Tuesday, November 24, 2015

Full interview with Sprott and Tekoa

Marc Faber interview with Tekoa Da Silva of Sprott Global

TD: Marc I saw some recent commentary of yours indicating that there’s only so much debt-funded capital investment a person can make in their business before the debt becomes superfluous, unhelpful. Can you talk to that?

MF: Well, I distinguish between productive credit and unproductive credit. A productive credit is something like—let’s say we start a company. We buy the land. We build the factory. We acquire machinery and inventories and we hire people and then we produce either goods or services.

That credit is then serviced by the cash flow our businesses will generate and by the earnings over time, we will repay the loan.

An unproductive credit is a credit whereby you and I borrow money to go and gamble in Las Vegas, or buy a car. Then every month we have to pay off that loan. So that unproductive credit loan, in the initial stages of society, yes it stimulates economic growth above the trend line because future demand is advanced to today.

Otherwise, people would save for ten years and then buy a car. Now, they can buy the car today and pay it off over time. But unless the wages go up substantially, it’s a very unproductive credit.

TD: Marc, I’ve also seen you note that early American railroad companies, heavily indebted, mostly went bankrupt. But they left behind lots of physical assets created by the debt.

Currently, is Western society creating anything with all the debt? 

MF: Yeah, I love that question because when the people default on their household debt, mortgage debt, and student debt, I wonder what will be left behind. They will be people you can’t hire because they studied the wrong stuff.

The difference with the US is that if there is a massive default, nothing will be left behind. At least in China they will have railroads, tunnels, bridges, highways, airport infrastructure, port facilities and so on.

So I say that China, with all its shortcomings and faults, at least they have had productive credit until recently. Recently it has also changed somewhat. But at least it has been productive credit that builds something. Here in the US, credit is used largely for consumption.

TD: Do you have any idea how this is going to resolve itself?

MF: Well, my sense is that the current neo-Keynesian interventionists, using fiscal measures and monetary policies, will in time fail massively. It’s not going to work. If in the US, you print money, then yes, real estate recovers somewhat, stocks go to new highs and so forth.

But the median household income is down because the cost of living for most people is going up much more than wages. So these monetary policies have, in my view, in the long run a very negative impact on economic activity and not a positive impact.

Anyone with halfway common sense can understand that printing money does not create a rich and prosperous society. Otherwise, nobody would work and everybody would have a money-printing machine at home.

TD: Another piece of data I saw you publish recently was a chart showing the increase of service sector employment contrasted against a decline in manufacturing employment in the United States.

How does that resolve itself? Does something change with the currency and cause export opportunities to become more attractive over time?

MF: Well, the manufacturing sector in general has high-paying jobs. They’re not the highest-paying jobs but they’re relatively high-paying jobs because nowadays, in manufacturing, you have machines that cost $5 million. Some cost $25 million.

You can’t have someone operating that machine that spends the whole day on his Facebook account. You need someone with some skills and most people that come out of universities nowadays have zero skills but lots of student debts. That’s the difference with previous generations compared to this generation.

On job creation, we’ll soon have more bartenders in the US than people employed in manufacturing. Of course it’s more fun to work in a bar than in a factory but it doesn’t help society overall.

It’s actually very interesting that although the cost of labor in China and other countries has gone up a lot in the last 10 years (in other words the wages went up a lot), the US in terms of goods, the deficit is still rising. It’s not contracting.

Where it’s contracting in terms of trade deficit is the oil sector. In other words, the US needs to import less oil. So that has helped but on manufactured goods, the deficit of the US is going up, up, up, and up.

So the manufacturing sector which is at the backbone of an economy is basically shrinking relative to the whole economy in the US.  People working in healthcare, nursing homes, bars, restaurants (in other words low-paying jobs)—that is booming. Amusement parks also.

Prosperity is not created as a result, and this is reflected in statistics such as home ownership rates. Young people, they generally have no money to buy a home. They hardly have the money to rent their homes. So they stay with their parents or they share an apartment with one, two, three, four, five, six, seven different people.

This is the new reality. Then you hear statements by the Fed and the financial sector on how great everything is because the stock market has gone up.

I was recently in Turkey. Some media hack said to me, “Well, the stock market is going up.” So I said, “How many people in Turkey own shares?” He said, “1.3 million.”

Of a population of 80 million, I told him, “You mean to say that you favor say monetary interventions that benefit 1.3 million at the expense of the other 79 million?”

