Mr. Chetan Parikh and Mr. J.Mulraj of Capital Ideas Online Interviewed Dr Marc Faber

Mr. Chetan Parikh and Mr. J.Mulraj of Capital Ideas Online interviewed Dr Marc Faber .

Dr Marc Faber was born in Zurich and studied Economics at the University of Zurich, obtaining a Ph.D. at the age of 24. Between 1970 and 1978 he worked at White Weld & Co Ltd. For the next twelve years he was the Managing Director of Drexel Burnham Lambert, based in Hong Kong. In 1990 he set up his own ﬁrm Marc Faber Ltd., acting as an investment advisor, fund manager and broker/dealer. He is a well known ‘contrarian investor’ and brings out a monthly newsletter called the ‘Gloom, Boom and Doom Report’. His website is at www.gloomboomdoom.com. He is the author of a boom ‘The Great Money Illusion – the Confusion of the Confusions’. He was recently in Mumbai and gave a speech at a function organized by Enam Financial Consultants Ltd.

J Mulraj and Chetan Parikh, of www.capitalideasonline.com interviewed Dr Faber in Mumbai.

Q: Thank you Dr. Faber for giving us this interview for capitalideasonline. Even prior to Sept. 11th you had a very bearish outlook on the global economy. The Sept. 11th terrorist attacks have certainly impacted globalization in terms of outsourcing, production, just in time inventory management, supply scale economy. How badly is globalization aﬀected in your opinion and how would global economy growth suﬀer?

A: Actually before Sept. 11th I was particularly negative about the U.S. economy and the economies of the Western industrialized nations. I thought that the Asian economies had bottomed out. And I still think that relatively speaking the Asian economies will do better probably in the years to come and that the ﬁnancial markets in Asia will do better than say in America. But obviously if you have a setback as you have now is the U.S. and because the U. S. is the biggest customer of Asia, then in those sectors of the economy that depend upon exports and related industries in the European centers and manufacturing, you have also then a setback. But of course as you know in Asia maybe 50 percent of the economy is still a rural economy. That shouldn\’t suﬀer all that badly. I mean that should provide the stability for Asia in the years to come.And

www.capitalideasonline.com Page - 1 Mr. Chetan Parikh and Mr. J.Mulraj of Capital Ideas Online interviewed Dr Marc Faber . you still have the potential to have domestic led growth in Asia. That may cushion the downturn in the export industries. So relatively speaking for Asia I am not that negative, but obviously you can’t be considering that the Sept. 11th event was bullish for the world. That for sure not. The question is how negative is it and that we don\’t know for sure simply because we don\’t know how the conﬂict will eventually be resolved, if it can be resolved.

Now about globalization I think we have this move since the end of the Second World War towards increasing world trade and especially in the 1980s and 1990s. We had this buzzword globalization and we had the freeing up of global capital markets and we had the introduction of instant communication and the container did a lot to the world in the sense that it allowed actually world trade to take place because that was the eﬃcient way to transport goods. And then with the cargo planes you had another step forward in globalization because you could ship entire factories from A to B essentially overnight.

So the industrialization of a city like a Shanghai was mind-boggling in the last 10 years!You know I have never seen a city develop as much in 10 years time as Shanghai. Unlike Bombay and Delhi.

I think you know we have reached a stage – in the 1990s sadly globalization led to even further growing income and wealth disparities in the world, which already were in 1990 larger than at any time in history of mankind and it has widened even further, then you get to a situation where the masses of people that have nothing and the few people and countries that have a lot, that a clash is inevitable — is inevitable. Whereas Sept. 11ths would have occurred or not, sooner or later the cracks begin to appear and I think one important event was already the Durban conference, the anti-globalization protesters which were symptoms of something that wasn\’t doing well.

