In Transcripts

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick


“I can’t imagine any other period in history such as we had between 1980 and today where asset prices have gone up to the same extent, assets such as art, stocks, bonds, homes – everything is much more expensive than it was 20-30 years ago, and that is overlooked frequently.”

– Marc Faber


Kevin: We have a guest today, of course, David, you mentioned him last week – Dr. Marc Faber. It is one of my favorite types of interviews because Dr. Faber comes at his analysis, which is, I think, now going on four decades, starting with philosophy. And you do the same thing. You bring perspective first, and then you go into detail.

David: When I first was encountering Marc Faber – this goes back probably two decades ago, because he has been a staple in our house from one generation, now, to the next – I enjoyed reading him, but what ratcheted up my interest was in the early 2000s when he wrote a book called Tomorrow’s Gold, and he was talking about Asia. He was talking about the growth in Asia, the dynamics that were in place, and he gave this broad historical sweep, making a case that the growth in Asia was a very compelling story. Of course, this was 2002, 2003, and he was spot-on. It has developed.

Now, there are other issues in place today. You can’t say that Asia is necessarily the same in terms of an opportunity set as it was 10-15 years ago. But he is very careful in his thinking, very historically grounded, certainly, as you mentioned, very philosophical in his orientation. And he is willing to take both sides of a position. He has the reputation for being a bear, and even a perma-bear, and that’s not the case. I’ve seen him very bullish through the years, because we’ve read him for two decades.

There are times that he has a bearish tone, but there are also times when he is very bullish on equities, when he is very bearish on gold as opposed to bullish on gold. So, it changes in light of the circumstances and in light of the markets, and I do appreciate that on a monthly basis. I would encourage people to go to his website,, to explore, and if you’re interested, take a look at his newsletter on a regular basis.

Kevin: I love the bird’s-eye view that he brings, and he does bring humility to the process, as well.

David: Dr. Faber, thank you for joining us again on the McAlvany Weekly Commentary. We’re very intrigued by your writings each month, and highly recommend the Gloom, Boom, & Doom Report. Your most recent letter – “Are Interventionist Policies Bad for the Economy’s Health” – was, as usual, philosophically reflective, looking at issues in the economy and the financial world from a unique perspective, bringing an insight from other fields.

Let me begin with this question: We may be six months into a recession already. Raising rates, in theory, would be a bad idea if that is the case, here in the U.S., and I wonder if the Fed isn’t obligated, at this point, to lift them at least 25 basis points, with all the verbal indications and the forward guidance that they have given suggesting that’s the course. What are the consequences, do you think, at this point, to either raising them 25 basis points, or not doing so?

Marc: Yes, that’s a very good question. First of all, I think, regarding the question whether we are in recession or not, an economy is very complex and it consists of many different sectors, from the health care sector to housing, to consumption, to production, industrial production, capital spending, and so forth. And what you can have is some sectors that are in recession, and other sectors that are not in recession. Moreover, we live in a global world. In other words, a company that may be based in the U.S. or in Europe, its main business may not be in the U.S., but somewhere else in the world.

And so, we have to look at the entire global economy. And in this respect, I think it is quite clear that we already are in an industrial production recession. In other words, industrial production is no longer growing, but contracting, in particular in China and in other countries that depend on China, the resource producers. And what is still doing well, relatively – and there are some questions about how you measure it – is the service sector. And so, what you have in the U.S. at the present time is still what they call an expanding service sector and you have a contracting industrial production sector.

And concerning the Fed, in principle they should not increase rates here, but I have to say this, that, in my view, they should never have cut interest rates to zero, and they should have increased interest rates a long time ago, probably already in 2010, 2011. So they kept rates artificially low for too long, and when they finally raise them it may have a negative impact whereby the bond market has already discounted an interest rate increase of around a quarter of a percent. So, if they increase the Fed fund rate to a quarter of a percent, the bond market, in my view, will not sell off.

And number two, if they do not increase interest rates, I think the Fed will lose a lot of credibility, or it will lose all its credibility because they have already lost a lot of credibility. If you look at public service, basically, the public has a very low opinion of the Federal Reserve, and if they don’t increase rates, I think that it will backfire on their prestige. But economically speaking, after having kept interest rates down for so long, the present time, theoretically, would be the wrong time to increase interest rates, just as the world is sliding into a recession.

