faber interview

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February 23, 2011; Interview with Dr. Marc Faber:

Posted on 25 February 2011.

The McAlvany Weekly Commentary

with David McAlvany and Kevin Orrick

Kevin: David, before we go to our guest today, Marc Faber, the oil market is really onIt is very volatile. We are starting to see it hit those kinds of

numbers that we were seeing a couple of years ago.

David: Here in the states we have West Texas Intermediate above 90, we have Brent at108. We have gold, which is up in recent days, as much as 40 dollars. It is movingabove that $1400 level. Silver, impressively, above $34. Kevin, something verysignificant is happening in the metals market, which is worthy of note for all of ourlisteners. We have been in a trading range with the gold-silver ratio above 45, going back to 1983, and we just broke through this last Friday. We are trading at around 42currently.

The question is: Will it hold? Will silver maintain its advantage in the marketplace? Wewant to get an international perspective, not just on the precious metals and commoditiestoday, but on a number of things. Our guest has grown up in Europe, and has lived forthe last 30 years in Asia, so he brings, certainly, an international flavor.

Kevin: This is why we have Dr. Marc Faber on the program today. He is, of course,publisher of the Gloom, Boom, and Doom Report . He always has very insightful ideas asto the way we should be looking at the news right now.

David: Germany. This was the secondmajor upset following Westphalia last year. We had the German election in Baden-Württemberg in late March, in which we watched the dominance of the ChristianDemocratic Party relinquished.

How does that play into the future of the EU, thestrength of the currency, or the strength of the union, itself?

Marc Faber: I am not a political expert about European matters, and you should ask apolitician about this. But in general, the point is simply this: The German public is

probably not particularly happy about the fact that Germany bails out the PIIGS, in otherwords, Portugal, Ireland, and so forth. So there is great opposition to Germany being partof the EU, and Germany supporting governments, including Greece, which have abusedthe system by not maintaining fiscal restraint.

David: It seems that the pressures remain for Europe. The debts remain for theindividual countries. As you mentioned, Portugal, Italy, Ireland, Greece and Spain, andas long as the debts remain, the issues, whether it is insolvency or fiscal pressure, are areal burden, still, yet to bear.



What we would like to also look at is the U.S. equities market. The developed world hashad a decent run in prices since March of 2009, and the emerging markets have not doneas well, relatively speaking. Maybe you can speak to over-valuation and under-valuation,vulnerability in the equities markets.

Marc: fantastic run. The S&P has doubled, andin emerging markets we have price increases that are far better than a doubling of theindices. In general, emerging economy stock markets since 2003 have way outperformedthe S&P. So we had unbelievable moves in markets. In the U.S. we only had on twoprevious occasions a move such as we had in the last 27 months from 666 on the S&P toover 1300, and that was in 1934, coming off a major low when the market had declinedby 90% between 1929 and 1932, and then another move into between 1934 and 1937,and that was then followed by renewed extreme weakness in the markets.

So stocks have done fantastically well, and I was fortunate to be relatively positive aboutequities between October 2008 and March 2009.

I would have thoughtthe market would rebound, maybe by 40-50%, but not a doubling.

The markets in the world, between March 2009 and today, have done actually muchbetter than anybody had expected. Starting in November 2010, the American marketstarted to weaken, and I think that we have just begun a more significant correction in theU.S., whereby I expect the fact that international investors over-weighted the Americaneconomic stock market until recently, and under-weighted the U.S., and now money isflowing back into the U.S. I think emerging stock markets will go down further, but Iwould probably just stay out of the U.S.

David: As you look at the cyclically-adjusted price-earnings ratio for the S&P, it recentlyhit 24, which is very similar to what we saw in 1928, very similar to what we saw at the

market peak in 1937, and also in the massive bull market run up until 1966, wherevaluations were clearly overdone. But what that implied was underperformance for anumber of years following, not necessarily a cataclysmic collapse, but certainlyunderperformance.

