With Marc Faber, Author of the weekly newsletter “The Gloom, Boom, & Doom Report”
Swiss economist, fund manager, and legendary market bear Marc Faber joins Steve to discuss stock markets in 2017, central banks and their effects on stock prices, the performance of precious metals, and the importance of diversification.
2017 Bear Market
Steve kicks off the conversation by asking Marc about his view of markets and where they might be heading in 2017. Faber admits that his bearish positions on US stocks over the past two years failed to pan out. He theorizes that this had to do with the fact that, while in 2014 the Federal Reserve stopped “printing money” (via “asset purchasing” or “expanding their balance sheet” also known as QE or “quantitative easing”), central banks in Japan and Europe picked up the slack with more aggressive money printing of their own. According to Faber, this provided more liquidity to Japanese and European investors, who, in turn—partially because of the dollar’s rising strength—flocked to dollar-denominated assets like US stocks and bonds. As far as a possible 2017 bear market, while Faber believes that US stocks are highly overvalued, he stops short of predicting how long this trend might last. Having underestimated the power of central banks in the past, he now expects the Federal Reserve would intervene with more money printing if markets were to take a significant tumble. His advice for those that are bullish on equities is to branch out into European and emerging market stocks which are comparatively cheap, despite strong returns in 2016. He lists several emerging economies that enjoyed robust double-digit growth in the past year as evidence of the markets earlier mispricing of these markets.
Marc Faber Stocks
Steve raises the point that predicting markets is difficult if not impossible and asks whether the average investor ought to ever make investment decisions based on market predictions that so often turn out to be worth no more than wishful thinking. Faber strongly agrees, going so far as to suggest that anyone claiming to know where the stock market will be in 5 years is a charlatan. Staying true to his thesis about central banks, he notes that their manipulations of markets are as powerful as they are hard to forecast. The best antidote to blindly and, perhaps, unconsciously following market predictions in Faber’s eyes is having a globally diversified portfolio. Such a portfolio would aim for relatively good as opposed to fantastic returns and would include, in his words, “some equities [a mix of US and foreign], some real estate, some bonds and cash, and some commodities, specifically, for the individual investor, some precious metals.”
Central Bank’s Balance Sheet Expansion
Returning to the topic of central banks, by Faber’s count the Federal Reserve, Bank of England, Bank of Japan, and ECB (European Central Bank) have expanded their balance sheets 17 times since 1998. This track record prompts the unanswerable question, “Will they do this another 20 times in the future?” He’s convinced that if the stock market were to revert even just to its lows in February 2016, the Fed would launch QE4—this time by buying stocks—and that they would have strong political support for such action. He points out that one of the fundamental problems with such central bank interventions to inject liquidity into markets is that they can’t control where the money will flow or what effects it may have on currencies. Unintended consequences abound.
The discussion turns to gold and precious metals, with Steve observing that gold prices are difficult to explain but seem to rise when currencies are devaluating, which often occurs when there is unusual economic uncertainty. Faber adds that this is also true of investor confidence in financial assets. When confidence is low, precious metals (and other traditional assets like real estate) tend to soar. While gold outperformed many asset classes in the wake of the 2008 recession, after a few years it reverted to a vicious bear market in 2011. Faber believes this bear market is over. This timing call, and the fact that gold rose from $255 to $1200/oz. after 1999, leads him to recommend holding some precious metal shares.
Dr. Doom, Bearish “About Everything”
Steve remarks at the end of the interview that he has a different sense of Faber’s thinking and strategy than he had beforehand, noting that he’s less gloomy and a strong supporter of portfolio diversification. Faber’s response is that he’s probably gloomier—in the long view— than Steve reckoned. In fact, he holds extremely bearish views “about everything” and worries that governments around the world are bankrupt—financially and intellectually—and that central banks will continue printing money as their only solution to this situation. This doesn’t mean that he expects asset prices to tank. On the contrary, he thinks some will rise, but he does expect that, over time, money will lose purchasing power and precious metals will gain.
Steve Pomeranz: I’d like to welcome Marc Faber. Marc is known for publishing the widely read monthly newsletter, “The Gloom, Boom and Doom Report” which is very well known for its quite contrarian investment approach. The report can be found at GloomBoomDoom.com. Just to note, we love contrarian points of view here because they challenge us to retest our own view of the world. All investors really should view all sources whether they’re comfortable or not. Welcome Marc Faber to the show. Hi, Marc. Welcome.
Marc Faber: Thank you very much for having me.
Steve Pomeranz: Marc, what is your current outlook on the US stock market?
Marc Faber: Basically, for the last two years I’ve been wrong in the sense that I thought the market would go down simply because of the high valuations we have in the US. I think that what happened is the Fed stopped printing money at the end of 2014. In other words, they didn’t increase the balance sheet any further, but the Bank of Japan and the ECB and the Bank of England continued to increase the balance sheets. In other words, they printed money which weakened their currencies. When investors in Europe and Japan are flush with liquidity as a result of the asset purchases by the central banks and see that the dollar is strengthening, they pile into US assets, real estate, stocks, bonds, so the stock market has actually continued to be relatively strong.
The fact is simply that US equities now are extremely expensive by historical standards and, especially, compared to other markets in the world, say, European markets, emerging markets, and Japan. If someone is very bullish about equities, in my view, he should buy essentially non-US securities but securities, especially in the emerging economies.
Steve Pomeranz: I was going to ask you about that. Let me ask you this question about these kinds of predictions. You were making your prediction on a maybe a single or a few factors, but there were other factors at play that you didn’t see or that is part of the difficulty of making these future predictions. Is it worthwhile to really invest based on these kinds of predictions which are so difficult to make?