And then I thinkone important event was really this issue of AIDS patents and AIDS drugs where the rich countries simply said we\’d rather let poor people die then give them the medicine. I think this was really an aﬀront against the world you know, an insensitivity incredibly because in the Western countries the poor people they have social security. But if pharma companies had given these drugs to the people of emerging markets they wouldn\’t have lost money. They would still have made money but they wouldn\’t have made as much money as they would have otherwise made.I think that was really very very bad and so the world is now characterized by an atmosphere of tensions and let\’s say a malaise. And I think this was only get worse, specially since even in Europe and around the world in academic circles lots of people really ask themselves “Why do Americans actually bomb Afghanistan? What is there to bomb there in the ﬁrst place? If they don\’t like Saddam Hussein or Osama bin Laden, why didn\’t they take Saddam Hussein out already a long time ago when they could have done it and if they don\’t like Osama bin Laden as I perfectly

www.capitalideasonline.com Page - 2 Mr. Chetan Parikh and Mr. J.Mulraj of Capital Ideas Online interviewed Dr Marc Faber . understand this is war, why don\’t they go in with 5000 troops and take him out instead of punishing essentially a population which is largely innocent?”

Q: Is that the way future wars will be fought?

A: Well, I think you know if you study the history of wars and also of other events in history, if you push people to the wall and you have superior weapons then obviously the only way to fight the superior weapons is through guerrilla war, rebellion and terrorism and there is the very fine line between terrorism and freedom fighters — I mean was Mao Tse Tung a terrorist? Yes or Chang Kai Sheikh. Was Ho Chi Minh a terrorist? Yes, for Americans and for the corrupt Southern Vietnamese regime. But he may have been a freedom fighter. Or Che Guevera and Fidel Castro, were they terrorist or guerrilla fighters or freedom fighters or liberators? The Sandinistas in Nicaragua. Samoza was also a dictator. So it\’s a fine line and we don\’t know and its very difficult. The hero of someone is always the enemy of somebody else. I suppose that the Romans considered Jesus Christ also as some kind of a terrorist. He didn\’t kill, but he was morally a terrorist for them. A dangerous individual. Was Spartacus a liberator of the slaves, the slaves’ leader? He was I suppose for the Roman Empire a big threat. So, I mean I — of course I do not support the killing of innocent civilians but strictly speaking if you had the German army in the second world war — a lot of people were in the German army that didn\’t want to join the army, but they were forced to join the army. Well, do you kill them? Yes because they were in uniform, you\’d kill them but you also kill innocent people. So war is a dirty business, but obviously if you go and carpet bomb Cambodia and Vietnam and for the last 10 years Iraq and Serbia, then somewhere, somehow in the world there is one guy who\’s as I am fed up, I don\’t have the money to buy the weapons to fight this, so I will play dirty games. I fight with my hands. That is the only thing which I have.

Q: Given the current geopolitical reality would the quest for non-fossil fuel alternatives be speeded up? Driven both the economic inevitability as well as political expediencies. Fossil fuels reserves are running out necessitating a quest for a replacement in any case but will political compulsions spur that quest?

A: Ya, sure I understand. I think the world has been very complacent about oil because as you know the oil price went down until 1998 and because of the American presence in Saudi Arabia they thought that the oil supply would always be there and so forth. And I suppose there is still suﬃcient oil around and the Arabs, they have to sell it because they can\’t live without any oil and we can still ﬁnd some new oil reserves, but according to the number of studies global oil production will start to decline after say 2006 and in non-OPEC countries it has already started to decline. So, the world for sure will look for alternative sources of energy and those are just historically seen, its not an elegant solution to drill a hole, put the oil in a pipeline and

www.capitalideasonline.com Page - 3 Mr. Chetan Parikh and Mr. J.Mulraj of Capital Ideas Online interviewed Dr Marc Faber . then on a tanker and then ship it to your house and burn it and you know, somewhere the world will ﬁnd that technology that can replace this process.

But like coal — I mean coal is still being used today because it\’s relatively cheap and so oil will still have a role in the years to come and so far the alternative sources of energy are rather more expensive. So I think that the outlook actually for oil prices is reasonably good probably in the recession as we have now, it may still drift somewhat, but when the recovery comes I think the oil prices will go more and for sure the world will accelerate the development of alternate sources of energy..

Q: Because of political expediencies?

A: To some extent. But you also have to see one thing I meanthe oil companies are very powerful lobby in the United States. And on the one hand they realize they cannot only rely on oil for ever and they may to some extent want to develop alternative sources and technologies of energy,but they don\’t want to develop it too quickly and not too eﬃciently. As you know there was once a very good movie of a man who invented a machine that could produce energy from water and the oil companies essentially wanted to knock him oﬀ.

