US economy is like Botox, looks fine only on the outside - Marc “Dr. Doom” Faber
Reverberations from the economic meltdown of 2007-2008 can still be felt across the globe, even though politicians claim the economy is getting better. Unemployment, cuts in the manufacturing sector, extreme economic inequality - all these symptoms still plague nations, including the US. However, the worst is, possibly, yet to come, as some economists warn. What’s behind this dreary outlook? What’s causing the economic troubles in the world? We ask a world-famous investor, publisher of the "Gloom Boom Doom Report" - Marc Faber is on Sophie&Co today.
Sophie Shevardnadze: World-famous investor, publisher of the "Gloom Boom Doom Report", dr. Doom, Marc Faber, welcome to the show, it's really great to have you with us. Now, the outcome of the U.S. vote in November won't just impact the American economy. The whole world will feel it. You were saying that your worst fear is Hillary Clinton will become president of the U.S. You said she's "a questionable character". I mean, you might not like her personally, but why do you say that she'll destroy the whole world? Do you mean to say that her actions will be harmful to the global economy, and, if yes - then how?
Marc Faber: Well, if you look at her period during which she was Secretary of State, the U.S. committed several aggressions in the Middle East, including, also, the invasion of Libya. Libya, which was probably, the only properly functioning African Economy. So, I would say that her achievements with nation building have been a catastrophe. And then, if you put yourself into the shoes, of, say, mr. Putin, or of the Chinese - she declared while she was Secretary of State, America's Pivot to Asia. Wouldn't you consider that to be an aggression? China has never started a war, they were always drawn into wars by foreign powers, and now the U.S. acts in provocation of China.
SS: Well, you know what Mrs. Clinton is saying: she said that if she's elected, she will put her husband - former president Bill Clinton - in charge of the U.S. economy, to re-vitalize the U.S. economy. Now, he oversaw a period of economic growth in the U.S. in 90s. Can he be interested with the American economy once again?
MF: He will re-vitalize corruption in America. The Clinton family is involved in so many scandals - that s what is going to happen. There will be a massive and increased crony capitalism. The U.S. always accuses other countries of corruption, of "crony capitalism", but in America it's even more extreme!
SS: Okay, now, let's talk about your other favorite candidate, the famous Donald Trump. Now, you believe that "he wants to destroy the world, but he will destroy the U.S. economy". He's a businessman, he's a dealmaker - why don't you think that he can steer the way of the American economy in the right direction?
MF: Well, look: to be frank with you, I don't support any of the available candidates, but if I had to make choice - in other words, if you put a gun in my face and say: "Mark, you must choose someone, either Hillary Clinton or Donald Trump" - for sure, I would choose Donald Trump, because he's a businessman and he has some common sense and he's an outsider and not necessarily supported by the Republican party. My favourite candidate in terms of intellect - unfortunately, with misguided views about the economy - but in terms of intellect, is, actually, Bernie Sanders. He's quite an intelligent man who already in 2003 attacked the U.S. Federal Reserve, at that time Mr. Greenspan, that his monetary policies have created wealth for Wall St. and for people that own assets, but have done very little for ordinary people in the U.S. - and this has been now proven to be correct, and even mr. Greenspan, later, in 2008, in a Congressional Inquiry, accepted the fact that his models have been flawed.
SS: Now, Trump and Bernie Sanders - they are not like your traditional presidential candidates, so to say, right? And the reason these two have such appeal to people - you've said it - is because of the problems in the American economy: lack of growth, unemployment. Is the economy heading into serious trouble?
MF: Yes. The economy in America is like botox surgery. You create, on the surface, something that looks quite okay, but behind the scene, it's not so okay. If we look, precisely, at, say, labor statistics: so, jobs in the manufacturing sector are being cut, the manufacturing sector is no longer very important in the U.S., but jobs in leisure and hospitality, barmen and waiters are going up strongly. Full-time jobs are being reduced and part-time jobs are being created. So, if you really analyze the figures - including, also, the figures that come out about the budget deficit, in other words, the fiscal stimulus and so forth - they all look horrible! Superficially, the U.S. will tell you: "Well, our deficit has shrunk from over a trillion dollars to, say, $450 billion. But, I am adding the government debt every year, and by that measure, last year, the deficit was close to a trillion dollars. The government debt since Obama became president 8 years ago, has gone from $8 trillion, to now over $19 trillion. These are the facts.
SS: Now, you've mentioned Fed Reserve. Fed raised interest rates for the first time, in almost a decade in December, and it plans to keep on doing that in 2016, being optimistic about the American economy. But, after a bleak job report, it's backtracking on its plans for the moment. With its reputation at stake, will it proceed with the plans later this year? What do you think?
