“America is full of gangsters and frauds. Western Europeans are spoiled brats,” says MARC FABER, a world-class investment powerhouse.
You focus on investing on the basis of fundamental value. What do you make of Warren Buffet who uses strategies similar to yours?
I think that he was very successful in the Eighties and the Nineties. He hasn’t made any greater money in the last ten years. There is no art involved in getting rich in growing markets, but at a time when the markets are fluctuating up and down. When everything is going up and you maintain the philosophy that you are investing for the long tem, you will get rich. But I agree with Buffet that the greatest amount of money can be got on titles that are not cyclical. And that it is good to avoid investments into new technological titles, because there are thousands of them at the beginning, but in the end, only one or two of those companies will succeed and survive in the sharp competition. I appreciate Buffett’s approach to investing, but I definitely do not consider him to be a genius.
And who is, according to you, a true genius?
There are geniuses, for example, in mathematics, in physics, and in sport.
And in economics?
Yes, there, too. People like Ludwig von Mises, Friedrich Hayek, Joseph Schumpeter, Wilhelm Röpke, and others; they were economists with very profound knowledge of history. I don’t value those who are sitting at a university, putting together theoretical models. Simply put, economics concerns all aspects of human life.
Hayek, Mises… What is your opinion of the Austrian School of economics?
I am not dogmatic, in the sense that I would only accept a single set of economic theories. I do think, however, that Americans lack a sufficient historical approach to the study of economics. Economics: that’s everyday life. Just take a look out the window – one person is buying, another is selling, another yet is going for a train or going home; that is economics. The people who work at universities do not see it that way. They have their models, which do not encompass reality. In my opinion, the Austrian School – and its historical success proves it – far better identifies the causes and consequences of economic cycles. As I have said, however, I am not an Austrian-School dogmatist – I do not think, for example, that it is necessary to avoid the system of uncovered money; it should only be introduced with a certain discipline.
You have similar favourites as Peter Schiff, who is now – because he predicted the crisis – an investment guru, in the way you are. What do you think of him?
I would say that he is a relatively clever man. But I probably would not entrust my money to him.
Why? Has his star risen too fast?
He is capable of causing real havoc. I wrote the foreword for one of his books. Let us say it this way: he at least understands where the real problems lie. Many people can’t even tell that. But his conclusions last year were erroneous. He advised avoiding the US dollar and investing in developing economies. But the developing markets collapsed and the dollar shot up. But generally, in the long-term, I agree with him. The dollar will indeed be a weak currency. But sometimes, when liquidity is choked, the dollar goes up, which happened last year.
Do you think then that Schiff is good at describing general shifts and trends, but his timing is wrong?
What does anyone know about timing… It is very difficult to determine what will happen when and how. Generally, I think, he sees things right. But as I have said, he can cause real havoc around himself – he can shout his opinions to the world convincingly.
Some people reproach you for the same – that you can guess the trends well, but the timing is worse…
In 2001, I wrote the book Tomorrow Gold. Go and buy it. I recommended investing into commodities and on Asian markets. And in 2007, I started to be very pessimistic about the entire global economy. When the US stock exchange index Standard and Poor’s 500 reached its bottom early this March, I said in an interview for Bloomberg: buy stock. You can look it up, see for yourself. When someone comes to me and says that my timing is bad, I smile – sometimes it’s good, other times it’s worse; that’s how it is. But whoever listened to me in 1999 or 2000 and bought gold is now four times richer. Tell me, please, what else has appreciated four times in the last eight or nine years.
Into what stock do you presently recommend investing?
It is as if you asked a doctor what cure he is currently recommending to people. What I want to say is that it all depends on the specific situation of the particular individual: what his investment portfolio is; whether he has already bought real estate; how much he has in cash; whether he holds any stock, and if so, how much (and which); whether he holds bonds – and also in what currency he has all that.
OK, let us take for example an investor with a small income. A beginner.
If I only had very little money, the first thing I would do would be to buy a house or an apartment. Having a roof over one’s head is the foundation. And someone who has kids should get insurance. So that the kids, should the worst happen, could study. Only once you have a roof over your head and insurance, you can start looking at stock. If I had for example a hundred thousand dollars in cash, I would presently invest about twenty percent into stock.
And into what kind?
Well, India is a large country. China too, Vietnam is developing rapidly, Latin America is a large continent… For many years, the West was getting rich, first through colonialism and later because forty percent of the world was under the control of socialist and communist – economically inefficient – regimes. Rich western countries became even richer and the standard of living there went up significantly. That has changed in the last ten years. Poor regions of the world – China, India, Vietnam, Eastern Europe, Latin America, the Near East, the former Soviet Union, and others – are slowly getting rich and, above all, will continue to get rich. On the other hand, there is nearly no growth to be expected in the West. For example, my daughter will probably have a worse standard of living than I had.