So if investors are expecting a healthy rate of return in equities over the next ten years, itwould certainly be difficult to argue for that, based on the cyclically-adjusted price-earnings multiples. What you are suggesting is that emerging markets and developingworld markets are really in the same boat, which would imply that the whole concept of decoupling is not necessarily one that you would agree with?

Marc: I think that there will be some decoupling, and whenever you look at the markets,different sectors perform differently, but generally speaking, in the same direction. So if someone were to take a very bearish view about emerging stock markets, I do not think he should go into European stocks or U.S. stocks. I take a more balanced view. I think we are in a money-printing environment. If something happens in China, they will printeven more than the U.S. prints. If something in happens in Europe, they will also printmoney.



They are going to print money everywhere, and with interest rates, essentially on short-term deposits, being zero, or below zero, inflation-adjusted, in other words, if inflationrates everywhere in the world are higher than the interest rates on short-term deposits, I

-

I think that you cannot make a very bullish case for stocks, but I think you can make amore bullish, or more positive, case for stocks than say, for U.S. government bonds,because the specifics in the U.S. will stay very high, and the quality of the banks willdiminish and the interest payments as a percent of tax revenues will go up, and so forth.

and world growth, or if youbelieve in disaster, in either case you are probably better off in equities than in bonds.

In terms of returns, I agree with you, I do not think that the returns will be fantastic, but if you print money it is very difficult to say what the returns will be, because it is not stocksthat adjust on the downside, but it is the currency that adjusts on the downside. So intheory, it is possible that the Dow could double if you print money, or it could even go up10 times, depending on how much money you print, and with Mr. Bernanke at the Fed, I

think it is quite likely that a lot of money will be printed.

David: That is a critical observation, that what is happening is really a degradation of global currencies. Certainly we saw that in Germany in 1919-1923, when the Germanstock market went up nearly 14 times, yet in terms relative to gold, still diminishedsignificantly, so it was a better bet than buying German bonds, or sitting in Germanmarks, but on the other hand, it was still a relative loser, you could say.

I guess one of the critical issues today, for investors, is existing in a world of negativereal rates of return, where you have both an increase in taxation that is a potential, but thereality of money-printing and inflation, which strip away any of your real returns. With

into assets like gold and silver?rates of return otherwise?

Marc: An investor has the choice to invest in real estate, in equities, in bonds, incommodities, and I separate precious metals from commodities, from industrial andagricultural commodities, because I consider it money. Also we can buy art, and stamps,and other collectibles.

I have a large subscriber base for my Gloom, Boom and Doom Report , and I asked eachone of them to let me know if they have the impression that the cost of living increases,

in other words, the percentage of how much they pay every year, more, for their families,is less than 5%. So far I have not received a single email, so I think inflation is around5%. The return on deposits is essentially zero. And then people begin to worry, becausepaper money is no longer a store of value, and at the same time, it is a bad unit of accounts, because it is debased by the central bank.

So people buy paintings, they buy real estate, they buy stocks, they buy, to some extent,bonds last year, we had large inflows into bond funds and they buy precious metals.The problem with all these easy monetary policies and artificially low interest rates, is



that not everything goes up at the same time. In other words, we had a bubble in theNASDAQ in 1997 to March 2000, then the bubble burst. Then we had a real estatebubble 2000-2006. Then in September 2007 and July 2008, oil went from $78 to $147and the CRB went ballistic, so we had a commodities problem. In 2008 everythingcollapsed. Oil, in an unprecedented move, went, in July 2008, from $147 to a low of $32in December 2008. In other words, in six months, oil fell from $147 to $32 a barrel.

These kinds of moves are brought about by the Federal Reserve monetary policies, andfor the investor, there is no point to be overly dogmatic. From 1999 to 2007 and 2008,gold outperformed equities by a huge margin. Also, silver outperformed equities by ahuge margin. In 2009, equities outperformed gold, and from here onward, it is going tobe the same pattern. There will be suddenly other assets that appreciate, and some assetsgo down.

