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Interview with Dr. Marc Faber, lnvestment Advisor, Fund Manager and Author

By Keith W. Rabin

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 Ph.D. in Economics magna cum laude.  Between 1970 and 1978, Dr Faber worked for White Weld & Company Limited in New York, Zurich and Hong Kong. Since 1973, he has lived in Hong Kong. From 1978 to February 1990, he was the Managing Director of Drexel Burnham Lambert (HK) Ltd. In June 1990, he set up his own business, Marc Faber Limited, which acts as an investment advisor, fund manager and broker/dealer. Dr Faber publishes a widely read monthly investment newsletter "The Gloom, Boom & Doom" report which highlights unusual investment opportunities, and is the author of the recently released book "Tomorrow's Gold" and "The Great Money Illusion - The Confusions of the Confusions" which was on the best-seller list for several weeks in 1988 and has been translated into Chinese and Japanese. A book on Dr Faber, "Riding the Millennial Storm", by Nury Vittachi, was published in 1998.   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 including the Iconoclastic International Fund, The Baring Chrysalis Fund, The Baring Taiwan Fund, The Income Partners Global Strategy Fund, The Framlington Eastern Europe Fund, The Buchanan Special Emerging Markets Fund, The Hendale Asia Fund, The Indian Smaller Companies Fund, The Central and Southern Asian Fund and The Regent Magna Europa Fund plc and Tellus Advisors LLC.

Thank you Marc, for agreeing to speak with our readers. Can you tell us a little about your background and current activities?

I am Swiss and have worked in the investment field since 1970, first with White Weld & Co., later with Drexel Burnham Lambert Inc. I have lived since 1973 in Hong Kong and formed my own investment management and advisory company in 1990. I publish the Gloom Boom & Doom Report (www.gloomboomdoom.com ) and have written several books including the latest one entitled “Tomorrow’s Gold”, which is available through Amazon.com.

Until recently the U.S. was perceived as a safe haven and in many ways a beneficiary of global turmoil. This has been changing due to U.S. economic and corporate excesses and the 9/11 tragedy. As a result, investors have been enduring dramatic losses in dollar-denominated assets. This would seem to argue for greater international exposure, yet economists such as Joseph Quinlan argue that investor fear exceeds their desire for greater diversification and outflows from the U.S. -- have to date been minimal. Can you give your thoughts on this and whether this trend will be sustained?

Most investors seem to be brain-damaged. They buy high and sell low. They buy what is perceived to be safe or promising big returns, not what will provide big returns in future. In the late 1980s, they bought Japan and Asia and were negative about the US. In the late 1990s right up to now, they bought the US and shunned Asia, although Asia is following the crisis of 1997 relatively inexpensive.

Alan Greenspan and many analysts have expressed the view that current economic difficulties in the U.S. are largely the result of "global uncertainty" and that once problems with Iraq and other issues are resolved, positive growth and momentum will be restored in the U.S. Do you believe that is the case what is your outlook for the U.S. economy?

The problems of the US economy have nothing to do with “global uncertainty”. Greenspan messed it up so royally that he now has to find an excuse for his disastrous handling of the economy over the last 10 years or so. Now, we are paying the price for the ill-fated US belief that all problems can simply be solved by easing, printing money and expanding credit. Mr. Greenspan should never have been a Fed Chairman and future historians will judge him very negatively.

Throughout much of the 1990s, there was a lot of discussion about the "East Asian Miracle" and the coming "Pacific Century". This talk largely evaporated during the 1997 Asian financial crisis. Do you believe we were too quick to write off the "East Asian Miracle" and does the "Asian Way" represent a real alternative to Anglo-Saxon business and financial practices?

I do not believe so much in stereotype phrases like Asian miracle, the Asian way, etc. When it comes to money all people are of the same religion. In Asia, we have in theory looser controls over the economy than in the West, but recent events in the US and other western countries with respect to the terrible abuses that occurred throughout the economy, the business sector and the governments suggest that the Asian are small town thieves when it comes to plundering companies and ripping off shareholders.

During the Asian financial crisis, the U.S. was viewed by many as a "global economic locomotive" that needed to maintain its performance until Asia and/or Europe could regain its economic footing. Now the U.S. engine appears to have run out of steam and Europe or Japan do not seem ready to take on the load. Can the world regain positive momentum without a locomotive and what are the ramifications of continuing weakness in the U.S., Europe and Japan?

We have to distinguish between markets in terms of dollar sales and in terms of units. Today, many physical markets are already larger in China than in the US. I am thinking of steel, where the Chinese production is larger than the one of the US and Japan combined, with China still importing steel. Also the markets for refrigerators, TVs Radios, motorcycles, cellular phones are larger in China than in the US. Now add the markets of India, Japan, Indonesia, etc to the Chinese market and you actually see that Asia by itself is a huge economy in terms of units. I am a believer in a secular economic military and political decline of the US and a rise of China and other Asian countries. I think the US is today where the UK was at the beginning of the 20th century and that global growth in future will be driven by Asia.