David: So, if the currency of a central bank is its legitimacy, and if confidence is what keeps them in business, what do you think would change their more or less revered status?

Marc: Well, my sense is the Fed is basically a clueless institution. They consist of professors, and they have little business experience. They have, also, little international experience, and their forecasting ability is proven to be very poor. So, they have always said they are data-dependent. Well, data dependence would mean that at the present time they should not increase rates, but as I said, I personally think that they should have done it a long time ago. Data dependence would mean that at the present time they shouldn’t raise rates. It could be that they would increase rates by a quarter of a percent just to show the markets that they are willing to increase rates and because they have talked about it so much, and then they will not follow through. In other words, in six months’ time, or three months’ time, they can say, “Well, we have to cut rates once again because at the time we increased rates we were under pressure by, say, the Republicans, or whoever it is, to increase rates. We knew that it wasn’t a good time, but the market forced us to do it. And they’ll find an excuse.

David: What do you think about Knut Wicksell’s idea? If you’re right, and number one, they should not have taken rates to zero, but then as you also suggested, we’ve kept rates too low for too long, Knut Wicksell would have said, “You keep rates too low for too long and they will ultimately go much higher than you want them to.” How do we keep a lid on rates? would be the first question. And maybe a nuance of that is, can central banks actually keep control of that market? Or is that a presumption of control that really doesn’t exist?

Marc: A central bank can keep control over short-term rates, but they have no control over long-term rates, or very little control in theory. They have the control in the sense that they could buy up all the 30-year treasuries in the U.S., or in Japan, the Bank of Japan could buy up all the treasuries outstanding, all the JGBs. That, they can do, in theory, but obviously, the consequences are not very desirable because I think if the government in the U.S. would buy up all the treasuries then the bond market liquidity will suffer very badly, and probably at that stage the dollar could become quite weak.

So, over the short-term interest rates they have some control, over long-term, little. And where they have no control – I have to specify this, they have no control in a free market economy in a capitalistic system – is over the lower-quality bonds, the junk bonds. The triple Bs, the double As are the worst. But it’s not correct to say they have no control at all because in theory, they could also buy up everything, also these bonds, and in theory they could buy up the entire stock market, you understand. So, we don’t know how far they will go. That is the problem.

David: Back to this issue of edging into a global recession. For many years, it was the U.S. current account deficit which was driving global growth as we exported dollar liquidity. In the aftermath of the global financial crisis you then had China appear to be the primary driver of global GDP growth. Much of it was, of course, generated by interventionism from the People’s Bank of China. What, or who, is the next driver of global growth?

Marc: Again, it’s a very good question, and I have to correct you here a little bit. The U.S. Trade and Current Account Deficit did not necessarily drive global growth, but they drove global liquidity. That is a very big difference. And the Trade and Current Account Deficit meant that capital investment and production was carried out somewhere else and that boosted income somewhere else, and so forth, but every current account deficit is obviously offset by a current account surplus somewhere.

And so large reserves accumulated in the Middle East and in Asian central banks and that liquidity then flowed back into the U.S. in the form of treasury bonds and treasury security purchases, and more recently in the form of buying assets such as stocks, and in the case of Chinese, in particular, buying real estate. So on the one hand, money flows out through the trade deficit, then it comes back in the form of asset purchases, but the impact on the economy is, of course, very different. In the one case, when the money flows out of the U.S. and it boosts capital spending and industrial production, it creates prosperity somewhere else. When it flows back to the U.S. the impact on economic growth in the U.S. is very minimal because they buy existing assets.

But the point is, reverting to your question, what will drive global growth from here? There will always be some growth in the world, and maybe not across the board, but in some sectors, and also we shouldn’t be obsessed with growth [unclear]. It would be important to lift the standards of living of people. So, in theory you could have a stagnating economy and the standard of living of people goes up because of more favorable regulations or better infrastructure, or cleaner air. So growth, by itself, is not necessarily the most desirable objective. Quality, not quantity, is also important.

