Marc Faber: Expect A Deflationary Bust In Asset Markets

Claudio Grass, Managing Director of Global Gold Switzerland, talks to Dr. Marc Faber about investing, markets and precious metals. Subscribe on to receive Global Gold interviews, outlook reports and book reviews for free in your mailbox.

Global Gold: Let’s talk about the ongoing power shift from the West to the East.

Mr. Faber: Well, basically, everything is connected and interrelated. We had a colonial system until the end of the Second World War, followed by the rise of individual countries. And over the last twenty-five to thirty years what we had was the rise of China with 1.3 billion people. Because of China’s rapid growth and 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 the size of trade between Africa and China. But today, the situation is reversed. As a result, China has gained large geopolitical influence due to its growing economic relations. This helped shift alliances from the US to the East, which has led to tensions. China has many provinces that are larger than a European country and as an economic block, China is huge! It dwarfs everything else in Asia. But now China is surrounded by military bases in Asia, by American aircraft carriers and by the signed defense treaties between the US and Japan. Moreover, the Chinese never forgot that Japan had attacked them numerous times over the past 200 years. Additional disputes between China and its surrounding countries, Vietnam, the Philippines, Taiwan, and especially Japan about maritime rights will cause further tension in the region.

Despite these tensions, the power shift is still underway. You have a superpower like the one Britain was until the First World War and you have a rising power like Germany whose economy in 1910 overtook that of the British. Here you have the superpower that believes in the old order and the new power that believes it should have more influence on global affairs. The resulting tensions create an environment that is favorable for confrontation. But it doesn’t have to come to war. In my view, China’s long-term objective is to kick out the US from their military bases, particularly after Hillary Clinton and Mr. Obama announced the American Pivot to Asia two years ago; it was a kind of direct attack or confrontational behavior towards China.

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

Mr. Faber: Today, we find ourselves with the same anti-free market interventionists who set up the Federal Reserve, the US Treasury and the US government. These same incompetent professors and academics also run foreign policy in America and then go and intervene in the affairs of Libya, Syria, Egypt, Iraq or Afghanistan. And as can be expected, they mess up just about everything. We have this Wolfowitz Doctrine that says they don’t want to tolerate any other major power such as the Soviet Union or China. So they want to contain these countries. When these countries become economically more and more important, the tensions, in my view, are only going to increase.

I think it’s unlikely that the West will take any action. First of all, they don’t have the money. Second, a survey done by the US military stated that over 71% of their youth are unqualified to join the military for a number of reasons, including educational, behavioral and health conditions. So, if 71% of American youth are not qualified, it means the US doesn’t have the labor force to actually implement its foreign policies. And so they resort to private contracting companies that create more problems than solutions.

I’m very negative about the Middle East. I think the whole region will blow up. Eventually Iraq will be divided into three different countries: the Kurds, the Sunni in the North and the Shiites in the South. All I can say is that, in general, financial markets are not paying sufficient attention to this.

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

Mr. Faber: I think it’s a symptom of the new world order I was referring to where the balance of economic power has shifted to Asia and emerging economies. This becomes very clear if you look at European companies. Where do they grow? 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 US foreign policy is. The US supported the opposition in Ukraine thinking that Russia will do nothing. But Crimea is strategically important to Russia since it gives their fleet access to the Mediterranean and the Middle East. And so, by supporting the opposition in Ukraine, the Americans essentially removed a democratically elected president. He may have been incompetent, but he was democratically elected nevertheless. That’s democracy! In democracy you have incompetent people at the top. The Americans also thought they can push the Russians a bit further by trying to lure Ukraine into NATO. That was a step too far and so the Russians reacted by signing a gas deal with China! The significance of this deal lies in that the payment will no longer be made in Dollars but in local currency, the Ruble or Yuan. I think this is symptomatic of an empire, the US, in decline and a global currency in decline as well. Don’t forget, until WWI, the world currency was the British Pound and its importance diminished afterwards. And now we have a gradual lessening importance of the US Dollar.

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

Mr. Faber: Well, nobody knows for sure and I’d like to remind you and your readers that China is unlike any other country. It is twice the size of Europe and the US combined 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 you look at export and import statistics of countries like South Korea, Taiwan, Hong Kong, Singapore, Thailand, Malaysia, and their trade figures with China, you will find it is not growing or is hardly growing. Under the interventionists in China there will obviously be monetary easing, fiscal spending and so forth, like anywhere else. And so, they can maybe postpone the problems but in general, I would say the remarkable thing about the last twelve, fifteen years is that in the case of metals, Chinese consumption has grown from 12% of world consumption in year 2000 to now 47% and this Chinese consumption of industrial commodities was just 2 or 3% in 1990. So we’ve had this huge expansion in Chinese appetite for resources. My view is that China’s demand 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 will obviously grow in the long-term. But for the industrial commodities, it will slow down meaningfully. And so the impact on other emerging economies where we have hardly any growth at the present time, will be felt. As is the case in the West, real growth will be very difficult for many Asian economies.