I happen to think that some prices will go down, but they have become oversold on anear-term basis, because over the last three months, the whole world became overlyenthusiastic with the inflation phase, so the thinking was, government bonds are bad, andequities are good. That may reverse for a little while, but I think long-term if you look at

ten years, one of the worst investments will be long-term U.S. government bonds.

David: What measures might the Fed and the Treasury employ to defend the bondmarket as it is so critical to the financing of our deficits and our way of life in America?

Marc: I think they do not necessarily want to support the bond market, because the debtissuance is so huge, they almost have to monetize part of the debt. I have read Treasuryreports in 2010 by Tim Geithner saying the U.S. government debt increased by more than2 trillion dollars during that period of time. The deficit, in my opinion, mathematically,cannot come down, because 80% of the budget is mandatory expenditures, in otherwords, you cannot cut them. Legally, they have to be met.

Of the remaining 20%, you can cut a little bit, but not that much, because then servicescollapse. In my view, the fiscal deficit of the U.S. will stay around 1½ trillion dollars foras far as the eye can see, and maybe even go to 2, or 2½ trillion dollars, and then theinterest expenditures on the debt go up. So actually, over time, in my view, unless taxesare increased significantly, and spending is cut significantly, not by a little bit here, alittle bit there, the budget will never again be balanced, and that will then necessitate, intime, QE-III, QE-IV, and QE-V. Taxes cannot be increased dramatically, because if youincrease them very substantially, we will go straight back into a recession.

David: It seems like perhaps one of the best strategies that they have to employ is a

manipulation of the CPI numbers so that people assume that real-world inflation is 2 to2½%, while running at a 5% rate, essentially cutting the debts in half over a long enoughperiod of time. If real-world inflation is, as John Williams of ShadowStats has said,closer to 8%, then we are alleviating a lot of our existing stock of debt, at a rapid rate.

Marc: Correct. But you understand, you are not really helping the economy, you are

money and keep it in the banking system, who simply do not want to speculate. So, it is a



but it will become obvious one day, when with their money they can buy less and less. Inother words, the purchasing power of money goes down. That is why I am tellingeveryone, if you already own cash, consider gold and silver to be a component of yourcash portfolio, and own some of it, because the government can appropriate it, butotherwise they cannot fiddle around with it in terms of increasing the supply.

David: You made that distinction earlier, that precious metals you do not put in the samecategory as commodities in general, because you consider it money. Is that only the casewhen money that we are used to, here in the U.S., for example, U.S. dollars, or in

Is that theenvironment where you treat precious metals as a cash alternative?

Marc: Yes, and also, I would scollapse in the Chinese economy, which is not necessarily my prediction, but somepeople say there is a horrendous bubble. I agree, if we define a bubble as artificially lowinterest rates, and excessive credit growth, then we have a colossal bubble in China. Butit may go on for another 2-3 years.

Then it will have a very negative impact on the demandfor industrial commodities. And we may get, at some stage, in some sectors of theeconomy, the risk of deflation. In other words, the demand for industrial commoditiescould, for a year or two, decline, and so, obviously, the price of copper, and of nickel, andalso, to some extent, oil although this would depend very much on politicaldevelopments would go down.

In that environment, there will be more money-printing. If the S&P drops 20%, all thepeople that are now criticizing Mr. Bernanke for QE-II will go back to their old pattern,as they have done between 1980 and 2007, to encourage the Fed to print money, becausethey all benefitted from rising asset prices. But as soon as the S&P drops 20%, the

American policy-makers will all again be for further monetary policy measures andfurther fiscal measures.

At that time, obviously, you could end up with a global economy that is very weak, butwhere prices go up for certain commodities, such as gold and silver.because of an oversupply situation, but they move because they are a safe currency.They become the proper unit of account. In all hyper-inflation economies, eventuallypeople give up their own currencies as a unit of account.

If you had gone to Zimbabwe during their hyper-inflation, or if you had gone to Germanyduring their hyper-inflation, or Mexico during their hyper-inflation, nobody in those

countries calculated prices anymore in their domestic currency, it was all then becominga dollar standard, or gold standard. That is why I think that people should have some of their money in gold and silver.

