Family offices should get ready to sell dollar assets and buy emerging markets, says top investor

Global strategist Marc Faber has said family offices should get ready to sell dollar assets following extensive money printing by the US Federal Reserve.

“The most important decision for family offices of the next one to ten years is which currencies they should hold,” he says.

He believes US investors should diversify overseas and retain a weighting of 20% in gold and precious metals. He sees potential in bitcoin, oil shares, and emerging markets.

US government debt had risen by $1.3 trillion over the last twelve months, twice as fast as a patchy rise in GDP. Debt and money printing has lifted shares by a quarter this year.

Going further back to 2002, the Federal Reserve has expanded its balance sheet by 404%, boosting stock prices by 444%.

Faber told the Family Office Association: “The economy of the rich is doing very well. The economy of the poor isn’t doing so well. And that’s why we have so many demonstrations around the world.  I suppose they will move to the US one day.”

Although consumer price inflation is depressed, the cost of healthcare and education are rising fast. Wealthy investors continue to consume: “But approximately 50% of people in the US have no money. I have observed the same in Thailand. As an economist, inequality worries me greatly.”

Faber warns the people who are poor can easily outvote the rich, while governments have plenty of ways to undermine the wealthy – including socialism and a command economy.

Born in Switzerland, based in Thailand, Faber started his career in 1972 at the Boston-based White Weld & Co, later bought by Merrill Lynch. Unimpressed by the deal, he moved to Drexel Burnham Lambert, an investment bank renowned for raising junk bond finance for its clients.

Drexel’s collapse in 1990 persuading Faber to change direction. He started to advise family offices and other investors out of Asia and started publishing his renowned Gloom, Boom & Doom strategy report.

Faber is a big investor in emerging markets and backer to Asian Frontier Capital led by Thomas Hugger who used to be managing director at LGT, the Prince of Liechtenstein’s private bank.

Faber avoids hedge funds, believing their fees are way too high, taking the view that family offices can devise simple hedging strategies across a limited number of asset classes which serve perfectly well.

He notes the financial complexity of modern US capitalism. You might compare it to a Jenga stack: “It’s no longer the real economy driving the financial market. It’s the financial market driving the economy. When I started out, the stock market was between 35% and 35% of GDP.  Now it’s 150%. Economies have become complex and that makes them vulnerable.”

It is unlikely we shall see interest rates higher than 5% over Faber’s lifetime because employers depend on them staying low and governments lack the courage to raise them. Money printing will continue: “Otherwise the system collapses.”

Faber does see a role for startups and innovation: “All you need is one stock which will succeed.” But success cannot be guaranteed. “It will bail you out of the other 99 startups which don’t.”

Will the lenders to failed ventures get repaid? “The only thing I know is that most of this year’s new issues, the so-called unicorns, are losing money, perhaps as an investment in their future.”

Faber spotted some strange currency movements last year like a 16% rise in the Ukraine hryvnia, 9% for Russian rouble and 7% for the Thai baht. This could signal an early lack of confidence in the dollar. It might not. Either way, family offices need to think hard when deciding which currencies to back, going forward.

He believes family offices with the means should take a view on China, despite its recent bad press, and India: “Wealthy families have very little exposure to them. And I think that’s a mistake. If you look at emerging markets as a whole, investors have been selling.  That’s not a bad time to start buying.”

He is a long-term investor in emerging market bonds, saying investors should look at Uzbekistan, a liberalising economy where state bonds yield 6%. Singapore real estate companies can return 6% and should be safe.

Faber sees a range of opportunities in gold and precious metals. Platinum, for example, is unusually cheap, as are diamonds. And they should all hold their value better than the dollar.

The physical ownership of precious metals is much to Faber’s taste, although he says family offices need to be careful where they store them. And moving a strongbox around can ruin your back.

“But I have precious metals in the US and I live in Thailand and hell breaks loose, I will not have access to my gold in the US. So I need some gold in Thailand.”

Faber thinks bitcoin is worth buying because it is free of fiat currency entanglement and can be accessed from different countries. The bitcoin price is volatile, but the upside should be greater than the down for those who can bear the pain of loss.

Faber is wary of getting his e-wallet hacked: “Custody is an issue.” “But I think maybe bitcoin could become the standard.”

He also likes shares in the oil majors which look oversold due to disputes within Opec and the clean energy challenge.

Power generators, cars and manufacturers continue to rely on crude. Its price has been recovering but Faber is wary of commodity futures because of the potential cost of rolling them over. He prefers agricultural shares over soft commodity futures for similar reasons.

 Marc Faber was in discussion with Angelo Robles, chief executive of the Family Office Association. The podcast is available on www.familyofficeassociation.com