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

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

We’ve seen what happened before with the bailout of Mexico in 1994 and the Asian crisis in 1997. If Mexico had failed at the time, we may have had a more significant setback in emerging economies in the mid-1990s, but we wouldn’t have had the depression that followed in 1998. So in my view, government intervention can postpone the problem but it may also make the situation actually worse by not letting the market clear as soon as some signs of problems appear. If, for example, LTCM hadn’t been bailed out, I don’t think the whole system would have collapsed. Some people would have lost money, I guess Goldman Sachs and the counterparties of LTCM, but it would not have been a threat to the global financial system. But this is what’s being presented to the public by the interventionists, who argue: ‘Had we not intervened, the whole world would have collapsed’.

That brings me to the next question. We at Global Gold think in scenarios. We don’t believe in models, but rather use our common sense and history as our guide to try to understand ongoing developments and 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 monetary system or wars), which we weight with 20%. Do you think we are overly optimistic or pessimistic?

Mr. Faber: Well, my view is that the current monetary arrangements are not sustainable in the long run. We have sensitive, overly indebted Western economies in the US and Europe. It is not visible yet, because the unfunded liabilities are probably not accounted for. A company under GAAP would have to account for them, but governments don’t have to. What this means is that the benefits of people will eventually have to be cut either through inflation and adjustments that are below the true cost of living increases or through reduced payments to the individuals. With benefits going down or through outright expropriation over the last two or three years, more and more voices have come up talking about wealth inequality. I previously discussed the problem of wealth inequality brought about by expansionary monetary policies where the main beneficiaries become the asset holders. Wealth inequality should be largely addressed through monetary policies in the sense that you should have an interest rate structure that does not favor the kind of asset inflation we have.

You just mentioned that central banks print like there’s no tomorrow and the debt levels, especially unfunded liabilities are at all-time highs. Do you think will we see a deflationary bust or a Zimbabwe style hyperinflation? In other words are we approaching the end of a long-term debt cycle?

Mr. Faber: Yes, eventually we’ll have a collapse or deflationary bust in asset markets. That’s inevitable. Printing money can postpone such a collapse but eventually the bust will occur. Every inflation, whether consumer price inflation or asset inflation, eventually comes to an end.

That brings us to gold. We at Global Gold consider physical gold stored outside the banking system as an insurance policy against the collapse of the actual monetary and financial system. We are, therefore, not going to ask you where you see the gold price, but rather, could you elaborate on why you personally hold gold and why it makes sense in your view?

Mr. Faber: Well, first of all we had the gold bull market from 1999 to 2011 and we’ve been in depression since then. If I compare the credit growth, monetary growth and asset growth among central banks and the whole banking wealth accumulation that we had in the last fifteen years, I don’t think that gold is terribly expensive. I hold physical gold for the reason that one day I may not be able to remit money from one country to another. I don’t know when this final systemic collapse that I am foreseeing will occur but all I can say is that in monetary, inflationary times, when inflation is measured properly, in real terms: stocks usually don’t do particularly well but gold does.

Nobody knows how the world will look like in five years’ time. I don’t think that gold investment is the best over the long run, because it doesn’t generate cash flows and doesn’t “grow”. But I think it makes sense to hold it for diversification. My business depends on financial markets, so I own stocks, bonds etc. Most of it is in “paper” and I want to be diversified out of paper into 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 corporation to pay me back. In the case of physical gold, I don’t depend on anyone to pay me back, but I do rely on well-established property rights. All governments now largely consist of bureaucrat socialists that are anti-wealth – and this also goes for the Swiss bureaucrats. If a proposal to collect all the gold from banks and Swiss owners of gold comes up, they are likely to follow through. I think that the collection of one’s gold by the bureaucrats is the largest risk we have today.

Global Gold: I do agree with you on the fact that bureaucrats pose the largest threat today. However, I am still confident that the decentralized political system in combination with the last remaining direct democracy and very strong respect for property rights in Switzerland limits the power and actions of the politicians in Switzerland. At the same time, this political structure assures that political decisions take much longer time than in any other country on this planet. Nevertheless, we at Global Gold monitor regulatory changes on an ongoing basis to be able
to optimally advise our clients should this become necessary.

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 will continue this discussion and cover a lot more at the upcoming BFI Inner Circle Wealth Forum taking place in Summerlin-Las Vegas, Nevada, September 29th and 30th. While Mr. Faber will not be able to join, Claudio Grass, Managing Director of Global Gold, will be part of a panel of speakers that will dwelve further into the current markets and geopolitical conditions and what investors, particularly US investors, can do to internationally diversify and prepare themselves for what’s ahead. What role can precious metals play and how can Global Gold help you? Visit the BFI IC Wealth Forum for more info and registration.



About Dr. Marc Faber: He is the worldwide renowned Swiss investment advisor and fund manager. After obtaining a PhD in Economics at the age of 24, Faber worked in New York, Zürich and Hong Kong, and has settled in Hong Kong since 1973. In June 1990, he set up his own business, MARC FABER LIMITED. “The Gloom Boom & Doom Report” is Dr. Faber’s famous monthly newsletter which highlights unusual investment opportunities. He wrote several books including “TOMORROW’S GOLD – Asia’s Age of Discovery” that appeared in 2002.

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