David: Let me ask a question about silver, because this is a bit of a tricky juncture. From1983 to the present, we have seen the gold and silver prices fluctuate in a relationshipbetween 100-to-1 on the high side, down to 40-to-1 on the low side. You would have togo back to the 1960s and 1970s to find a different pattern of behavior, where those metals



favored silver even more greatly, and the ratio traded between 20 and 50. Are we in atransition back to that earlier period, where silver perhaps continues to outperform?

And as a part of that question, too, let me throw China into the mix. You mentioned thepossibility, not that it is your position that we will see a collapse in China, but if that wereto happen as a result of rapid credit expansion, cheap capital, large-scale fraud, theincentives that have been there to ignore risk, if we do see a collapse in China over thenext 2-3 years, does that impact silver negatively, because of its industrial component, oris that such a marginal factor, when gold and silver are being treated as money?

Marc: First of all, I think that gold and silver will move in the same direction, but as Itried to explain earlier on, when you print money, essentially, everything goes up, but atdifferent times, and with different intensities. In a bull market, usually, toward the tailend of the bull market, silver tends to grossly outperform gold. So, yes, maybe it willoutperform gold, but I stick to gold because my safe deposit box is not large enough toput enough silver in it, whereas, it is large enough to put enough gold in it.

Different people have different takes on this, and my friend Eric Sprott, who knows thesilver and gold markets extremely well, thinks that silver will go ballistic. Yes, maybethat is true, but I do not think that silver will go up alone, without gold also moving. Thedirection will be same. Concerning China, yes, I suppose that silver would have a largerindustrial component than gold, but as I pointed out, if China collapses and there is ahuge deflationary scare, I suppose that it is the real industrial commodities, like copperand nickel and so forth, would be more vulnerable than gold and silver.

David. Coming back around to the U.S. markets, we have seen, for at least 12 monthsnow, record insider selling. That has been very pronounced at the banks, starting in aboutNovember of 2009, where there has been a disproportionately high degree of selling byinsiders, as opposed to buying. Would you combine that with other indicators, like

liquidations from bear funds?

Marc: I would just like to say about the insider selling, this is also something that Ifollow and that concerns me. But having said that, and being on the boards of differentcompanies, let me explain to you what happens.company and I get stock options, and I exercise the stock options and then to diversify, Imay sell some of the shares I own in that company through my stock option plan, andthen I may go and buy other stocks in the market, or make other investments.

Because of the proliferation of option plans in the last twenty years or so, there is anatural tendency that when a CEO sells shares, it is reported, but when he invests with

hedge fund management, or buys shares in other companies, it is not reported. I think there has been a change in the validity of this statistic. But I agree with you, at thepresent, the ratio is so huge between selling and buying, that it is a rather negativeindicator. Then, when you combine that with other indicators that are also negative, ahugely over-bought market, for instance, I think some caution is in order.

David: To look toward the end of our conversation today, one of your recent reports youWhat would you suggest is the end-game? Are we

talking largely about the credit markets, interest rate reversals, and an end to the



shenanigans that have been played for 30-40 years in those credit markets? What is yourarea of greatest concern, and what would be some practical things that investors can do inthese harrowing transitions?

Marc: I think we are all doomed. I think what will happen is that we are in the midst of akind of a crack-up boom that is not sustainable, that eventually the economy willdeteriorate, that there will be more money-printing, and then you have inflation, and apoor economy, an extreme form of stagflation, and, eventually, in that situation, countriesgo to war, and, as a whole, derivatives, the market, and everything will collapse, and likea computer when it crashes, you will have to reboot it.

For the investor, the question is: How do I navigate through this complete disaster that isgoing to unfold? And I think if you look at different asset classes real estate, equities,bonds, cash, precious metals I suppose that you have to be diversified. I think realestate in the U.S. may go down another 10% or so, or even 15%, but I am always tellingpeople, if you can buy the piece of land or the house you like, what do you actually careif it does down another 10%? If everything I bought in my life had only gone down 10-15%, I would be very rich, because a lot of things became worthless, especially loans to

friends, and bonds, and so forth.