Q: So what sort of alternatives you foresee? Shale oil or hydrogen fuel cells?

A: I think in particular solar energy.

Q: Solar energy.

A: Yes, and hydrogen. But I do not believe experts about energy. I just follow the oil markets closely. But in terms of alternate sources of energy I think obviously solar energy will be one of them, hydroelectric power, hydrogen and natural gas I mean that is plenty of natural gas around.

Q: In the January issue of the Banker you prescient in forecasting future tourism including the advent of rebels who would ‘rock the world’ in your words. In what way do you believe the world could counter such hatred from people who as you stated have nothing to lose at all?

A: Yes, we have hada number of world bank programs and charities and so forth and aid programs that have disbursed money around poor countries.The problem is that these funds were mostly disbursed in an ineﬃcient way, where it just went to the leaders and the leaders just took it out again. And it didn\’t go to the people. I think the Western world should really try to make a major eﬀort how to stimulate economic growth in poor countries. And one of the sore subjects is simply that very poor countries — they frequently only have products to sell for which actually the industrialized countries have imposed quotas, you know like

www.capitalideasonline.com Page - 4 Mr. Chetan Parikh and Mr. J.Mulraj of Capital Ideas Online interviewed Dr Marc Faber . agriculture.

For example the Europeans, they just don\’t want to import agricultural products from around the world because they know that it would destroy their agriculture. But what can you expect a country like Sudan or the African countries to export? These are not going to export cars to Europe, nor machinery, nor weapons. So you have to give these countries the opportunities to sell them something to foster trade and business. And so I think the world has to realize the only way that you will have a peaceful world or relatively peaceful world is that you can lift the very poor countries. Now you want lift them by sending over a $100 billion because $100 billion will come out the next day. You have to give them business opportunities.

Q: Why is it, Dr. Faber, that the heads of state meet, the heads of religions never do?

A: Yes, it is a good question.

Q: Because at this time the heads of religion whoever they might be were to meet and say that any religion never supports taking of innocent lives, wouldn\’t it have a becalming eﬀect on the world?

A: I suppose that when it comes to money all people are of the same religion. In other words you know the politicians they meet because they have kind of have common grounds — essentially it is either money or influence on you know geopolitical influence or alliances and so forth.The heads of religions they basically have very little to talk to each other about. Because they all essentially will claim that the others religion has no validities. It is very seldom that you will find the head of religion that says there is one God and this God is for the Muslims Allah, and for the Christians it is God, and for the Buddhists it is Yourself and so I think that\’s the difficulty you know to bring their religious groups together to discuss it.

Q: Akbar had tried to do this in the Mughal age, call a religious conclave..

A: Yes, that is correct. Yes.

Q: After that I don\’t recall any other such attempt

A: But, I also suppose that — and this is one reason — Buddha, the teachings of Buddha became very popular among large number of people.Religions in general are very intolerant. They are extremely intolerant — and I mean our own Catholic church has been kind of a disastrous institution, I mean horrible institution in terms of the way they treat people around the world and especially they are the ones that fueled anti-Semitism.

Q: So, if politics fails and religion doesn\’t help, do you think that science, for example the use of genomics,

www.capitalideasonline.com Page - 5 Mr. Chetan Parikh and Mr. J.Mulraj of Capital Ideas Online interviewed Dr Marc Faber . would be a possible solution to what could become a clash of civilizations? Do you see an Aldous Huxley type of a world where genomics would be used to make people more benign and kind, whatever, someday in the future?

A: I doubt that people will ever be kind and nice. I think, you know I have four dogs and I observe them.The nice thing about dogs is that they are not greedy and they don\’t accumulate wealth. They are just greedy for their food and for that they will fight with each other, but after that they usually don\’t fight.But human beings, they not only fight for the food they want to eat right now, but also for the accumulation and power. And I think that will never change in history. There will always have again and again conflicts.

The only thing that possibly could improve is whereas before you had a country like Britain and a country like Germany and there was not much interaction through trade and business transactions between the two countries, so the conﬂict was more likely. Once you have groups that own and have facilities in England and in America and in China and in Burma and everywhere then between countries you will not really have wars, or less likely to have wars. The wars will more be within the global economy between classes. And you know the French Revolution was not a war against another person but it was a war of the peasants and the impoverished ones against the aristocracy. And I think I doubt you will have it in the near future any great wars between nations, in other words Russia against the United States or the way we had World War I or World War II.

