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Central Bankers Driving Us Toward Uncertain but Gloomy Future

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In a recent interview published at the Daily Bell, Anthony Wile engaged in a wide-ranging discussion with economist and investment expert Marc Faber.


Wile and Faber hit on a wide range of subjects from oil markets, to agricultural lands, to the future price of gold.

Faber said we shouldn’t follow the media lead and blame China for all of the current problems, echoing what Peter Schiff has said. Ultimately it all comes down to central bank and government actions – policies Faber views as unsustainable.

But what exactly does the future hold? Faber said there is no way to precisely tell, but it isn’t good:

It’s difficult to make predictions but it’s impossible to make any accurate prediction when you have interventions. We have a lot of interventions, and in the whole history of mankind, which is documented say starting 5,000 years ago up to today, interest rates have never, ever been this low. Never. And this is an experiment the professors and academics who never worked a day in their lives in a real job have undertaken. Nobody knows the precise outcome. I can only say the outcome will be negative.”


Read the full interview:

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 mis-predicted 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?

Marc Faber: I don’t know about the oil. We talk about the stock market being oversold; the stock market is, of course, nowhere near as oversold as energy prices. Energy prices are down from over $100 to something like less than $30, so that’s a huge decline. The stock market is down, say, 12% form its high a year ago, so it’s not a big decline percentage-wise. There are lots of stocks that are down 40%, that I concede, but as an index it’s not oversold, really. But oil is very oversold and sentiment is very bearish and all these analysts – to whom actually investors shouldn’t listen – who said when the oil price was around $90 that it would go to $150, now are saying it will go down to $10. They were wrong once; they will probably be wrong another time. But I don’t know. The problem with modern central banking, say in theory, the Keynesianism upon which central banks are essentially intervening, their argument is that with their fiscal and monetary interventions they can smooth out the business cycle. In other words, you have less fluctuations, you have less booms and you don’t have depressions. But in reality, the central banking forces have created much more volatility. When you think, the euro is the second largest currency in the world and it dropped 40% in less than two years. Same for the yen. So they have actually created more volatility, not less, and because for a while commodity prices went up combined with artificially low interest rates everybody was exploring for oil and also for gold and silver and other commodities, so the supply now is quite large. The demand was driven mostly by China but China had a massive capital spending boom, also because of easy credit, and so they overbuilt capacities. Now the demand is less and the supply is increasing, the prices dropped a lot. My view would be that the equilibrium price is somewhere between $30 and, say, $50. Oil could drop if there is a lot of liquidation to, say, $20 or even $15. It’s possible. But to realign demand and supply in the long run, I think an oil prices of probably around actually more than $60 is required because at $40 nobody makes money so nobody will explore for oil. That will then tighten the market over time, but not immediately. That could take time. A client just asked me whether he should buy oil. I told him I don’t know.

Anthony Wile: What about the status of mining now?

Marc Faber: Earlier I explained that in the US under the surface of the market there were some sectors that were very weak, and by far the weakest sector was the precious mining, where precious mining stocks frequently declined by more than 90%, and obviously precious metals prices have also gone down substantially from the 2011 high. I think that, and I always tell investors, you have to be diversified. You can’t put all your money into one thing. So for the allocation to precious metals and gold miners, I think present time, the risk reward in mining stocks is very favorable. In other words, maybe they’ll go down a bit more. In some cases they could go bankrupt, so you lose 100%. But if they move, they’ll move up 3, 4 times easily. So I think for an investor, and he would have to diversify in different mining companies, for the capital that he can allocate into precious metals, I think it’s a huge buying opportunity at the present time.

Anthony Wile: As for people protecting themselves at this time, you’ve stressed the importance of diversification. It seems more people are looking into leaving for “safer pastures” – second homes in international locations, second passports, etc. What’s your take on that? Some are noticing a sense of panic bubbling beneath the surface of society, at least in the US.

Marc Faber: I don’t think they should panic because the world goes on and people endure hardship, and they survive. I think clearly the big, big question in the years to come will be do democracies function or not. Because in a democracy, everybody votes for his benefits and so forth and the government in the end doesn’t have the ability to pay everyone’s benefits. So I think in future, Western governments will have to require elderly people to either work longer – in other words, you only get your pension when you’re 70 or 75, or you will get less pension or a combination of less pension and higher taxes and so forth. Governments in the Western world are basically bankrupt because they promised too much. Whether that is the states or the federal government or pension funds and so forth, basically they don’t have the money to pay for the benefits of everyone, so that creates uncertainty. Number two, what also creates uncertainty, not for poor people because they don’t pay any federal income tax – say 50% of Americans don’t pay federal income tax. But among wealthy people a big concern is obviously wealth taxes. I think that will come, probably first in Europe but in time, also in the US. Because in a democracy, it’s very easy to go to the electorate and tell them – and the fed will see to it that the media buys this stupidity – they will say, “Look. You know why the economy’s doing poorly? It is because the rich people have too much money and they don’t spend enough. Se we have to take the money away from the rich and give it to the poor.” The rich didn’t do anything wrong. It’s the Fed that did something wrong because by printing money they lifted asset prices, real estate, stocks, bonds, commodities, everything. So the people that have no money, they didn’t benefit, but the people that already had money, they benefitted enormously. So the Federal Reserve actually created wealth inequality and income inequality to a large extent. I’m not saying only, but I would say to a great extent. Then the Fed will say – having brainwashed the government, brainwashed the media – “We have to take it away from the rich and the rich will have to pay more tax.” I think in general I would probably support some better tax system on the corporate sector and on individuals, because there are individuals that pay very little tax because there are all kinds of tax avoidance schemes. But the corporations frequently hardly pay any tax. In fact, they get more subsidies from the government than they pay tax, so it’s an incredible situation. Some candidates in the US have argued for a flat tax. I also argue for a flat tax. This is the best system. It’s easy. You can fire 80% of the Internal Revenue Service agents. With a flat tax you just collect from everyone these taxes and no deductions and so forth. But you understand, the accountant lobby, the auditors, the lobbies, everybody’s against a flat tax because that closes loopholes. They pay less tax now than if there were a flat tax. In America I would say a federal flat tax would be around I guess 10%. They’d probably charge more, but in theory that would be enough.

