Marc Faber Shares His Playbook for Hedging Against Inflation and Investing in Emerging Markets

Impact Wealth recently caught up with Faber from his office in Hong Kong to learn where he is advising clients to park their capital during uncertain times, what to expect when buying cryptocurrency, and which sectors after tech will have the best ROI for investors.

What is your perspective on the state of the world right now, and your predictions for the next 10 to 20 years relative to its economic landscape? 

Asia is rising and is becoming more important economically. And the countries in Asia have some economic advantages by not being democracies: decisions can be taken more independently or rapidly than in the Western world. Economically, you can’t be very optimistic about the Western world and America because the debt level has gone up a lot. And as you know, interest rates have recently been rising, not much, but percentage wise, they’re up more than a hundred percent on the 10 year US Treasury. And if this rise continues, then obviously the deficit will become problematic some time in future. And that will necessitate more money printing and the money will then flow into some assets. The money has flown into real estate in some areas and into equities, not all equities, but some equities, precious metals and into Bitcoin more recently. So whether the printing of money will help the economy and individuals is questionable, but it can continue to lift asset prices.

What do you recommend to hedge against this massive inflation that will come out of excessive money printing?

I think when you print money, there will be some symptoms of inflation, but we have to be very clear about one point: The Federal Reserve, or any central bank can print money, but they cannot demand or plan where the money will flow. So if you print money, it can go into commodity prices; into real estate or into Bitcoin.

The inflation we had in the last 20 to 30 years hasn’t been so much in consumer prices. Although if you look at your insurance premium, at your taxes, at educational services like schools or universities for your children, all these prices are up of course, much more than the consumer price index would suggest. But largely we had inflation in asset prices such as the price of a Picasso painting, stocks and bonds as interest rates came down.  Bonds became inflated, as well as growth stocks and real estate. Not so much in city centers because people have been moving out to the suburbs and in the countryside to areas that were previously depressed, and those prices have gone up a lot. So it’s not universal, but when you print money, it never goes evenly in the economy. That’s the tricky part for the investor.

What do you feel are safe havens for investment and areas that are undervalued that will appreciate given the way the world is moving? 

When I grew up in the late forties and fifties, the safe haven was essentially having your money in a savings account or a traditional bank. Cash was perceived as safe, but in a printing environment, cash is no longer safe: it will depreciate in value in its purchasing power. I think a big threat is the loss of value of the US dollar.  If you print money, it will go down relative to something where you can’t print or a country where you don’t print or a commodity that you can’t increase the supply dramatically, such as gold, silver platinum, or something like Bitcoin where you can’t increase the supply beyond 21 million units.

Do you think there are risks to investing in Bitcoin? Because even though it is limited, there could be other regulatory threats. There is not really a precedent for this kind of nascent digital asset.

People in the U.S. can buy Bitcoin or they can invest in an ETF that owns Bitcoin. So that shouldn’t be a problem. The issue, in my opinion, is that there is a euphoria at the present time in Bitcoin. The whole world could buy Bitcoin and pension funds could start to invest in Bitcoin, along with mutual funds and hedge funds. Prices could go up a lot. But the question is really, you have Bitcoins, but then there are other cryptocurrencies. So someone, one day could form another cryptocurrency that could be more accepted than Bitcoin. That’s a possibility, but equally, if you are a portfolio manager or you are a family office, I don’t see why you shouldn’t invest a little bit of your money in Bitcoin. Maybe it goes to zero, who knows. But if it works, it can go up a lot. If Tesla can go to $800, then a lot of things can go up.

What do you feel will be the best performing asset classes and sectors say in the next year or two?

I wrote about platinum two years ago, actually in 2019. I think that platinum is very attractive. As in downside, risk is limited. Usually platinum has been selling at a premium to gold, and now it is at a discount to gold of about 80%. So in other words, if interest goes to normal, which is a premium to gold, it would essentially double in price.