Understand what I mean? Because if you print money in Turkey, the currency goes down and it hurts most people, but it benefits shareholders because stocks go up. 

TD: Marc, what do you see over the next decade or two in terms of Asian growth? In decades past if you look at 100 people, a certain number may have a car, a certain number may have a refrigerator, etc. What do you see when you explore these days?

MF: Well, everything is relative. I think that realistically seen, Asia can grow without the rest of the world. What we need is peace. If there is peace I think there could be growth across Asia. I would say 4%-5% per annum. Maybe some countries like Vietnam can grow at 6% per annum trend line. Maybe India can grow at 5%-6% trend line.

Compared to Europe, I think there will be no growth for the next 10 years. In the US in my view, there will hardly be any growth, and the standards of living and real incomes will go down.

So a growth rate of 3%, 4%, or 5% in Asian regions would be fantastic.

Near term, my sense is that the Chinese economy is growing at a maximum of 4% per annum. In most countries I visit, whether it’s Singapore, Hong Kong, Thailand, Malaysia, Indonesia—we have at the present time practically no growth. Maybe some contraction. In Singapore, the manufacturing sector has been contracting.

TD: With that in mind, how far into this commodities down cycle do you think we are?

MF: Well, compared to the stock market commodities are probably relatively inexpensive. But a strong price recovery I don’t see. First of all, a lot of commodity supplies are coming on stream.

Second, a lot of producers will continue to produce as long as they cover variable costs. Three, as I mentioned before, demand from China is not likely to pick up anytime soon.

So the outlook for commodities is maybe not much lower on the downside and maybe you can have a rebound. Oil fell from over $100 down to around $40. Maybe we can have a rebound to $60. I would guess the long term equilibrium price of oil is somewhere between $40 and $60. But you can undershoot, like in 2008, when it went down to $32.

TD: How do you see the precious metals--gold, silver, platinum, palladium fitting into that picture?

MF: Well, precious metals are relatively inexpensive compared to equities. So if you want to invest new money at the present time, I would recommend looking at mining companies and the precious metals. Personally, I don’t think precious metals, gold, silver, platinum, have a lot of downside risk.

But other people will disagree with me and say well, “the metals are useless, they will go lower.” That I doubt because of what I just said. With central banks coordinating policies and printing more and more money, I think some people will gradually say, “Well, if we get negative interest rates on deposits, then why not hold some gold?”

If on a ten-year Japanese bond I get only 0.29%, I would rather own gold. You understand?

So I think in the absence of anything more compelling, with grossly-inflated assets markets, gold, silver, and platinum are relatively attractive. And statistically—gold mining shares compared to the rest of the stock market are incredibly inexpensive.

TD: Marc, what would you advise to the individual—what can they do to shield themselves?

MF: Well, my view is that we had a fabulous time for asset holders, from 1981 to recently. Stocks went up. Interest rates went down. In other words, that lifted bond prices.

If you invested continuously with the cash flow every year since 1981 in 30-year bonds, you’ve actually outperformed equities. But you have to roll it over and you have to reinvest the interest.

If you invested in homes in 1980, even after the recent decline, you’ve still made a lot of money. In particular, if you invested in high quality homes, in say Newport Beach, Vancouver, Whistler Mountain, Sun Valley, Aspen, the Hamptons, New York City, Madison, Fifth Avenue and so forth, those have gone ballistic.

If you bought a Roscoe or Picasso painting in 1980, by now it’s up maybe 20x. So lots of things have gone up a lot in price, and that was the ideal time for asset holders. But from here on I expect asset returns to be very muted.

Now you can come to me and say, “Yes, but if you invested in Facebook, you would have made a lot of money.” Yes. But I can then turn around and say that Facebook investors, they probably also owned GoPro. They owned Yelp and Twitter, all stocks that have tumbled. You understand?

So that one stock has done fantastically well and this is one of the problems for the stock market. At the present time, there are only about 10 or 15 stocks making new highs. The broad market-- in other words the ‘generals’ are moving ahead, and the soldiers behind are no longer following. They’re all down. They’re all dead.

So the market in my opinion has very little upside potential. Bonds have very little upside potential. Gold, silver, and platinum probably have the best upside potential in this environment. But it may take a while until it really gets going.

TD: Marc, is there anything you think we may have missed?

MF: I think this covers it. But I did mention to an audience today that I like Indochina, Cambodia, Vietnam, Myanmar, Thailand and so forth. It is a region that will grow a lot and there is great economic potential.