But what will drive it in the future, quite frankly, because as you pointed out, I travel a lot. In China we have a very meaningful slowdown, and it’s not the slowdown that will be over in just three months’ time. The Chinese economy has decelerated very meaningfully and some sectors of the economy and some provinces are in recession, and how they come out of it is not entirely clear to me because of the bloated debt level. And in turn, China was a big buyer of goods from emerging economies, from the commodity producers, so when the Chinese economy slowed down commodity prices collapsed. And that, then, brings a recession to commodity-related countries.

For instance, Goldman-Sachs recently said that in Brazil you almost have a depression. I don’t think it’s a depression because I’ve just been there, but definitely, it’s a contraction in the economy, we have to see that. And throughout Asia we have economies that are no longer growing. With the exception of Indo-China, being Vietnam, Cambodia, Laos, Thailand, Myanmar, and in the north Yunnan Province, and then adjacent to Myanmar to the west, India and Bangladesh. These countries, well understood from a very low level they have a GDP per capita of around 1000 U.S. dollars. And so there, there is still some growth. That is why I said at the beginning, you can have in the world, essentially, a contraction in overall growth, but some regions can still grow.

David: I spoke with Charles Goodhart earlier this year and discussed the implications of additional monetization schemes, new QE programs, and he, surprisingly to me, sort of offhandedly commented, “Oh, we’ll just sterilize those purchases,” as if there would be no impact. And I wonder, as we move toward a “normalization of rates,” which sounds great – I wonder if the massive quantities of debt in the system, the corporate and governmental debt, in particular, which has risen dramatically since the 2008-2009 period – am I missing something? Is there something in the debt and rising interest cost category that to a central bank seems clear: “This is not a problem, there is a very simple explanation and reason why we have nothing to be concerned about.” Is there something I’m missing?

Marc: Actually, no. I was recently at a panel discussion and one of the economists suggested that the Fed will definitely increase the Fed Fund rate to 0.25% in December, and then they will move to 3% next year. So, let’s say you have a Fed Fund rate of 3%. That would imply, in my view, everything else being equal, which never happens, but under normal conditions would imply the ten-year treasury note yield of probably around 4%, and the 30-year probably around 5%. And then the mortgage rates [unclear] would be probably around 6%. I tell you, the housing market collapses if interest rates go up meaningfully.

David: So the implications are very real, and it’s not as if we can ignore the impact of the rising cost of capital.

Marc: In my view, no. Money has already tightened at zero interest rates. That is why the dollar is so strong. Milton Friedman said at the time that the level of the interest rate does not tell you whether monetary policies are expansionary or contractionary, and we have had a tightening of global liquidity with evidence in some sectors of the economy where corporations have now more difficulty to borrow money and they have to pay higher prices. And in my view, if the Fed really goes to 3% next year, which I have to emphasize, I do not believe for a minute that they will move there, but if they do, I tell you, the U.S. will be in a recession, but 100%, not a smaller recession, a significant recession.

David: For corporations, if you exclude the financials, we’ve seen debt which has nearly doubled at that same time the average interest rate on that debt has dropped by about a third. So far, so good, there is really no problem here. You double your leverage and you increase the interest expense by – let’s say your interest expense is only increased by about 10%. Again, so far, so good. In theory, you can buy a lot of growth with that capital. Is that what corporate America has done with the increase in debt?

Marc: They haven’t bought a lot of growth (laughs), they’ve bought back their own shares, which in the long run is actually bad for growth, and they engaged in mergers and acquisitions financed by debt, which is also negative for growth in the long run. But I would not overlook the fact that since the mid 1990s the U.S. government’s debt has grown from roughly 4 trillion dollars to now close to 19 trillion dollars. But the interest expense on the government’s debt hasn’t gone up. It’s about 250 billion dollars annually.

Now, if the Fed Funds Rate goes to 3%, then obviously the interest cost on the government debt will go up very substantially. So, the government, instead of paying, say, 250 billion dollars annually, would have to pay something like 500-600 billion dollars annually. So, basically, it will go up.

