Marc Faber: I’d Buy Gold & Treasurys

Marc Faber is the editor and publisher of "The Gloom, Boom & Doom Report" and founder of Marc Faber Limited, an investment advisory and portfolio management firm, based in Hong Kong. He is also a keynote speaker at the upcoming Inside ETFs conference in January. ETF.com recently sat down with Faber to hear his thoughts on key macroeconomic and market themes.

ETF.com: I want to get your take on oil prices. They're tanking, seemingly every day, with WTI hitting less than $35 earlier this week. Is this something you see continuing?
Marc Faber: It can go down to lower levels for a brief period of time. We were at $147 in July 2008, and by December 2008, we dropped to $32. And then we rebounded from it. Markets are volatile; anything can happen. But from a demand/supply point of view, the equilibrium price is probably between $40 and $60.

ETF.com: You've been a critic of the Fed and its policies. Do you think the latest interest-rate hike was the right thing to do?

Faber: The best would be to have no monetary interventions. In other words, as Milton Friedman pointed out, to have a steady growth in money supply, fixed by the constitution at 2% or 3% per annum. We don't need a central planning authority to intervene and buy assets and boost the money supply or slow down the growth of money supply.

I'm against these constant interventions in the price of credit with monetary policies, but if they're going to do them, they should have raised rates in 2011 and 2012 when economic growth was much stronger than it is now. Right now, the global economy is slowing down meaningfully, so they should not have increased interest rates. But they did so to maintain some credibility.

The global economy is probably already in recession now. It will be more obvious in the U.S. in March or June of next year. At that time, the Fed will say, "Well, we didn't want to increase interest rates, but there was pressure on us to do so. So we increased them, and now we have a recession, and now we have to cut them again and flood the market with QE4."

They'll use whatever happens as an excuse to cut rates again and engage, as [ECB President] Draghi is currently doing, in unlimited purchases of assets.

ETF.com: So you see this interest-rate hike backfiring, and eventually the Fed is going to have initiate quantitative easing again down the line?

Faber: The global economy isn't really affected by a 25 basis point increase in interest rates. But I believe the Fed will point to that as the reason for the coming recession.

They basically view money printing as good and tightening as bad. The economy is slowing down meaningfully. When the Fed realizes the economy is in recession, they will cut again.

ETF.com: If the Fed is forced to backtrack on interest rates, that can't be good for stocks, right?

Faber: It's not good for the stock market. If you look at valuations of U.S. stocks relative to valuations in other markets, the U.S. stock market has big downside risk.

ETF.com: Do you see value in the emerging market stock market after they've come down so much?

Faber: There is value here and there. But in general, considering the slowdown I'm expecting, there's no hurry to buy these emerging markets. You can wait for another six months or so.

If you said, "Marc, here's $1 million. You have to choose, and you can only choose one thing: You can buy the U.S. stock market or you can buy emerging market stocks." If this was an investment for the next five to 10 years, I would say to buy emerging market stocks.

ETF.com: What areas are you bullish on?

Faber: Around the world, there is still opportunity in real estate. Not at the highest end. For example, in Los Angeles, some areas like Beverly Hills are very pricey. Young people can't go and live there; it's out of the question.

But they can go and live in East Los Angeles, which is developing very rapidly, having previously been a dilapidated area. That’s happening over in other cities such as Berlin, Frankfurt, Munich and Zurich. If I lived in those areas, I would probably invest some money in real estate.

In Asia, we have huge wealth in Japan, South Korea and Taiwan. We have developing countries with very low GDP per capita, as low as $1,000 per annum in Laos, Cambodia, Vietnam, Myanmar. These are regions that will also have rising real estate markets over time. It's is very regional and fragmented, but there are opportunities.

No. 2, look at the yields of European bonds compared with U.S. bonds. I see France yielding 0.97% on the 10-year, Germany yielding 0.63%, Italy yielding 1.68% and the U.S. 10-year yielding 2.26%. What would you rather own? A 10-year U.S. Treasury or Italian bonds?

The central banks have distorted any price mechanism. But in this environment of distorted prices, you can say something is relatively inexpensive and something is relatively expensive. U.S. bonds look relatively inexpensive, so I bought some 10-year Treasurys.

ETF.com: Where else do you see relative value?

Faber: Stocks in some countries have more upside than others. The stock market in Vietnam, due to the improving economic fundamentals, has better potential than Hong Kong and China, where the fundamentals are worsening.

I also believe precious metals are inexpensive, though they may stay inexpensive for a bit longer because sentiment is now very negative.

Again, if you said, "Marc, here is $1 million, but you have to put everything in either gold or in the Dow Jones," then I would say I'd take gold.

Everything is distorted, and it's a relative game. Looking at the fundamentals of the world, including the quantity of money, the magnitude of debt as a percent of GDP, the low economic potential and the mad frame of mind of central bankers and their intellectual dishonesty, I would own gold.

ETF.com: You're going to be at the Inside ETFs conference in Florida in January. What are you going to be talking about?

Faber: I’ll talk about macroeconomic developments. Right now, the mood is very negative about Asia. I moved to Asia in 1973 and I've been writing about it in my “Gloom, Boom & Doom Report” since then. When I came to Asia, Hong Kong, Singapore, Taiwan and South Korea were dirt poor. But you go to Korea, Taiwan or Singapore nowadays, and they’re very modern societies.

There has been a huge economic development. On the other hand, in the West, not much progress has been achieved in terms of real GDP per capita. The typical family in the Western world—including Europe and the U.S— is actually hardly better off than in the 1970s.

Carl Icahn and Mark Zuckerberg are much richer. That's true; some people have become very wealthy. But the typical family has lagged behind significantly. But in Asia, I can say that basically everybody has progressed; some more than others, but there was huge progress.

The dominance of the global economy that resided with Britain in the 19th century, with Europe and the U.S. in the 20th century, is moving elsewhere—particularly to Asia. In the long run, there are still huge opportunities there.

ETF.com: It's easy to forget that these Asian economies are still emerging and still growing, though they may be in a slowdown currently.

Faber: The problems they’re facing may last a few years. But in a portfolio of Singapore and Thai shares, our dividend yield on average is 4-5%. Sure, they're not performing well in the near term, but compared with Japanese bonds, Italian bonds, etc., I feel reasonably OK about my returns.

Editor's Note: ETFs related to Faber's views include the Market Vectors Vietnam ETF (VNM | C-39), the iShares MSCI Singapore ETF (EWS | B-96), the iShares MSCI Thailand Capped ETF (THD | C-98), the iShares 20+ Year Treasury Bond ETF (TLT | A-83) and the SPDR Gold Trust (GLD | A-100).

Contact Sumit Roy at [email protected].