Marc Faber: You are raising a very good point. This is one reason I advocate that, in the absence of knowing how the world will look like in three, five or 10 years time, the investor should always be diversified with some equities, some real estate, some bonds and cash, and some commodities, specifically, for the individual investor, some precious metals. With that basket, you’re not doing fantastically well, but at least relatively well. I believe that whoever claims that he knows where the Dow will be in five years is a charlatan because to predict the markets is difficult. To predict markets when there is manipulation by central banks is impossible.
Steve Pomeranz: I don’t know if you’ve ever heard this saying from Sir John Templeton. He said when asked where the markets were going to go or where they’re going to be, he said he doesn’t know where the next 1,000 points are going to be next year, but he knows where the next 5,000 points are going to be. Do you believe in that?
Marc Faber: My science is this. We have central banks that have increased…the major central banks I’m talking about, the Bank of England, the Federal Reserve, the ECB, the Bank of Japan. They have increased the balance sheets by 17 times since 1998. Can you tell me or can anyone tell me whether they want to increase the balance sheet another 20 times in the future? In my view, this is a real possibility. Stocks could go up and become even more overvalued, and if stocks go down—say the S&P today closed at 2,300. If it drops to the low of last February which was 1,810, I guarantee you that the Fed will start QE4 and buy stocks, and Trump will be cheering that. He doesn’t want to have a recession. He doesn’t want to have a collapsing stock market. The stars are aligned for higher money printing, for more money printing. Now when you print money, there’s one problem. You don’t know exactly where the money will flow to. It can essentially boost US stock prices but depress the dollar. It can also boost precious metal prices more than US stocks. It can maybe boost bonds, or it can boost commodities, or it can boost wages. [inaudible 00:06:17] inflation [inaudible 00:06:18]. You don’t know exactly what will happen. That’s why I say you have to be diversified.
Steve Pomeranz: Most of my listeners, I guess probably the vast majority, earn their money in US dollars, and they invest the same. They invest with US dollars. We look at international markets which have been weak in US dollar terms for so many years. I’m thinking about the developed countries as a whole, France, Germany, Japan based upon the broad indexes. So far this year the developed country and emerging market indexes have outperformed the United States. Do you see that as a trend that could continue this year?
Marc Faber: I have to correct you slightly. Last year Brazil was up 66% in US dollar terms from a very depressed level. Russia was up 55% and Kazakhstan, 60%. Thailand was up 22%, and many other Asian markets outperformed the US. Gold, by the way, outperformed the US dollar. It went up in US dollar terms. I can see or that would be my view as I said before, if you want to own equities, I would own equities that are relatively depressed namely emerging markets. Number two, we had a huge bull market in precious metals until 2011. Then we had a bear market. I think that bear market has come to an end. During that bear market of precious metals—2011 to 2015 December—the gold shares, and silver shares and platinum-related shares collapsed completely, in some cases by 90%. Since then they have recovered. They’re still relatively depressed, so I would buy some precious metals here and some precious metal shares. I would also look at agricultural commodities and place on agriculture like plantation companies, fertilizer companies, et cetera.
Steve Pomeranz: It’s very difficult to understand what moves gold. I would think that during the ‘08 crisis up through 2011, it was really a fear of the devaluation of the currency and the feeling that when the economies are so weak the faith in currencies diminishes; the faith in real things like precious metals increases. We don’t really have that now. We have very strong, lots of faith in currencies with a hint of inflation, but I don’t know if there’s a direct correlation between gold prices and inflation. What do you think would drive gold prices higher?
Marc Faber: I think, in general if investors are confident about financial assets, it’s not particularly good for gold prices. But if they lose faith in financial assets and in the purchasing power of money, they then migrate to other assets including real estate, farmland, gold, and so forth as happened in the ’70s. My sense is that interest rates may go up, but we see how hesitant the Federal Reserve is in increasing rates. In other words, they will lag behind the rate of inflation and also the rate at which the cost of living is going up meaningfully. In other words, paper money…if you have paper money, even in ’99 you got out of the stock market, you kept paper money in the bank between ’99 and today, your purchasing power has lost considerably; where if you were in shares, in bonds, in precious metals, you did fine. Gold is up from ’99, $255 to $1,200. Who’s to complain about that? It had a correction after 2011.
The media and, of course, some banks and their economies who want to essentially abolish cash, they hate gold. The funds manager last year, every year says, “Financial stocks did well.” They did well after November. They say, “Energy stocks did well.” Yes, they did well because the oil price doubled. What they don’t talk about is, for instance, that gold shares went up something like 100%. Barrick at the end of 2015 was at $6. Freeport, $6 and so forth and so on. They had huge moves, but, of course, the portfolio managers, they hate to tell their clients that they missed these moves.
Steve Pomeranz: It comes down to this one most important point, and that is it’s the price you pay for things that really matter. It’s buying these gold stocks when they’re depressed, buying oil stocks when they’re depressed. Unfortunately, we’re out of time. My guest is Dr. Marc Faber. He is the publisher of “The Gloom, Boom and Doom Report”. You know, Marc, I’ve got a different little sense from you today that you’re advocating more diversification and less gloomy predictions about the future.
Marc Faber: I want to tell you, of course, I’m extremely bearish about everything, but because I’m so bearish I think that within my bearish scenario there is no other option for our Western governments, which are all bankrupt, bankrupt financially and also intellectually, that these governments will all continue to print money. In nominal terms, some assets may continue to go up whereby the purchasing power of money will lose against precious metals. That would be my view.
Steve Pomeranz: Dr. Marc Faber, talking to us from Thailand today. Thank you so much for joining me.
Marc Faber: It’s my pleasure. Bye-bye. Thank you.