.Moreover, the Chinese never forgot that Japan had attacked them numeroustimes over the past 200 years. Additional disputes between China and its

surrounding countries, Vietnam, the Philippines, Taiwan, and especially Japanabout maritime rights will cause further tension in the region.

Despite these tensions, the power shift is still underway. You have asuperpower like the one Britain was until the First World War and you have

Basically, over the last, I would say, 100 years, the Keynesians and theNeo-Keynesians thereafter propagated their view that the larger thegovernment and the more the interventions the better a society becomes.They have managed to discredit the Austrian School of Economics. As aresult, society in general has turned into an entitlement society where wehave an insurance policy for everything and the government is expected topay the bills. And so, the freedom of the individual is undermined. But withfreedom comes responsibility, personal responsibility. This has been pushedaside and people dont realize that they cant be free if they dont take onresponsibility. Adam Smith said the government should be in charge of awell-structured legal system, low taxes and defense and nothing else! Instead,we have more and more socialism and state planning, which diminishespeoples freedom. I believe we need to have a huge change in society tomake people understand that if you want to have freedom you also have totake on personal responsibility.

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a rising power like Germany whose economy in 1910 overtook that of theBritish. Here you have the superpower that believes in the old order and thenew power that believes it should have more inuence on global aairs. Theresulting tensions create an environment that is favorable for confrontation.But it doesnt have to come to war. In my view, Chinas long-term objective isto kick out the US from their military bases, particularly after Hillary Clintonand Mr. Obama announced the American Pivot to Asia two years ago; it was

a kind of direct attack or confrontational behavior towards China.

Can you tell us your opinion on the recent developments and events inthe world like the Middle East? Will these events in that region furtherescalate? Will they have a long-term impact?

Today, we nd ourselves with the same anti-free market interventionists whoset up the Federal Reserve, the US Treasury and the US government. Thesesame incompetent professors and academics also run foreign policy inAmerica and then go and intervene in the aairs of Libya, Syria, Egypt, Iraq orAfghanistan. And as can be expected, they mess up just about everything. We

have this Wolfowitz Doctrine that says they dont want to tolerate any othermajor power such as the Soviet Union or China. So they want to containthese countries. When these countries become economically more andmore important, the tensions, in my view, are only going to increase.

I think its unlikely that the West will take any action. First of all, they donthave the money. Second, a survey done by the US military stated thatover 71% of their youth are unqualied to join the military for a number ofreasons, including educational, behavioral and health conditions. So, if 71%of American youth are not qualied, it means the US doesnt have the laborforce to actually implement its foreign policies. And so they resort to privatecontracting companies that create more problems than solutions.

Im very negative about the Middle East. I think the whole region will blow up.Eventually Iraq will be divided into three dierent countries: the Kurds, theSunni in the North and the Shiites in the South. All I can say is that, in general,nancial markets are not paying sucient attention to this.

Global Gold:

Mr. Faber:

What are your thoughts on the Chinese-Russian gas deal? Is this afurther step towards the decline of the Dollar or the next step towardsreplacing the USD as the world reserve currency?

I think its a symptom of the new world order I was referring to where thebalance of economic power has shifted to Asia and emerging economies.

This becomes very clear if you look at European companies. Where do theygrow? Not in Europe. Asia has become and will remain the growth market.The gas deal is a big deal in the sense that, it proves how incompetent USforeign policy is. The US supported the opposition in Ukraine thinking thatRussia will do nothing. But Crimea is strategically important to Russia sinceit gives their eet access to the Mediterranean and the Middle East. And so,by supporting the opposition in Ukraine, the Americans essentially removeda democratically elected president. He may have been incompetent, but hewas democratically elected nevertheless. Thats democracy! In democracyyou have incompetent people at the top. The Americans also thought theycan push the Russians a bit further by trying to lure Ukraine into NATO. Thatwas a step too far and so the Russians reacted by signing a gas deal with

China! The signicance of this deal lies in that the payment will no longerbe made in Dollars but in local currency, the Ruble or Yuan. I think this issymptomatic of an empire, the US, in decline and a global currency in declineas well. Dont forget, until WWI, the world currency was the British Pound andits importance diminished afterwards. And now we have a gradual lesseningimportance of the US Dollar.

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How do you see the economy in China, will it get a lot worse before itgets any better?

Absolutely! With regards to China, no one knows what will happen butcan we exclude a possible hard landing of China? And the questionis when it comes to this, do you believe it will have an impact on thegeopolitical power shift or is it just a short-term intermezzo for the riseof China?

Well, nobody knows for sure and Id like to remind you and your readers thatChina is unlike any other country. It is twice the size of Europe and the UScombined in terms of population. So it is a huge empire and giant economy.My view is that the economy is not growing at the rate the government claims

it is. The economy is growing at maximum 4% per annum, because when youlook at export and import statistics of countries like South Korea, Taiwan,Hong Kong, Singapore, Thailand, Malaysia, and their trade gures with China,you will nd it is not growing or is hardly growing. Under the interventionistsin China there will obviously be monetary easing, scal spending and so forth,like anywhere else. And so, they can maybe postpone the problems but ingeneral, I would say the remarkable thing about the last twelve, fteen yearsis that in the case of metals, Chinese consumption has grown from 12% ofworld consumption in year 2000 to now 47% and this Chinese consumptionof industrial commodities was just 2 or 3% in 1990. So weve had thishuge expansion in Chinese appetite for resources. My view is that Chinasdemand for raw materials will not collapse, but it will not grow at the same

rate anymore or hardly grow at all, except for oil. Their demand for oil willobviously grow in the long-term. But for the industrial commodities, it willslow down meaningfully. And so the impact on other emerging economieswhere we have hardly any growth at the present time, will be felt. As is thecase in the West, real growth will be very dicult for many Asian economies.