Number two, say the Fed Funds Rate is at 3%, and the Japanese interest rates are at zero, it should be clear to me that people will then move out of Japanese bonds and Japanese cash into U.S. treasuries and treasury notes to catch the higher interest rate, and the yen will collapse, and then other currencies will also collapse. And it will go on and on and on. So I think, actually, the Fed, and in coordination with the other central banks, they all move themselves into, essentially, a disaster scenario in the long run.

Now, whether disaster will strike now or in five years’ time, we don’t know. I don’t think their monetary experiment will lead to anything but a collapse of the system. Throughout history, starting 4,000 years ago, before Christ, in Babylon, up to today, interest rates globally have never, ever been this low for such a long time. This is really a new experiment carried out by some academics.

David: When you look at the environment, when you see retail stocks 20-40% off of their peaks, when you see copper in decline, and other industrial commodities at 2008 and 2009 crisis levels, what is Dr. Copper telling us? What are the commodity currencies, like the Aussie dollar and Canadian dollar? What are they telling us at this point?

Marc: They are telling us that something is not quite right, or they are telling us that something, actually, is terribly wrong. And I always tell people who are so optimistic about the U.S. stock market, five years ago people were very optimistic about commodities – intelligent people, and then commodity prices collapsed. They didn’t expect that. And the oil analysts were all essentially positive about the oil price, and then it collapsed. So, the only thing that hasn’t really gone down yet, meaningfully, are real estate prices around the world, although they had the collapse of 2007, but they recovered – not everywhere did they recover fully, but there was a stronger recovery. And stocks are at a high in the U.S., but of course, not in American economies where most stock markets, in dollar terms, are down 20-30% from the peak, and bond prices are at the peak because the market for bonds is being manipulated by the central bank.

David: And this gets to a very critical question: How do you find value in an era of easy credit and central bank market interventionism?

Marc: You have to tell me where to find value.

David: (laughs)

Marc: But if I look at all asset prices I can see some value here and there in some markets. The Iraqi stock market is cheap, the Vietnamese stock market is not particularly expensive. Real estate in Indo-China, which is Vietnam, Laos, Cambodia, Myanmar, Thailand, is not particularly expensive. But what strikes me as the most depressed asset class relative to everything else is, essentially, the precious metals. My sense is that if you consider the debt level in the world in 1999 and today, and you consider the population growth over that period of time, and you consider the growth in central bank assets over that period of time, and the value of equities around the world, then I think I can make the case that, actually, gold, silver, platinum, and the shares of these precious metals, the mining companies, are as depressed as they were in 1999, from where they had a very strong rally. So, maybe they are not, in absolute terms, as cheap as they were then, but relative to everything else, they are a good value at the present time.

David: So, the topic is fortitude. In your most recent missive, you attached comments from Daniel Oliver discussing the gold shares in their past, their current, and perhaps their future performance. Can you comment on the psychological challenges of investing, which he brings out when he says, “Sadly, it’s doubtful that many who took the trip down have the fortitude to stay for the trip back up.”

Marc: But that’s the problem of investing. If you look at 1982, August, the Dow-Jones was below 800, so most of the people who are my age, over 65, they could have bought the Dow-Jones at the time and had a huge gain on stocks because that 800 level in 1982 to today is not a total return. You would have to add the dividend into the equation, so the total return would be extremely high. But how many people have the courage to hold stocks for such a long period of time and ride out the 1987 crash, then there was a correction in 1993-1994, and then there was a big correction in 1998, and then after 2000 and after 2007.

So, I think it is very important for investors to stay disciplined and say, “Okay, I’m going to have at all times, some money in equities, some money in real estate, my house or rental properties, and some money in cash and bonds, and some money in precious metals. And if one of these assets really goes down meaningfully, then the cash and the cash flow from my bonds and the dividends will allow me to increase my waiting in that particular asset class.

But most investors are not like this. What they do is, they buy technology stocks in 1999 and then comes the crash of technology in the year 2000, after March 2000, then they all pile into financial stocks and real estate after 2001, and then comes the real estate crash after 2007, and financial stocks tumble and then they lose a lot of money there. And then they pile into commodities, they lose money there. They basically are out of step with what is happening in the markets, and if you look rationally at equities today, then you can say from an evaluation point of view, the U.S. market is expensive.