For hundreds of years arguments have been made as to the potential of emerging markets and the potential they offer. What we have seen, however, is higher volatility and what you have termed "gloom boom doom" than one generally finds in more mature markets, especially over the long term. Would it then be fair to say that investing in emerging markets is more cyclically-oriented and a trading opportunity than a long term investment? What should investors who lack the resources of large institutions and ability to buy foreign listed securities watch out for?

I think this is a good point. However, I suppose that in many countries such as China and Russia, there will also be long-term opportunities. I am not sure that these companies already exist, but it is clear to me that China will also one day have a GE, an IBM, MMM, Coca Cola, etc. It is important to understand that rapidly growing economies have wild business fluctuations. In my book “Tomorrow’s Gold” I describe the life cycle of emerging economies and for an investor it is obviously important to time his purchases well. I may add that I include in “emerging markets” also “emerging economies” such as the Internet, the PC, and cellular phones. People who bought stocks in the TMT sector at the wrong time will probably never see their money back, as new players will displace the early leaders of these industries.

One is continually hearing now about the danger of deflation yet gold, oil and many other commodities are at, or approaching multi-year highs. Can you explain this phenomenon and its implications for investors? Are we beginning to see both forces exist simultaneously in a manner last seen during the "stagflation" years of the Carter administration?

Very few people understand the phenomena of inflation and deflation – both of which can occur at the same time. We have in many industries over-capacities and the opening of China and so many other countries is putting terrific pressure on the prices of manufactured goods. At the same time, these new countries will have a strong demand for commodities –especially oil and food products. Therefore, although prices of manufactured goods could continue to decline, prices of commodities may rise much further. In addition with Mr. Greenspan not hesitating to print money and expand credit and the prospect of Mr. Bernanke becoming Fed Chairman, and the possibility of a War, you have a favorable environment for commodities.

Technology and the Internet have had tremendous implications on our lifestyle and the way business is conducted around the world. After several bad years we are beginning to see investor interest in smaller Asian Internet companies such as SINA, PCNTF, REDF, SIFY, etc. and other such as IGLD in Israel. Is this a meaningful trend and what are your thoughts on technology in general?

Yes, I think that out of the ruins there will be some winners. I just don’t know which ones will really make a lot of money.

The Dollar has been weakening and most U.S. investors are unaware that even investments that have broken even are down double digits when measured against the Euro and many other currencies. Do you think this trend will continue and what are the trends that will arise as a result? Which currencies other than the Euro will be beneficiaries of this trend?

The dollar has been far too high considering the economic fundamentals of the US and considering the policies of its economic decision makers who don’t care at all about “sound money”. Therefore, I believe that the dollar has entered again a secular bear market, whereby it will lose in due course once again 90% of its value. The question, however, is against what the US dollar will lose value. Probably it will still decline against the Euro, as European fundamentals will improve with the inclusion of so many new countries into Euroland. However, I think the real weakness will occur against a basket of commodities and against hard assets.

Many of our readers represent corporations and governments in Asia and other markets that are seeking to position themselves to appeal to the international financial community. Do you have any thoughts or words of wisdom on steps they might take to make themselves more attractive in this regard?

The best way to get exposure to investors is to perform well and not to constantly lie to the investment community. Companies should spend more time running their businesses than talking to investors, while the executives would do better to read once a while something else than Newsweek and spend their time on the golf course.

For over a decade there has been a lot of talk about globalization and the integration of world financial markets. While this has perhaps slowed down in recent years, we are seeing increased after hours trading and firms seeking dual listings or even bypassing their national markets to list on foreign exchanges that they believe will deliver more attractive valuations. Can you comment on these developments and their implications for investors and public corporations?

We are moving towards a global market place where financial assets will be traded 24 hours a day. With this development it is clear that some shares will be more actively traded during European or NY hours than in Asia. After all, whereas the physical markets in Asia are huge, the financial markets are disproportionately large in the US compared to real economic activity. Thus, the high trading volume in the US compared to other countries.

The events of 9/11 have had a dramatic effect on corporate and political behavior. What are your thoughts on the implications of the "global war on terrorism"?

I am not so sure this statement is correct. 9/11 has given companies an excuse for poor performance and to cut travel and entertainment budgets. It has also given every dumb and totally uninterested expatriate wife, whose life consists of patronizing the local American Club, to force the husband to move back to the US for fear that he might find “something” more attractive in a foreign country.

Even before 9/11 we began to see a more vocal backlash against globalization, as seen in the disruption of the Seattle WTO meeting and the IMF/World Bank deciding to reschedule and scale down their annual meetings. Now we are beginning to see large-scale demonstrations around the world against U.S. policy toward Iraq and other international initiatives, which in many ways are similar to those we last saw during the Vietnam-war era. Do you think these are related and can you comment on this trend?