Well, I think that there is a very high chance for a hard landing in the realestate sector, because we have a gigantic credit bubble. Usually these arecreated during the periods when credit expands at a faster pace than theeconomy and are followed by some kind of hardship. I do not rule out thatgovernment interventions can postpone the problem. They will bring aboutnew misallocations of capital and maybe even make things worse. However,because China is so large I think that many sectors can still thrive in anenvironment where, for example, the real estate market collapses, so I donot think that the impact will be that strong.

Weve seen what happened before with the bailout of Mexico in 1994 andthe Asian crisis in 1997. If Mexico had failed at the time, we may have had

a more signicant setback in emerging economies in the mid-1990s, butwe wouldnt have had the depression that followed in 1998. So in my view,government intervention can postpone the problem but it may also makethe situation actually worse by not letting the market clear as soon as somesigns of problems appear. If, for example, LTCM hadnt been bailed out, Idont think the whole system would have collapsed. Some people would havelost money, I guess Goldman Sachs and the counterparties of LTCM, but itwould not have been a threat to the global nancial system. But this is whatsbeing presented to the public by the interventionists, who argue: Had we notintervened, the whole world would have collapsed.

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That brings me to the next question. We at Global Gold think inscenarios. We dont believe in models, but rather use our common senseand history as our guide to try to understand ongoing developmentsand where they will take us. One of our scenarios for the mid-term,meaning in the next 5 years, stands for crisis (collapse of the monetarysystem or wars), which we weight with 20%. Do you think we are overlyoptimistic or pessimistic?

You just mentioned that central banks print like theres no tomorrowand the debt levels, especially unfunded liabilities are at all-timehighs. Do you think will we see a deationary bust or a Zimbabwestyle hyperination? In other words are we approaching the end of along-term debt cycle?

That brings us to gold. We at Global Gold consider physical gold storedoutside the banking system as an insurance policy against the collapseof the actual monetary and nancial system. We are, therefore, notgoing to ask you where you see the gold price, but rather, could youelaborate on why you personally hold gold and why it makes sense inyour view?

Well, my view is that the current monetary arrangements are not sustainablein the long run. We have sensitive, overly indebted Western economies inthe US and Europe. It is not visible yet, because the unfunded liabilitiesare probably not accounted for. A company under GAAP would have toaccount for them, but governments dont have to. What this means is thatthe benets of people will eventually have to be cut either through inationand adjustments that are below the true cost of living increases or throughreduced payments to the individuals. With benets going down or throughoutright expropriation over the last two or three years, more and morevoices have come up talking about wealth inequality. I previously discussedthe problem of wealth inequality brought about by expansionary monetary

policies where the main beneciaries become the asset holders. Wealthinequality should be largely addressed through monetary policies in thesense that you should have an interest rate structure that does not favor thekind of asset ination we have.

Yes, eventually well have a collapse or deationary bust in asset markets.

Thats inevitable. Printing money can postpone such a collapse but eventuallythe bust will occur. Every ination, whether consumer price ination or assetination, eventually comes to an end.

Well, rst of all we had the gold bull market from 1999 to 2011 and wevebeen in depression since then. If I compare the credit growth, monetarygrowth and asset growth among central banks and the whole banking wealthaccumulation that we had in the last fteen years, I dont think that gold isterribly expensive. I hold physical gold for the reason that one day I may notbe able to remit money from one country to another. I dont know when thisnal systemic collapse that I am foreseeing will occur but all I can say is thatin monetary, inationary times, when ination is measured properly, in realterms: stocks usually dont do particularly well but gold does.

Nobody knows how the world will look like in ve years time. I dont think thatgold investment is the best over the long run, because it doesnt generatecash ows and doesnt grow. But I think it makes sense to hold it for

diversication. My business depends on nancial markets, so I own stocks,bonds etc. Most of it is in paper and I want to be diversied out of paperinto something that is not the liability of someone else. In the bank account,I depend on the bank. If I own corporate bonds, I depend on the corporationto pay me back. In the case of physical gold, I dont depend on anyone to pay

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me back, but I do rely on well-established property rights. All governmentsnow largely consist of bureaucrat socialists that are anti-wealth and thisalso goes for the Swiss bureaucrats. If a proposal to collect all the gold frombanks and Swiss owners of gold comes up, they are likely to follow through.I think that the collection of ones gold by the bureaucrats is the largest riskwe have today.

I do agree with you on the fact that bureaucrats pose the largest threattoday. However, I am still condent that the decentralized politicalsystem in combination with the last remaining direct democracy andvery strong respect for property rights in Switzerland limits the powerand actions of the politicians in Switzerland. At the same time, thispolitical structure assures that political decisions take much longertime than in any other country on this planet. Nevertheless, we atGlobal Gold monitor regulatory changes on an ongoing basis to be ableto optimally advise our clients should this become necessary.

Global Gold:

Thank you very much, Mr. Faber, for the interview. It was a great

pleasure and an honor to hold this in-depth interview with you today.

Global Gold Inc.Herrengasse 9

8640 RapperswilSwitzerland

[email protected]

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global gold talks to marc faber - july 2014

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