Now, can it get more expensive? Yes, it can, but it can also get much cheaper. And so you would then try to measure, “What is my potential reward if I’m right and stocks become more expensive, and what is the potential loss if I’m wrong and stocks go down?” And so, each investor has to, essentially, take a very disciplined approach to investment, and say, “I’m going to buy assets when they are relatively cheap.” And it is correct, what you said, most gold investors – and I’m on the boards of some gold companies – even the employees of gold companies and the boards of directors no longer believe that the gold price will go up (laughs).

David: (laughs) Well, the COT report out recently shows large speculative investors short and the commercials very close to a net long position, and these are the kinds of levels that have classically been present at a significant turn in the market, implying a significant rally in gold in the next few weeks. And here we have, in retrospect, ten years into the past, where gold went up 600%, and then it was followed by five years where gold has declined by about 46%. What’s next in the gold market? When you look at it from a relative perspective, are you saying that $1000 dollar gold actually makes sense, and there’s not very much to be afraid of?

Marc: Personally, I think it makes sense. But number two, I want to have some aspects outside the monetary system. In other words, I don’t want to have all my money in stocks and bonds, I don’t want to have all my money on deposit with the bank, and so, I want to hold something in liquidity, but outside the financial system. And therefore, I hold gold, essentially, as an insurance. I’m not terribly concerned about the price. Yes, it would be nice if it goes up but I’m convinced that, as I explained in my introduction, the actions by central banks around the world can only lead to a horrible outcome – horrible – and in that scenario, I don’t want to have all my money with a bank, I don’t want to have all my money in stocks, and I don’t want to have all my money in bonds.

David: Is there something to be gleaned from the sociological, and maybe even psychological observation you made about the boards and the employees of gold companies which today have a sentiment which is really almost destroyed. They look and say, “Really, there is no future in our industry.”

Marc: (laughs)

David: (laughs) Is there something to be gleaned by – I don’t know that that implies a capitulation in the market, but what do you surmise as you listen to those kinds of comments and sentiment?

Marc: As you know, I have also a website, and I write market commentaries, and basically, I’m now dismissed with, “Oh, Marc is always bullish about gold.” This is not entirely correct, but I would always hold some of my assets in gold. And I think that, as I mentioned to you, if I look at the bond market, at the stock market, at cash in the bank that doesn’t have any yield, at the art market, if I look at all these, and then I look at the global debt level, and I look at the level of central bank reserve, how much it has gone up, don’t forget Federal Reserve, in the mid 1980s, had a balance sheet of 200 billion dollars – now it’s over 4-1/2 trillion. So under these conditions I say to myself, “I want to have some gold.” I don’t even care so much whether it goes up or down. And I also don’t care if other people own it or not – not my business. My business is to look after my assets.

David: There is this issue of either market dynamics driving the price, or supra-market dynamics driving the price, and I’m not particularly given to conspiracy theories by personality, but it is interesting that many of the major declines in the price of gold over the last five years have been in large block trades in otherwise thin time frames in terms of volume. And I supposed you could describe those moments as manipulation. At what point do you think those are issues we see in the rear view mirror and that “manipulation” becomes less effective?

Marc: No. I can answer it. Basically, it is true that what I would call knowledgeable observers, and there are even academic studies on the topic, have basically established that there has been manipulation in the gold market. I have no proof, personally, but based on these studies I have to assume that, yes, there is some manipulation in the gold market. To what extent it will last and be successful is very questionable, because if you look at the history of intervention, wage controls, or cartels, price support measures, or price controls like rent control, eventually the market has always overcome them.

And if the conspiracy theories are right, and there has been manipulation and the price of gold has come down as a result of that, actually, as an investor I’m rather happy about it because then I can buy gold at a lower price than I could have done otherwise. So, from a longer term perspective, I’m not all that unhappy about the price decline because now, instead of paying $1700 dollars for gold, I can buy gold around $1000, or maybe if they manipulate it down even more. And as I said, I have no proof that they do, but I’ve seen studies that are very thorough that have proven, as you pointed out, that some large sales have occurred in the past and depressed the price.