Marc Faber (63)
The investment guru was born in Zurich, where he also studied economics. In 1978 – 1990, he worked as the director of the Hong Kong branch of the investment bank Drexel Burnham Lambert. Since 1990, he has been managing his own investment company, Marc Faber Limited. He successfully predicted the 1987 stock exchange crash, the Asian crisis, and the popping of the technology bubble. He publishes the novel investment monthly The Gloom, Boom & Doom Report, which has many subscribers all over the world – including, reportedly, Bill Gates. Faber lived in Hong Kong for thirty years, and for the last seven in the north of Thailand. He says that his Thai wife Supatra is exceptional for an Asian, because she does not conform to her husband too much. Faber has a twenty-seven-year old daughter and loves motorcycles, of which he has several. His wife drives a pink Porsche.
You are even predicting that a large segment of those living in the western world will grow significantly poorer. Why exactly?
Governments in the West simply promised too much. In the Czech Republic, you know well that socialism has totally failed, but the western world is now headed towards – socialism. Governments are increasingly binding themselves to supporting healthcare, to various social programmes, and the taxation is sky-high. And European salaries are still high compared to Asia. That is why it is more expensive to get a business going there. In China, you get the idea of building a factory and you simply do it. You give employees two or a maximum of three hundred dollars per month and you can start producing. While in Western Europe, governments are coming with such and such regulations, and such and such restrictions. Before your factory is built, your costs are two hundred percent higher than in China or in other developing markets. And then those social security and health insurance payments… All added up, it is not competitive at all.
And is this bothering anyone?
The Americans or Europeans are saying to themselves we are so clever, we are inventing software – and those stupid Asians, they work with their hands. Of course, there are many smart people among the billions of Indians and Chinese, who are inventing and innovating, who are moving the economy forward. Compared to them, the people living in France, Germany, Switzerland, or Britain are spoiled brats. You ask them to copy this and that document and they will tell you that it is not their job. Is it possible to do business when you are employing idiots like that?
And what about Czechs? Are they, too, spoiled brats?
No, in the Czech Republic, in Eastern Europe in general, it is a bit better, although not entirely flawless. The experience and memories of socialism are a deterrent, and when young people can take advantage of the open market economy, they are motivated to take advantage of the opportunity and to bring their standard of living up to the level they know from Western Europe. And that is happening to some extent. People are incomparably better off than twenty or thirty years ago. By the way, I first visited Prague in 1968. I came, I think, on the eighteenth or nineteenth of August, simply just before the Russian invasion.
What was happening?
I was staying right next to the Czech Radio building. Everywhere around me were tanks – and among them, surrounded, was my Volkswagen. I met a girl in a nightclub who offered to take me with her to the countryside to avoid the soldiers. I remember that in the Czech countryside – it was about a three-hour drive from Prague – people lived in extremely poor conditions at that time. Kitchen, one tap, toilet, and that was all. That girl’s father had suffered under the Germans and had hoped that things would get better later – but it was even worse under the Russians.
And what about China? It is still Red, and you are looking up to it.
China is not socialist, or communist. It is ultra-capitalist. True, it is a one-party system, but it has nothing to do with communism. They do not have democracy like, let us say, in Switzerland or Germany, where any idiot can vote in an election. Tens of millions of Communist Party members, however, elect local, provincial governments in China. And those people then elect the central committee of the party. So to a certain extent, there are elements of a democratic process – it is not that someone comes and declares himself the head of state, like it used to be in Latin America, for example. It is a process in which the best people get ahead. It is not perfect, for sure, but what is democratic in the US? I don’t see any democracy there: I only see frauds and gangsters. They have the Democratic and the Republican parties, and all of them, without discrimination, only steal and steal. All are essentially corrupt.
And they have a crisis, too. Recently, I have spoken to four Americans, however, four Nobel Prize Laureates, and all of them agreed that the worst stage is over. Do you agree?
Not entirely. It may be gone for this moment, but I don’t think that any of the essential problems that caused the crisis have been solved. When you ask those Nobel Laureates what caused the crisis, none of them will tell you that it was the excessive provision of credit in the economy and the related excessive growth in indebtedness. They are living on another planet. I am not interested in economics from the point of view of the Nobel Laureates; I want to know how to make money for my clients. I am interested in the economics of common sense. But look at Bernanke (the head of the US central bank, note by L.K.). He says that he has studied the 1930s Depression. But he never said what caused the depression, i.e., a rapid growth in the level of indebtedness. Simply, central bankers should always go on the alert when the level of the growth of credit in an economy exceeds the economy’s rate of growth. That situation is unsustainable in the long term. It can function for a certain period of time – for example from 1980 to 2007 – but not forever. There are limits, and after they are reached a growth in credit does not stimulate the economy any further. And we reached that limit during the financial crisis.
And it will not be better any time soon, warn many economists.
I see the problems with the present global situation in the very fact that the policy which led to the crisis – the artificially lowered interest rates and excessive level of indebtedness – has not changed. Indebtedness in the private sector (the debts of companies and individuals, mortgages) is going down, but that is offset by the indebtedness of governments. Those extensive measures – stimuli, quantitative easing, and printing money – did prevent the economies from dropping further down, but on the other hand, they did not cause them to start growing. I do not see any revival. On the contrary, within ten years a total collapse will come, and not only of markets, but also of indebted governments.