MF: What I think is: there will be a museum, in future, of Great Central Banking Errors. One of them will be to have introduced negative interest rates - in Europe and also in the other parts of the world, notably in Japan - and the other one, prominently displayed at the entrance of the museum of the Central Banking Policy Mistakes, will be a bust of mrs. Yellen, a huge bust, because they've slashed the Fed Fund rate to next to zero in December 2008, and by 2010-2011, the economy was actually recovering quite well. That is when they should have increased rates, somewhat. But they waited, mrs. Yellen, she waited precisely until December 2015, when it was obvious that the economy, and the global economy, was decelerating very badly, and most likely, entering a recession. So, in other words, she is increasing rates, exactly at the time when you shouldn't' be increasing rates.
SS: Should investors expect interest rates to remain low in the U.S. forever?
MF: My sense is that they are not going to move the Fed Fund rate higher, but if they move the Fed Fund a big higher, say by a quarter of percent, they are not going to move again any time soon. In other words, if you expect the Fed Fund rate to go up substantially, you'd likely to be wrong.
SS: So, will the next economic crisis be worse than the one in 2008? And, when we should expect this crisis to hit? Can you give us a deadline?
MF: Well, we never really came out of the 2007-2008 recession. We had massive fiscal stimulus, we had massive monetary stimulus. In other words - if you just throw money at the system, then spending goes up, but there are, still, huge imbalances, and in my view, the world is facing very-very low growth going forward, very-very low growth. There are structural reasons for that. We have a horrible, I repeat, horrible bureaucracy in Brussels, in the EU, that basically is slave of the U.S. - the U.S. dictates a lot of policies in Europe, including that they've also blackmailed mrs. Merkel to be hostile against Russia. Russia and Germany, Russia and Europe were historically very close to each other, but this has now changed and, actually, one reason I am quite optimistic about Russia, is that I believe that people of Europe, they don't want to have an embargo against Russia, it just governments that do that. The ordinary people, they have actually a lot of sympathy for Russia and for mr. Putin.
SS: So, you say that dollar is not a desirable currency. Why don't you trust the dollar?
MF: In my view, the U.S. have never pursued policies that are designed to strengthen the U.S. dollar. Whenever there was an economic problem in the U.S., the view was: let the dollar to float down and make America, again, competitive. I have to say this about the subject: if I look around the world, and this is my personal experience, but also the experience historical, seen through literature: countries with weak currency always had weak exports, and countries that had a strong currency, always had a strong exports and were competitive. Why? The reason is that if your currency appreciates the entrepreneurs have to remain very competitive by productivity improvements - they had to acquire new machines that can produce the same or more quantity with less energy, with less input. So, in general, you have to see that the weak currency economies, like Zimbabwe, as an example, an extreme example, or Argentina, or Brazil - these countries have poor export performance relative to the rest of the world. Then, look at Switzerland, look at Japan - they are very strong export economies.
SS: But what is a desirable currency? The Chinese yuan, perhaps? Can anything compete with U.S. dollar at this point?
MF: My sense is that there's only one currency in the world, that we'll appreciate - and these are precious metals: gold, silver, platinum.
SS: Really? Do you keep your savings in precious metals?
MF: I do not keep all my savings in precious metals, but, historically seen, cash has been a bad investment, and over time all paper money have lost their purchasing power. I hold some gold and silver, I am also on the board of directors of mining companies. I hold real estate, mostly here in Asia, specifically in Vietnam. I hold some stocks - maybe 25% of total assets, and I hold some bonds in cash. So I'm diversifying, but an investor should realize that paper money will lose its purchasing power.
SS: But the little cash that you do have stored aside - what currency do you keep it in?
MF: Unfortunately, in absence of anything better, I have quite a lot of exposure to U.S. dollars, but I also have exposure, maybe 30% of the cash, in Euros, and in Euro bonds, denominated in Euros. I also own Russian assets and I have Singapore dollars, and I have some Hong-Kong dollars. But, in general, I don't think that cash will be a very good investment - in the sense that, hey, you have no interest at the present time, you have risks with the banks, because the bank can fail, and you have also a higher risk of wealth expropriation through taxes - in other words, in Europe. So, cash is not the most desirable. But, equally, if you buy shares, okay, Russian shares are inexpensive, and in many other emerging economies they are also relatively inexpensive. But, in the U.S., the stock market is at the very high evaluation, price to earnings, price to sales, and so forth. So, I don't think that stocks will perform well.