But as I said, I don’t think it will last. I think the market will eventually overcome this manipulation. It is like interest rates are too low. It’s ironic that Italy, Spain and France have lower ten-year government bond yields than the U.S. There is a very clear manipulation of interest rates in Europe, and in the U.S. also to some extent, but to a lesser extent. And in a free market, Spanish, Italian, and French government bonds would have a higher yield than U.S. treasuries. Nothing is good about the U.S. government’s finance, but it’s probably better than Italy and Spain.

David: We come back to this issue which you addressed in your most recent letter, that of interventionism. And if the history of interventions is that the market ultimately overcomes, you had a great picture here of antibiotic-resistant strains of bacteria. You overuse antibiotics, you overuse intervention, and you have the market, essentially, adapting to that, or in the case of bacteria, bacteria adapting to that, and bacteria then becomes some sort of a super strain and antibiotics don’t work anymore.

Marc: I think investors have to realize – everybody thinks, let’s say the U.S. prints more money, in other words they launch another QE, that stocks will go up. That is not written in stone. It may happen, but it may not happen. The money could flow somewhere else. It could flow outside the U.S., or it could flow into commodities again, or it could flow into precious metals. The problem with money-printing is, the central bank can control how much money they want to inject into the system. What they do not control is what people will do with that money.

David: So we come down to some basics. Your asset allocation is diversified, but not into every nook and cranny. You have, you mentioned a few minutes ago, four categories that you see as reasonable: Precious metals, cash and bonds, real estate, and equities, those four general categories. And I think you have described what you view as the best values, a combination of Indo-China, if you are looking at either real estate or equities, or the other pocket of value being precious metals and precious metals mining shares. Have I captured your allocations and your current predisposition adequately?

Marc: Yes. That is exactly what I would, at the present time – because obviously, I have a cash flow every year from my investments, and every year I have to think where I will allocate the cash flow. And my view is that I am quite happy to hold cash. I’m not so happy to hold it in U.S. dollars but I think, considering the other currencies’ position that the U.S. dollar is maybe the best of the ugly sisters, and as I said, I think [unclear] there is no great value in European government bonds. There is some value emerging in corporate bonds, but you have to be a credit analyst to really understand where the true value is, and I think it may be premature to buy these corporate bonds going into a recession.

And then relative to European bonds, I think there is some value in the ten and 30-year U.S. treasuries. I wouldn’t hold it for 30 years, or for ten years, but I think if you have less than 0.3% interest on Japanese government bonds and you have a negative yield on ten-year Swiss franc bonds, then I think the U.S. ten-year treasury, yielding, at the present, 2.15%, I don’t think is such a bad value. It’s not attractive in terms of return, but it’s conceivable that in the U.S., in its desperation, the Federal Reserve, and that may happen elsewhere, in Europe and in Japan, that they will introduce negative interest rates. And compared to negative interest rates and zero interest rates in the bank, the 2.15% interest on ten-year treasuries is not that bad.

David: One of the things that I like about your letter, Marc, and the way that you think is, there is a deep philosophical bent to your analysis. Yes, you are trained as an economist, but to open each of your letters with a variety of quotes from every imaginable background.

Marc: (laughs) Thank you.

David: You bring perspective. And I think part of what a successful investor needs to maintain through time is a perspective, a perspective on the markets, of course, but also a perspective on themselves. We talked a little bit about fortitude earlier, what you described as courage. There is necessary, to be a successful investor, patience, a sense of self-control, that you don’t necessarily hit the panic button at every opportunity because there are many opportunities to panic. What else might you add to a list of investor virtues?

Marc: Basically, I think it touches on what you said, some discipline and self-control, and in order to do that, I think you have to keep your mental health. And I think you have to keep, also, some common sense. If I look at the central bank’s policies, in the long run they really do not make any sense at all. And we are probably, today, in an unprecedented period of inflation, but it is hidden, because consumer prices are not going up that much. They are going up more than what the Federal Reserve and the Bureau of Labor Statistics claim, because consumer prices would essentially need to be the cost of living, and as you know, the cost of living has gone up a lot everywhere – insurance premiums, health care costs, food costs, rental costs – but we have a huge asset inflation.