The printing of money brings the threat of inflation. You, furthermore, predict hyper-inflation for the US within ten years.
Economists such as Bernanke & Co. are overlooking the fact that inflation is not only a sign of the excessive growth of money in the economy, but also excessive growth of credit. Furthermore, the fiscal deficit in the US is two trillion dollars. It will not go down any time soon; on the contrary, it will more likely go up. The indebtedness of the US government will therefore grow dramatically and the Fed will have to keep interest rates artificially low even in the future – as it did after 2001. If the Fed increased the rates, the interest on the debt would increase dramatically, so it might lead to a situation when fifty percent of the budget – of what is collected from taxpayers – is expended solely on covering the interest on government debt. The only thing America will be left with will be the option to print more money. And that, in the end, will lead to high inflation, to hyperinflation.
You are talking about the US, but does something similar threaten Europe, as well?
Yes, probably. If the US prints money to such an extent, others will have to adapt. I don’t know how about in the short term, but in the long term people would be better off putting their money into property, gold, stock, real estate, bonds. Hyperinflation makes regular people poorer, whereas those at the top still make money.
So Goldman Sachs will continue to make money, while everyone else gets poorer?
Yes, that already applies now. In the last ten years, this happened to every average household in the US. Since 1968, the average real income of an American household grew from 40,000 to 50,000 dollars. But what is called real income is a government inflation statistic, which calculates a lower inflation level than there is in reality.
Why is inflation undervalued?
The consumer price index is compiled on the basis of a basket of goods and services. It depends a lot on how the individual items in it are valued. For example, a US household spends up to twenty percent of its funds on health insurance, but statisticians only calculate with seven percent. They undervalue food, energy, and other items similarly. They undervalue their share in consumption, in order to make it look better.
Are you expecting a second bottom – when stock indices drop again and a second recession comes?
When you print a really large amount of money – like in the 1920s in the Weimar Republic, in the 1980s in Latin America, or recently in Zimbabwe – you can give a boost even to the Dow Jones index, such that it will fly, let us say, from ten thousand to a hundred thousand points. Or even a million! You only need to print that money. But the index will drop in real terms – for example, in comparison with gold, as has been happening since 2000, or the currency will collapse. You might get the Dow Jones index up by ten percent, but the currency will depreciate by 95 percent. This is not how wealth is created. No country has got rich by printing money. Wealth is created through savings and through capital investments, which does not mean just the buying of new factories and new resources, but also expenditures on education, science, and research.
What do you make of the so-called paradox of thrift, according to which savings are harmful during a recession, because demand is reduced by postponing consumption, companies go bankrupt, and savings as such go down, paradoxically.
That is nonsense!
But many economists now consider it to be an acute threat. The same allegedly happened during the Great Depression.
Savings are created during economic expansion. During a recession – in the ideal case – you are only living off of those savings; you are dissolving them, which smoothens the economic cycle. The real problem, therefore, is that no savings were created during the expansion.
But representatives of the Fed, both Bernanke and his predecessor Greenspan, claim that the interest rates on the US mortgage market were not low before the crisis because of the Fed’s policy of cheap money, but because of the excessive thrift in Asian economies.
Nonsense, again! Asian economies do not have excessive savings; they simply only have savings. What is excessive thrift, please tell me?
Excessive in the sense that the money saved in those countries was able to flood the US market to the extent that it created pressure for interest rate reduction.
Asia really does have significant FX reserves, significant liquidity. That liquidity stems from the deficit of the US current account, which increased between 1998 and 2007 from 150 to 800 billion dollars. Simple. Why did the deficit grow so enormously? Because the trade deficit grew. And why did it grow? Because they printed money in the US! They kept interest rates at an artificially reduced level! That is why real estate prices sky-rocketed. Take for example, that people had a house for a hundred thousand dollars, with a mortgage for fifty thousand. Real estate started going up, so all of a sudden, the house was worth two hundred thousand. So those people took mortgages for two hundred thousand – at lower interest rates. They took the money – like from an ATM – two hundred thousand minus fifty is a hundred and fifty thousand! And with that, they bought a Mercedes or some Asian consumer electronics. That was excessive consumption! But it was caused by the monetary policy of the United States – and, yes, Asian economies then have current account and trade balance surpluses because of it. What they do with the money is absolutely up to them!
And it was in Asia that you settled a number of years ago. Why?
I did not want to live in Switzerland. We have democracy there, but we do not have freedom. In Asia, there isn’t democracy, but there is freedom. And I like Asian women.
Their appearance or character?
I am not that interested in character, it is the appearance I enjoy more. I have plenty of character in my family (laughs).
An abbreviated version of the interview, obtained in Vienna, was published in Týden No. 41 on 12 October 2009.