Look at the history, for example, of Germany, for the last 100 years. They had WorldWar I. They had the hyper-inflation in World War II. The bond-holders got wiped outthree times. If you owned Siemens, and you still own Siemens today, it was not afantastic investment, but at least you still have something. You were not wiped out. Ithink that in equities you will be better off because you have an ownership in a company,than by being the lenders to companies, and the lenders, especially, to governments.

David: Do you anticipate an entry point into equities that perhaps rivals what we saw in1932, or perhaps 1949, or more recently, 1982, as we launched into a massive bull

market? Do you anticipate seeing values even remotely close to that?

Marc: In a money-printing environment, it is very difficult to know what is actuallycheap and what is expensive. Is the price of wheat high, or is it low? Inflation-adjusted,it is extremely low. In nominal terms, it is relatively high. I believe that, in March 2009when the S&P was at 666, the market was actually much cheaper than is generallyperceived, because of the money-printing, and I do not anticipate that we will see 666 onthe S&P again, in nominal terms.

In other words, they are going to print so much money that the S&P could be at, perhaps,2000, but in real terms, it could be down below the lows of March 6, 2009. Maybe in

gold terms, we could one day reach a ratio of Dow Jones to gold of 1-to-1, as we were in1980. In other words, the Dow could be perhaps at 10,000 or 12,000, and gold could beat the same level.

That is why I am advising people to accumulate gold. Can gold have a correction? Yes,there has been a little bit too much euphoria about gold, and we may have a correction,but I do not think we are in a bubble in the price of gold. In fact, I could make a case thatgold, at this level of $1400 an ounce, is cheaper than in 1999, when I look at theunfunded liability growth of the U.S., at the credit growth of the U.S., and at the



household growth, and at the money printing, and at all the wealth creation that happensin China and Russia.

Just consider, when I started to work in the 1970s, it was said there were two billionairesin the world. One was Rockefeller, and the other one was Mr. Ludwig. Then in 1980there were, I think, six or eight billionaires. Now you have thousands of billionaires.The paper money has become of lower value, and in that environment, it is conceivablethat actually stocks do not go down a lot, in nominal terms, but they go down inflation-adjusted, and not inflation-adjusted by what the government is publishing, but ininflation-adjusted terms, as John Williams points out. He says inflation is running at 8%per annum. I have it slightly lower, depending also on the household, whether you havechildren, or no children, and where you live, but I would say between 5-10% in Americais probably a realistic figure, and between 8-12% in countries like India, China, VietNam.

David: Thank you for joining us today. We will look forward to touching base with you,perhaps, later in the year, for your insights and they are particularly welcome, with aninternational emphasis. You have lived in Asia for a long time. We will have some

questions, perhaps, as we move into the summer months, specifically, on China, as weexplore some of the issues relating to that particular market. You have been writing onthat since 2004 in your book, , and we want to unpack that with you abit more in a future program, but thanks for joining us today.

Marc: Sure, my pleasure. Thank you very much. Bye-bye.

David: Have a good night.

Kevin: David, as always, that was a fascinating interview with Dr. Faber. Somethingthat he brought out that I thought was fascinating, is that we look at things in nominal

value in cash, but in reality, we have talked over and over with people, to let them knowthat they need to be dividing the value of something in something that would be, what Dr.Faber termed, a proper unit of account. He said he thinks gold will be the proper unit of account.

David: Kevin, it has been that, classically, but I think that point is so critical, because aswe discussed with Dr. Faber today, it is being in a money-printing environment thatdistorts all realities. You really do not know what you have in equities. You really donot know what you have in real estate. You really do not know what you have in bondsor cash deposits. These things become really irrelevant if you are still looking at yourmonthly statements or going through a personal balance sheet and coming up with

nominal figures. That is a real challenge, Kevin, to shift your thinking to real terms, butit is absolutely critical if investors want to walk through the next 5-10 years relatively unscathed.