I can’t imagine any other period in history such as we had between 1980 and today where asset prices have gone up to the same extent, assets such as art, stocks, bonds, homes – everything is much more expensive than it was 20-30 years ago. And that is overlooked frequently. And this huge – we’ll have to rephrase it – every inflation eventually comes to an end and ends up in deflation. So this colossal asset inflation one day will end up in a huge asset deflation. It may not imply that the whole world collapses economically, because we had in Japan after 1990 a colossal asset deflation. Stocks tumbled by more than 70%, golf club memberships collapsed by 80%, and home prices went down substantially, real estate went down a lot. But the standard of living of ordinary people actually went up because the cost of living went down, and the wages were relatively stable.

But it involved a very painful adjustment for Japanese asset-holders. And we asset-holders have been rewarded over the last 30 years or so, and I think the next period is a period during which we asset-holders will be penalized. So, it’s not a very optimistic scenario if you have ten million dollars and you think in five year’s time you’ll have 20 or 30, maybe you end up with half as many. But if you lose 50% and other people lose 80%, relatively speaking, you’ve done well.

David: So, coming back to that diversified asset allocation, do you think your best probability of walking through that is, not without harm, but less harm, is by having these baskets of real estate and stocks and precious metals and cash.

Marc: In theory, maybe the best would be to hold 100% cash, but what about if you are wrong and they print money like crazy and your cash loses as much purchasing power as it lost over the last 30 years. Maybe you bought a house 30 years ago and the house today is worth much more than 30 years ago. You bought stocks 30 years ago then you made a lot of money in stocks. If you held cash you haven’t made much money. You didn’t lose any, but relatively speaking to the asset, you lost out. And so, if someone says, “Oh, I don’t trust the system anymore, I’m all in cash.” To this I respond, “Yes, so what kind of cash do you hold?” Then you have to choose a currency, and how do you hold it? “With the bank.” What about if the bank goes bust?

These are a lot of issues that the prudent investor has to consider, and the prudent investor, coming back to your question about what else should he do besides discipline and having some courage, it is important to understand that he may have a view about the future, but that view may be wrong, and there are many studies about forecasts, including mine (laughs), and in the long run, most forecasters have a horrible record. So, we don’t know how the world will look in five year’s time. In this scenario I say to myself, “I don’t want to take huge risks.”

David: What you are describing as perhaps one of the necessary virtues for an investor is humility (laughs).

Marc: Yes. You see, when I started to work in the 1970s, stocks, the dividend yield on the Dow-Jones was always around 5% and more. The ten-year treasury started 1970 with a yield of 6% and it went to over 15%. So yes, by buying bonds in the 1970s you lost money in the 1970s, but you had a very high cash flow that was available for reinvestment. Please show me where I have a big cash flow at the present time. You buy rental properties, the cash flow is very low, the cap rate. You buy government bonds, the ten-year is 2.15%, that’s all you get. You buy stocks, most of them have hardly any dividends, so the cash flow is very low. And if you are wrong, you’re going to lose a lot of money, whereas in the 1970s stocks and bonds were cheap, but even if you were wrong for ten years, you had a large cash flow.

David: So today, your 10 million dollars, 2-1/2 million in real estate, 2-1/2 million stocks, 2-1/2 million in precious metals, and 2-1/2 million in cash (laughs) and that’s what you would take to the bank.

Marc: Something like that. Each investor has special skills and has his preferences. This is the basic model to start out with, saying, “I want to be diversified. I’m not going to put all my money in the S&P, nor all my money into biotechnology, ETFs, nor all my money in precious metals. I want to be diversified.” And then, depending on the investor’s skills and his preferences, he can then overweight something, or underweight something else.

David: We appreciate your perspectives and would encourage our listeners to visit your website at and look at your monthly missive, the most recent one, as usual, a very enjoyable read: “Are Interventionist Policies Bad for the Economy’s Health.” And we look forward to future conversations with you, Marc. Always appreciate the time we have with you on the line.

Marc: And thank you for the interview and I wish your listeners Merry Christmas and a wonderful festive season.

David: Thank you so much.

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