FRA is joined by Marc Faber to discuss his outlook on 2017, particularly the
effects of current events in the US, India, and China.
Dr Marc Faber was born in Zurich, Switzerland. He went to school in Geneva
and Zurich and finished high school with the Matura. He studied Economics
at the University of Zurich and, at the age of 24, obtained a PhD in Economics
magna cum laude.
Dr Faber publishes a widely read monthly investment newsletter "The Gloom
Boom & Doom Report" report which highlights unusual investment opportunities,
and is the author of several books including " TOMORROW'S GOLD – Asia's Age
of Discovery" which was first published in 2002 and highlights future investment
opportunities around the world. "TOMORROW'S GOLD" was for several weeks on
Amazon's best seller list and is being translated into Japanese, Chinese,
Korean, Thai and German. Dr. Faber is also a regular contributor to several
leading financial publications around the world.
A regular speaker at various investment seminars, Dr Faber is well known
for his "contrarian" investment approach. He is also associated with a variety
of funds and is a member of the Board of Directors of numerous companies.
2017 Outlook
We don't know what will happen. We don't know much about the past, we don't
even know much about the present, and we know nothing about the future. Markets
nowadays are not normal markets; these are markets that are manipulated by
central banks who can print an unlimited amount of money. They can buy all
the outstanding bonds and equities, and you socialize entire economies if central
banks buy all the assets. It is probably dangerous to be 100% in cash because
you'll lose an enormous amount of purchasing power. We didn't have an enormous
amount of consumer inflation, but we had a colossal amount of asset inflation.
Central banks will continue to print money but one day things will collapse.
If you look at the last few years, not all asset prices have gone up. The next
ten years will be a period of asset deflation.
Central banks globally are interested in generating a certain level of CPI
in order to ease the burden of government debt over a long period of time.
If you have deflation, the burden of an overleveraged system is very high.
Who benefits the most from inflation and is hurt the most by deflation? Governments.
The US inflation rate isn't very high, but everyone is having rent increases,
food price increases, and insurance increases. Why is consumption relatively
weak? Most young people don't have any money after paying the rent, insurance
premiums, and taxes that have gone up.
Increase in Infrastructure Spending
Fiscal policies that are expansionary will necessitate expansionary monetary
policies otherwise interest rates will go up substantially. These fiscal policies
are not necessarily favorable. When interest rates tend to go up, the Fed will
be very reluctant to increase rates significantly. If the inflation rate moves
up, the Fed will increase rates but in real terms rates will stay negative.
The cash holder will lose out regardless, in terms of purchasing power.
If you look at the recent literature of the establishment economist, they
advocate the abolition of cash because it will "eliminate crime", which is
completely nonsense because the big corruption is in governments and contracts
where money moves elsewhere. The other argument is that if the central bank
is deflationary, they could push interest rates into negative territory. This
is a subtle way to expropriate goods.
This is the mindset you have to be aware of, that central banks are screwing
over ordinary people's savings in order to save the financial market and over-indebted
governments that have outgrown their usefulness in terms of economic growth.
India's Cash Ban
They declared certain bank notes to be invalid. You had to turn them in and
there was a minimum limit that would be turned into the new bank notes. The
rich and the elite had advance notice to get rid of the cash. The fact that
86% of the money was turned in shows that there was very little illegal money
in the system. In India, if there is illegal money, it's in the hands of big
government officials and bankers and rich businessmen, who have ways to evade
all the rules.
It's a complete joke, this Indian "experiment". The idea was fed to the Indian
government by some think tank or economist in the US.
Governments always have a way to maintain and increase their power, and they
can tell the public that one of the problems of criminality is cash. There
is some level criminality related to cash, but if you ban cash it will continue
or even increase; there will be so much cyber-crime you won't know where to
start. It's just a pretext to give power to central banks. Under Trump maybe
some of the power given to central banks will be removed, but that will only
last until the next recession. If the stock market declines 20%, we'll have
another QE for sure. Whatever they call it, it'll be the same: money printing.
Trump versus Reagan
Trump has been frequently compared to Reagan. The difference between Trump
and Reagan is that asset prices were very depressed when Reagan became president.
It was no higher than it had been in 1964. Trump has huge headwinds. Interest
rates won't go down very much and Trump has an overvalued Dollar.
This high valuation of equities and low bond yields bring about a problem
of pension fund liabilities. The pension fund system is basically bankrupt.
They have to cut the pensions they give to pensioners or increase the contributions
meaningfully, which is like an additional tax. So with low interest rates the
Fed has actually created numerous problems. Most people are not wildly bullish,
but they think asset prices will go up, along with real estate prices. But
actually it's started to go down in the last six months.
The financial market today, globally, is disproportionately large compared
to the real economy. That was very different in 1980.
What's happening in China
The Chinese economy has definitely slowed down, and will continue to slow
down in the long run to a growth rate of about 4% per annum. China has a gigantic
credit bubble, which will hurt consumption at some point because the consumer
invests in a lot of things at overpriced levels, and going to lose money. The
best thing for China is to have a serious recession, because that will clean
the system. Recessions are useful because they clean the system, the bad debts,
and most importantly if you have a capitalist system it wipes out misbehaving
entrepreneurs. That eliminates the competition and so the price level stabilizes.
But if the government steps in, then the price level is likely to fall. These
interventions by central banks with fiscal policies may actually aggravate
deflationary pressures instead of removing them.
The economic system leaves us in a free market where old companies that look
backward and don't innovate are wiped out, and that's why we have progress
in the world. If we don't have that, we're going back to a socialist system.
There's no question that a slump in China will have a huge impact in the world.
The US is a slightly larger economy than China, but the US is over 70% consumption,
and of that consumption it is 70% services. China is still a manufacturing
center, and there is huge capital spending in China. If China really has a
recession, the demand for raw materials will plunge. This is a different world
from the 1950s, when the US was dominant. China is the largest trading partner
of 120 countries compared to the US being the largest trading partner of 74
countries.
Investment Protection
The only protection is to diversify because we don't know what will happen.
An investor should own some real estate, and invest some money in equities.
There are always pockets of value somewhere, but what the fund managers will
never tell you is that the best performing sector last year was mining stocks,
not energy. Big institutions don't want to tell you that because they hate
gold.
Abstract by: Annie Zhou
Podcast: 38 minutes 44 seconds