Kevin: David, something that will really make you stop and ponder, he did say that gold,at $1400 today, is still cheaper than it was in 2009, when it was hundreds of dollars lessthan it is, just given the amount of money that has been printed.



David: Kevin, as I go back through his worst-case scenario step-sequence, it really doesfollow a similar pattern to what we have discussed in general terms, financial crisesbecoming economic, becoming political, becoming geopolitical, wherein stagflation leadsto an environment where individual countries focus on their individual problems to theexclusion of the rest of the world, and world trade suffers as a result. That is anenvironment that is ripe for conflict war.

We did not get a chance to discuss this with him, but when you look at the recent mergerof the German bourse and the New York Stock Exchange, it is interesting that this createsthe largest derivative clearinghouse in the world, and the profits of both bourses, whenyou are looking at derivatives traded, come, primarily, from trading and derivatives, andnot the underlying products. In other words, if you are looking at the volume of stockstraded on the New York Stock Exchange, it now is trivial, by comparison, to the profitsgenerated from hybrid products.

Kevin: They are not real.

David: They are loosely connected to those real companies. So, Kevin, it is just bizarrewhen you think about some of the best companies in the world, whether it is a Nestles,whether it is a Proctor and Gamble, whether it is an Intel, the derivative products andinvestment themes that surround it actually are more important today in the financialworld than that product, itself. That is a clear distortion of where Wall Street has gone,and where the financial markets have gone, but it also speaks to how dangerous thesemarkets are, and he suggests that at the tail end of our interview today, wherein you havea collapse in the derivative market, because it truly is the greatest fiction we are livingwith today.

Kevin: It reminds me of smaller fictions that we have been through in the past, David. Inthe late 1990s we started to see this tech stock boom get to the point where companies

that did not produce a profit or a single product, were worth more than United Airlines,because they had dot.com behind their name. That was false. That collapsed.

And talking about derivatives, remember, just a couple of years ago, when we werehaving the show when we saw that the derivatives market, combined with thecommodities, and currencies, and equities, passed a quadrillion dollars. That wasunfathomable. Then, of course, we had the collapse.

David: You stack that number against the roughly 1 trillion dollars that is available, atany price, in the gold market, and you can realize that when things come unglued, andthat includes the derivatives market, as well, just financial securities, the real stuff in the

financial securities markets, stocks and bonds, is over 200 trillion, but again, relative tosuch a small, minute space.

I think one of the things that he mentioned today is a critical reminder that gold and silverare more and more being traded as currency, rather than a commodity, and that takesplace, particularly in those countries that are experiencing currency crises, to somedegree. He mentions India, China, and Vietnam, experiencing inflation rates of between8 and 12%, and our inflation rate in the U.S. being somewhere between 5 and 8%! Is it



right.

Kevin: The other thing that is amazing is, look at how few people, still, are actuallysaying that. We have talked about this over the last couple of weeks, how few people areactually participating in the only market that is protecting them from this inflation.

David: He mentions, in his most recent report of the Gloom, Boom, and Doom Report ,that he has spoken to a group of hedge fund managers in Singapore, a group of privateinvestors in South Korea, over 1000 people, and then very man-in-the-street type

Kevin: Even Switzerland.

David: Even Switzerland, and in each instance, in a roomful of over 1000 people, only 3-

It is surprising, Kevin.silver in a b Who is participating in driving it higher?

The classic reality, Kevin, when you are dealing with a bull market and its bubbledynamics, is that the bull market ends when the last person who has capital, and interest,can actually come into the market. The reality is, we are so far from that, when you look at the stock of capital that exists in the world today. The theme today: Money-printingimpacting all financial markets, in disproportionate ways. There is a lot of money, and alot of people But I think that we are on the cusp of that changing.

Kevin: That makes gold, still, the best kept secret in the world.

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