In the sixties, there was the saying about the “ugly American” because the world was afraid that America would take over the world economically. Now, we have anti American sentiment for the US arrogance and lack of sensitivity towards other views and customs. I admire in many ways the American way of life, but unfortunately American leaders know and understand what is going on in the world no better than my four Rottweiler dogs. Moreover, whereas my dogs only have one standard – to eat – the US has many different standards depending on their economic interests.

One economy that continues to defy gravity is China, and there seems to be a growing anxiety all over the world about its continuing strong growth and the displacement it is causing, particularly in the manufacturing sector. Can you talk a little about China, the role it will play in the world economy and what it means for investors, the U.S. and other countries in the region.

China today, is where the US was in the second half of the 19th century. At the time it became extremely competitive on world markets and its entry into the global economy led to a significant price fall between 1873 and 1900. The opening of China will depress prices for manufactured goods for a long time. At the same time China will become Asia’s largest customer for commodities and its tourists will be the largest group.

Similarly, Businessweek recently wrote an article comparing the movement of manufacturing jobs from the U.S. in the 1970-80s to a current displacement among service workers today. Given the improved communication and infrastructure that allows one to base an operation almost anywhere in the world, how will higher-wage and cost economies sustain their competitive advantage?

I don’t see how in the long run the US and Europe will be able to compete with tradable services from Asia. India will dominate the software industry and China the way China will dominate manufacturing. Research labs will also move to Asia as we have an endless supply of highly qualified and motivated people who can innovate and invent.

I notice you are more positive on Southeast Asian countries such as Indonesia, Thailand and the Philippines as opposed to markets such as Korea, Taiwan and Japan which possess superior infrastructure, more educated workforces, higher percapita consumption and a greater corporate and technological base. Can you tell us why this is the case?

I think that Korea, Taiwan and Japan will suffer to some extend from the competition of China. The resource based Asian economies will on the other hand benefit from the rise of China. This does not mean that stocks in Korea, Taiwan and Japan will not perform well, as companies can shift their production to China and, therefore, cut their costs.

What are your thoughts on Japan? What do you make of the debate between promoting inflation and demand vs. structural reform and industrial revitalization? Do you think we are at or near the bottom? Finally, do you think the best opportunities are with the export-oriented success stories such as Toyota or Hitachi or more the domestically-focused and/or distressed companies that will benefit from an economic turnaround?

I believe that in 2003, the Japanese stock market will bottom out and that good opportunities will arise. I am negative about Japanese bonds because I see a weaker Yen ahead and also the aggressive monetizing of the debt is likely to lead to higher inflation and interest rates.

Korea is viewed as one of the great "post IMF crisis" success stories. The country has shown a rapid willingness to reform and investor interest has grown to the point that companies such as Samsung now enjoy a larger market capitalization than Sony. It has also a rapid adapter of new technologies and leader in areas such as online trading, broadband and mobile telephony. At the same time, consumer debt is rising, unemployment is beginning to increase and troubles with the North are becoming a growing international concern. What are your views on Korea and it s economic prospects?

I think Korea will do just ok. I am not such a great believer in the success story of the last few years, which was built on excessive consumer debt. The stock market is somewhat over-sold and could rally from the present level by 20% to 30% this year.

Any thoughts on the emerging markets of Latin America, Central and Eastern Europe and the Newly Independent States and Africa you can leave with us?

I like some Latin American countries, because they are resource rich and will benefit in the environment I outlined. The price level of Argentina and Brazil is low and stocks may actually surprise on the up-side.

You recently authored a book named "Tomorrow's Gold" that has been attracting a lot of attention. Can you tell us about it?

Yes, it is doing very well and it will be translated into several foreign languages. Many people have written to me that the book is one of the most readable and interesting investment books. In my introduction to the book, I wrote that I owe all my knowledge to people from whom I learned a lot including Henry Kaufman. Sydney Homer, Charles Kindleberger, and all the classical and Austrian economists. I also learned a lot from Alan Greenspan, so if I am one day the head of the Zimbabwe Central Bank, I won’t repeat the same mistakes….

Thank you, Marc for a most informative discussion. Do you have any closing remarks for our readers.

"Follow the course opposite to custom and you will almost always do well"
J.J. Rousseau.

Click here to purchase "Tomorrow's Gold" directly from Amazon.com

Editor: Dr. Scott B. MacDonald, Sr. Consultant

Deputy Editors: Dr. Jonathan Lemco, Director and Sr. Consultant and Robert Windorf, Senior Consultant

Associate Editor: Darin Feldman

Publisher: Keith W. Rabin, President

Web Design: Michael Feldman, Sr. Consultant

Contributing Writers to this Edition: Scott B. MacDonald, Keith W. Rabin,
Jonathan Lemco, Jean-Marc F. Blanchard, Barry Metzger, Russell Smith,
Ilissa A. Kabak, Andrew Novo, Jonathan Hopfner, C. H. Kwan, Dominic Scriven and Andrew Thorson

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