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Interview
with Dr. Marc Faber, Phd: Investment 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
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