Over the last 200 years, we had the process of urbanization. In the 19th century, the rural population in America was much larger than the urban population, and people moved from the countryside to the cities, first to the cities on the East coast, and then in the Midwest. And at the end of the 19th century, there was a rush into California. This process of urbanization may reverse and people, especially in view of what has happened with the pandemic, may rather live in the countryside because life in the city centers is no longer very agreeable. That’s why if you look at Europe, the real estate prices in London, Madrid, Barcelona, Munich, Rome, Milan, Zurich, Geneva, and Amsterdam are very high, but the real estate an hour outside of the country city centers, or in remote villages in Portugal, Spain, Italy are very cheap. That’s where I would invest in real estate in the world: in remote locations.

In your portfolio for some of the families you manage, how are you allocating their investments?

In each bull market, you had a leading sector. In the late seventies, it was energy; in the early seventies until 73 in that bull market, it was the so-called NIFTY 50 stocks. These were companies like Sears and Eastman, Kodak, Polaroid, Xerox. These stocks went to the stratosphere, but then they crashed. In the late 1990s, we had the NASDAQ bubble and then the last stock crashed in all these cases. When the market crashed as a result of one sector having become overvalued, everything went down, there was hardly anything that went up, but there is an exception to this rule.  This is the Japanese bear market, which started off after December 1989. The Japanese had markets go up strongly from the sixties onwards to 1989. And in 1989, it made up for 50% of the world’s stock market capitalization. And then the Japanese market went down and in the US, the stock market went up and then stocks went ballistic and other emerging markets also went up.

So it could happen in this situation today that the tech-related stocks, Facebook, Amazon, and Google, go down and sectors that are depressed, like energy including coal oil, gas, and resource stocks like uranium and copper and nickel and gold, all of these could go up. That’s a possibility. It’s not something I would take on a mortgage to play the strategy. But I’m saying, personally, you asked me what I do, I have invested in some oil shares and in some banks also in emerging markets and I’ve moved money into Europe because Europe is the UK market. The United Kingdom’s market has never been cheaper relative to the U.S. market in its history. So statistically, look at these markets. I have invested in depressed markets relative to the United States, including emerging markets. Singapore is very cheap.

What are some of the advantages that you see for setting up shop in Asia versus the U S for some families that have the option?

I think you could ask the question: Why did some people in Europe move to the US in the 19th century? They thought the economic opportunities were better, so they moved from Western Europe to the US. And I suppose other people feel that the economic opportunities in Asia are better than in the US. I have young clients who are highly successful, tech people who made maybe a billion dollars or more at the age of 30, 35; they are renouncing their US passports.

In your opinion, what kind of economic reform do you think needs to happen in the next few years in order to stave off inflation or any of these dooms? 

Quite frankly, we’ve moved so far down the path of socialism that you have to reform society to again generate high gross rates. If you look at the 19th century between 1800 and 1900, the US economy grew at a faster pace. We need to move back to a society that accepts personal responsibility and away from a society where people expect when something is damaged (your car or the house or your health) that the government will solve the problem. This abdication of personal responsibility and assigning the responsibility to the government is very similar to a planned economy, a command economy, the socialist communist model, where the government plans everything for its citizens.

And with this planning, personal initiative and personal freedom diminishes. So I think we need to reform society. It’s not going to happen peacefully. It will be unpleasant. And economically, I have been an opponent to monetary policies for years. Everybody wants to print money because he benefits from money printing; corporate profits go up. When you print money, the portfolio managers, they perform better than when there’s no money printing. And so their fees go up. So they love it and nobody is going to criticize the Federal Reserve. Nobody, they all sit there and say, it’s all wonderful.

Do you see a great depression looming?

I can tell you that for some people, what has happened is already a great depression. The mortality rate of COVID-19 is not very high. It may be an unpleasant flu or something like this, yet it sounds very high.

And to combat this virus, there are governments in the Western world that have shut down economies and bankrupted small businesses. The barbershop, the cobbler, the small restaurants, a lot are gone and at least 40% of them will not return. And then you ask yourself, who did benefit? Well, the big chains, the big businesses; Amazon, Zoom, Walmart, McDonalds. If all the restaurants closed down, people order more from the chains, that’s still survival. So it’s, for many people, it’s a depression already. It’s actually worse than the depression because they knew they lost. They lost everything.