SS: Why do countries choose to hold savings in American Treasury? Japan, China, Russia - what's up with that?
MF: First of all, so much money was printed and it's floating around the world - I mean, foreign exchange reserves are huge and they have been going up, but recently they have been contracting - nevertheless, they're going up, and you have all the sovereign funds. So, if you're running a sovereign fund, and you have a trillion dollars in assets to invest - are you going to buy the Thai Baht or the Philippine Peso and so forth? Do you understand? You have an asset allocation and the bulk will obviously be a basket of currencies, and the majority will be in U.S. dollars, and then you will hold some Euros and yen and British pounds. That's the way it is, but it may not stay that way. If you go back to 1900, the major foreign exchange reserve currency was the British pound, and to tide it's a side show. So, I think, over time, the U.S. dollar will lose its importance.
SS: You know, I want to talk about the recent scandal. One of the biggest leaks in financial history: the Panama Papers, that exposed shady dealings of a number of world leaders - President of Argentina, now a former PM of Iceland, the Saudi King, a lot of celebrities were implicated - well the uproar bring about enhanced control over tax evasion and avoidance?
MF: I have to laugh about this Panama Papers - because it's obvious, it's another hidden attack against Russia, the Russian government, and other wealthy people around the world. Of course, no American would even think of evading taxes, that would never occur to an American mind! But, the fact is simple - If I open a company on the British Virgin Islands, in Panama, anywhere in the world, I have to declare the beneficial ownership. But, you don't have to declare the beneficial ownership in a Delaware company in the U.S. So, it's a hypocritical act, once again, initiated by people in the U.S., who want, basically, to put down foreign regimes. It's like if FIFA was an American organisation, nothing would happen. But it happens that FIFA built up the biggest business in the world, which is soccer, and it happens that the World Cup will be played in Russia, and not in the U.S. - so, obviously, the target FIFA.
SS: Now, in Europe, the eurozone troubles were the center of attention just a little while ago and they've been eclipsed by the other issues like the refugee crisis, the terrorist threat. It's widely recognized that without considerable reforms, the Euro and the Eurozone will be difficult to sustain. Nobel economist Chris Pissarides told me that there should be two kinds of Euros for different economies of Europe - a Euro-South and Euro-North. Could this work, in practice? Would you support a solution like that?
MF: I'm in support of dismantling of the whole EU, and having individual countries, but I have to add to the problem of the currency the following: the Europeans and the Japanese and also the U.S., they always talk about the reforms and so forth and so on. How do you go about the market-based reform, if the market was reforming countries? The worst policy is, essentially, zero interest rates, because at zero interest rates, governments can borrow money without any cost, for a while. In other words, the U.S. government debt has grown, from $4 trillion in 1994, to now over $19 trillion, but the interest expense is down because the level of interest rates has collapsed. The same in Europe - if you look at the debt profile of Europe... Also, we, economists, we distinguish, I mean, at least I do, between "productive" debt and "unproductive" debt. The "productive" debt is you and I borrow money and you would build a factory, buy the machinery and we produce something, and then the cash flow from this business will sustain the interest payments and the repayment of the debt. Unproductive credit, is, basically, government credit - you lend money to the government, and the government will then give it away to people - you know, the redistribution of wealth - that is a very unproductive credit. In Europe, and in the U.S., government credit as the % of the economy has grown enormously over the last 10-20 years, enormously.
SS: I want to talk a bit about the deal that U.S. and Europe are negotiating - the TTIP. That's been done in secret and it's supposed to be extremely beneficial to remove trade barriers and open up markets. So why keep it a secret?
MF: Well, I don't about trade restrictions and so forth. All I can say is that we had already free trade for hundreds of years between different countries, and we had merchant families in the world that traded goods and so forth. I don't think that for free trade you need an EU or you need the TPP and so forth. You can have bilateral agreements for free trade. What you certainly do not need for free trade is a country like the U.S. that declares an embargo. They had an embargo against Myanmar. They had an embargo against Cuba. For what? They have an embargo against Russia. You think Russia cannot buy your Mercedes car? They can import everything through China. Russia has been surrounded by countries - Baltic countries and also Balcan countries in the South, also in Central asia, countries that have specialized in smuggling for thousands of years - and Americans, they think that an embargo will hurt Russia? It is ridiculous!
SS: Mr. Faber, thank you so much for this wonderful interview. We were talking to Marc Faber - world famous investor, financial advisor known as dr. Doom, publisher of Gloom Boom & Doom Report, discussing the impending global economic crisis and all the smart ways to survive it. That's it for this edition of Sophie&Co, I will see you next time.