Anthony Wile: As for central banking, as things become more chaotic, will we see it collapse? When?

Marc Faber: I don’t think it will collapse right away, but there will be a time in the future, and maybe it can be far away. As I said, the central banks will never, ever admit any mistakes. It’s like the federal government will never say, “We made a mistake. We messed it up.” No, they will blame someone else for it. So it may endure for quite some time, but I believe that one day the mess will be so complete that central banks will sit back and say to themselves, or there will be some reasonable person somewhere in the world that will say, “The system as we have of money printing doesn’t work and so we better have monetary discipline, and Bretton Woods was actually the mechanism with some discipline. It wasn’t perfect, but it was better than what we have now. So probably we can go to back to a system where gold has a role to play in the monetary system. But maybe before they do that they’ll take your gold away. That is a possibility, as well, as they did in 1933.

Anthony Wile: Yes, and people are concerned about that. Marc Faber: Rightly so, rightly so. As I said, the central banks will never admit any mistakes. So first they’ll go after the rich and tax them and then there is now serious discussion about introducing negative interest rates. If you have negative interest rates, essentially you will then have to do something against cash, because people could stash cash under the mattress or whatever, or gold. So they may go after these cash substitutes. I don’t think it will work, and it will irritate a lot of people. In, say, countryside villages you can have a system where people write each other ‘IOU so much,’ and then you go and exchange that in another shop and so on. There’ll be some kind of form to evade the elimination of cash altogether. I don’t think that it will work, and by the way, if they eliminate cash in the world the whole economy collapses by 20% because we have a large underground economy. Now, the economists will argue, well, the underground economy’s bad, but I would argue that’s probably the economy that functions the best, because there’s no government in the underground economy.

Anthony Wile: There’s a growing local currencies movement that seems to have gained ground in some locations.

Marc Faber: Sure, yes, everywhere in the world.

Anthony Wile: Other thoughts, given the state of the economy today?

Marc Faber: I would be diversified. It’s difficult to make predictions but it’s impossible to make any accurate prediction when you have interventions. We have a lot of interventions, and in the whole history of mankind, which is documented say starting 5,000 years ago up to today, interest rates have never, ever been this low. Never. And this is an experiment the professors and academics who never worked a day in their lives in a real job have undertaken. Nobody knows the precise outcome. I can only say the outcome will be negative. That I can say with certainly. But exactly how it plays out, I don’t know. Whether we will go into deflation and then inflation. We have inflation but in asset prices. We don’t have a huge inflation in consumer goods. We have high consumer service inflation, like education costs, healthcare costs, Obamacare. All Americans will pay at least 30% more for their healthcare insurance premiums, and for many families this is a lot of money. But how it will all end I don’t know. That’s why I say in this situation of not knowing, there’s no point in saying, “I’m putting all my money into this or all my money into that.” You have to be diversified. In general, I think most investors will do better by owning the property in which they live than by speculating in Chinese stocks about which they have no clue. Because, let’s say we live in a village of 20,000 people, or in a small town, maybe 50,000. It’s easy for an individual to check every day the prices in the newspapers and on websites, and by driving around he can see how many properties are for sale and where, the location, etc. At least he can, without researching too much, form a well-informed opinion. Is the market high or low? Is this property here on this street high or low compared to that over there? With stocks, he doesn’t have that knowledge. So I think for many individuals it’s probably better to be in properties because they don’t do anything more stupid with it. But not properties where they take a loan for 100% value. They should take a property and pay it off right away if they can.

Anthony Wile: Finally, where does the price of gold go from here this year?

Marc Faber: I think it will go up but, as I told you, many people think it will go down. I think it will go up also partly because, at the moment, everybody’s so bullish about the US dollar and I don’t think that the US dollar will go up a lot from here. Actually, philosophically I can’t believe that the US dollar would be a strong currency, certainly not against precious metals. I think the precious metals have adjusted by more than 40% from their highs. I think it’s kind of been a bottoming process, so I would think that this is actually time to buy precious metals. But if we have a debt deflation collapse then everything will go down, and probably precious metals less than other things.

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