Marc Faber readies for hyperinflation, dollar's demise and civil unrest
SAN FRANCISCO (MarketWatch) — Mr. Market, the doctor will sell you now.
"Dr. Doom," that is — also known as Marc Faber, the Hong Kong-based investment manager, author, and publisher of "The Gloom Boom & Doom Report," his monthly musing about the state of global economics and geopolitics.
Faber is to financial-market optimists what the Grinch is to Christmas. He doesn't often like what he sees, and nowadays he finds even less to like about the world's economic situation than he did in 2008 — as if that wasn't bad enough.
"Financial conditions are today worse than they were prior to the crisis in 2008," he said in a telephone interview earlier this week from Thailand. "The fiscal deficits have exploded and the political system [in both the U.S. and Europe] has become completely dysfunctional."
Certainly, the unprecedented global stock market volatility in this hot August, including Thursday's rout, suggests that investors and traders alike are looking for someone, somewhere, to take the wheel.
Pin that against a backdrop of fragile economies, inflationary government policies, high unemployment, social and income disparity, military actions and geopolitical tensions in the Middle East and Asia, and you get a good picture of how Faber sees the investment map.
Faber (pictured left) doesn't take a contrarian stance in the strict sense; it's more of a constant vigilance — capital preservation over capital appreciation — so that one can live now to fight for investment gains another day.
"The way I look at it," Faber said, "I am ultra-bearish about everything geopolitically. In an environment of money printing, we have to ask ourselves, how do we protect our wealth? ... Where do we allocate the money?
Good question, but in fact a fairly straightforward one if, like Faber, you believe that Federal Reserve policy is stoking speculation over savings and debasing the U.S. dollar, hyperinflation is a real possibility, the stock market's recovery since 2009 has favored the rich and powerful, cash is trash, and gold and land in the countryside are the only true safe havens.
"The Federal Reserve is a very evil institution," Faber said with characteristic bluntness, "in the sense that they punish decent people who have saved all their lives.
"These are people who don't understand about stocks and investments," he added, "and suddenly they are forced to speculate."
Speculation is the opposite of investing — of which there is little of nowadays from the corporate sector, let alone government and retail stock buyers. Corporations are instead hoarding cash out of concern that slow global economic growth will slam profits.
Such a miserly attitude can become a self-fulfilling prophecy. Faber noted that corporate earnings will likely disappoint stockholders across the board, including commodity shares, with the exception of traditional defensive sectors such as health care, consumer staples and utilities.
Moreover, one of the main ways corporations are spending money — on mergers and acquisitions rather than on hiring and equipment — is ultimately inflationary, Faber said.
"The corporate sector is not spending much money on capital investments and new investments — that's why they have this huge hoard of cash," Faber said. "There will be many more takeovers and industry consolidation in the years ahead. It destroys jobs, but this is what will happen. As industries consolidate, they get more pricing power, and the cost of living increases."
Of course, Faber points out, while such dealings might not be ideal for Main Street, it can sustain Wall Street, which leads Faber to a prognosis for stocks that may surprise the doctor's patients.
"I'm not that negative about equities," Faber said. "If you're bearish about the world, you'll probably be better off in equities than in government bonds and cash."
So batten down the hatches, double-check the locks and keep Faber's to-do list handy:
1. Avoid Treasurys
"It's a suicidal investment to own 10-year or 30-year U.S. Treasurys," Faber said.
What about the Treasury rally in the wake of economic weakness, stormy stock markets and investors' flight to safe havens?
"What does a weak economy mean?" Faber said. "It means collapsing tax revenues. The deficits go up. You have to issue more government bonds." The abundance of new debt would dilute credit quality, he added, only further sapping investors' confidence in Treasury debt.
"U.S. government bonds are junk bonds," Faber said. "As long as they can print, they can pay the interest. But another way to default is to pay the interest and principal in depreciating currency.
"For that reason I would advocate a wide basket of diversification out of dollar-based assets," Faber added. "The dollar may rally somewhat, but clearly in the long run the dollar and other paper currencies — the euro is not much better — will have a depreciating tendency vis-a-vis honest money: gold and silver."
2. Cash is trash
Given his bleak assessment of the U.S. dollar, it's no surprise that Faber doesn't recommend holding cash as a long-term cushion against portfolio shocks.
"It would be very dangerous to say 'I don't trust stocks, gold, real estate, I want to keep my money in cash.' That's a way to end up losing a lot of money," Faber said.
Specifically, the problem in Faber's view is the loss of purchasing power as inflation whittles away the value of money.
"We're in a paradoxical situation where under a traditional monetary system the safest places are cash, Treasury deposits, government bonds," Faber said. Nowadays, he noted, "they have been made by monetization into the most unsafe assets from a longer term perspective.
"Weak economies usually have higher inflation rates than stronger economies," Faber added. "In weak economies you have loose fiscal policies and money printing. And the U.S. is the world champion in loose monetary policies. I don't believe a single word of what the Bureau of Labor Statistics is printing about inflation figures.
"Paper money has lost its value," Faber said. "Hyperinflation is the pattern to come."
3. Stocks offer some safety
"I am not completely bearish about stocks," Faber said. "If I have cash, government bonds and stocks, for the long term, I'd take stocks."
Just not necessarily U.S. stocks.
While Faber said the U.S. market is "oversold" and the Standard & Poor's 500-stock index (SPX - News) could rebound to the 1250 to 1270 range, he expects U.S. equity values to decline — though not in a full-blown capitulation.
"My assumption is that March 2009 was a major low, and that we will not go back below that low," Faber said. "Can we go to 900 on the S&P? Yes."
But as the S&P 500 slides closer to 1000, the Federal Reserve could step in with a third round of stimulus for investors to cheer, Faber said.
Fed action, he noted, "may not lift stock prices to new highs, but it may stabilize them. If you print money, stocks will not collapse."
4. Emerging markets will expand
In contrast to his dim view of U.S. and other developed markets, Faber is downright sunny about investing in emerging nations.
"I do not think that investors fully appreciate the enormous shift that has and is occurring in the balance of economic power from the Western world to emerging economies," he told subscribers In a market commentary published in early August.
This week, Faber reiterated his opinion that emerging markets will reward buyers over the long-term.
"I happen to feel that somewhere in the world we can make 7% on equities for the next 10 years," he said. "I can buy you a portfolio of high-dividend stocks in Asia that would have a yield of 5% to 7%." Dividend predictability is one reason that Faber also recommends holding corporate bonds.
Faber's own stock portfolio is centered on dividend-paying Asian shares, particularly in Malaysia, Singapore, Thailand and Hong Kong. These include a variety of real estate investment trusts and utilities.
Lately he's also turned positive on Japanese banks, brokerages and insurance companies. "They have a better loan portfolio than the European banks," Faber said of Japanese banks. "The banks in Asia are in a very solid position. All these are a play on the recovery in the stock market in Japan."
5. Gold is worth its weight
Gold blew through $1,800 an ounce on Tuesday, continuing its forward march as investors seek higher ground. Given his world view, Faber is convinced that the price of gold will continue rising and that any pullback is a buying opportunity.
To understand why, you have to see gold like Faber does — as a currency, an alternative to the U.S. dollar, that will be increasingly in demand as the U.S. and other governments print more and more money.
"The function of paper money is to facilitate the exchange of goods and services, to be a store of value and a unit of account — the U.S. dollar fails on all three," Faber said. "Intelligent people, instead of holding cash in U.S. dollars with zero interest rates, why not hold money in gold and silver?"
And as a currency, Faber said gold should be held in its physical form and not in shares of gold miners or even exchange-traded funds. That would rule out popular vehicles such as SPDR Gold Trust or iShares Gold Trust (GLD - News)
Be sure to store your gold in banks in Switzerland, London, Singapore, Hong Kong, Australia — just not in the U.S., Faber said.
"Physical gold in a safe deposit box is the safest," Faber added. "Forget about huge capital gains. I would look at capital preservation. I want to preserve my capital."
Jonathan Burton is MarketWatch's money and investing editor, based in San Francisco.