But I think what we can have is clashes of societies and in economics we have it all the time. Because occasionally you have for 20 years labor participation in GDP rising at expense of corporate profits diminishing as a percentage of the economy, then suddenly you have a reversal where the labor component of GDP goes down and corporate profits as a percentage of GDP rise as they did between 1980 and the year 2000, then you have these reversals.There\’s always an economic pie and in general the pie tends to get bigger and bigger and bigger. But at the same time you know that the shares of the pie are allocated differently. Sometimes they are allocated more to Japan, sometimes more to the U.S., sometimes may be more to Asia and sometimes more to labor, sometimes more to the corporate sector, sometimes more to the bondholder, sometimes more to the shareholders. And usually the market can resolve these issues but when the market fails and something goes, the rubber band bends too much and then there\’s a clash.

I think we may have reached a point in civilization — I mean in terms of too many people having nothing and a few people having really essentially everything. And the few people who have everything having become relatively arrogant. I think this is a big issue. Or insensitive.

www.capitalideasonline.com Page - 6 Mr. Chetan Parikh and Mr. J.Mulraj of Capital Ideas Online interviewed Dr Marc Faber . Q: Have all three zones, that is the U.S., the Euro zone and Japan been before in simultaneous economic decline? How long do you foresee this decline to continue and what would be the factors that could possibly pull these economies out? And what would this imply for asset prices? Actual asset prices. And also the ﬁnancial asset prices?

A: Yes, sure. I would say in 1973-74 we had the oil shock and the whole world went simultaneously into a recession. But I’d still like to point out that first of all in the early 1970s the financial market, in other words the debt market and the equity markets, as a percentage of the world\’s GDP was very small. So when the recession happened the stock market went down and the bond market went down but it wasn\’t so total disaster. I think today the big problem is that the financial market today is the world\’s most important commodity. Like in the 19th century it was an agrarian economy in the world and the business cycle depended largely on commodity prices. In other words rising farm prices, increased income of the farmers, with that increase income the farmers went to the cities to buy manufactured goods, you had the boom. When commodity prices fell, the income of the farmers was cut, they bought less and you had a slump, generally speaking.

If today you take oil, oil in the Middle East is the most important commodity. Oil prices go up, they have a boom. Oil prices go down, they have a slump.If, indeed, as I think it to be, the capital market is now the world\’s most important commodity, if that commodity goes down then it brings about a slump and I think we are in this situation now.Now so far the slump has been essentially in the stock market but not the bonds market. And now the big question is what will happen to the bonds market, because the bonds market will eventually affect the housing market and the refinancing boom in the U.S. So I think that is the big issue for the next 12 months. The refinancing boom comes to an end. You know we have had I mean really a huge increase in refinancing recently in America. That comes to an end. Then the whole thing blows up.

Q: That would come to an end once the interest rates cannot be further cut …

A: Either the interest rates cuts have no more effect or the housing prices decline. Now the housing prices — I have never seen a bear market where housing continued to rise in value. Eventually they were knocked off — eventually. But even if housing prices continue to go up, I suppose at some stage the money printing could actually lead to some underlying inflation and then interest rates could goYou up. know a lot of people, they think that when the economy will recover then the stock market will go up. Not necessarily. Because you know if the economy recovers, first of allyou can have an economy recovery with no profit recovery. Possible. Secondly you can have an economic recovery where suddenly interest rates shoot up dramatically — I tell you — if for one or two months in a row this statistic improves, the bond market is going

www.capitalideasonline.com Page - 7 Mr. Chetan Parikh and Mr. J.Mulraj of Capital Ideas Online interviewed Dr Marc Faber . to tank in the U.S.. I mean big time. The treasury market. The corporate bonds market may perform better because the worry for the corporate bonds market is a recession. So the spreads are very wide.

Q: Would the troubles in the banking sector in Japan trigger of such a collapse in the U.S. bond market because they might need to sell the stock of treasury bonds that they have?

A: I think the problem for the U.S. bond market and for the whole U.S. economy and I would say this is the Achilles heel are the capital ﬂows into the United States. It is interesting that throughout the \’80s and the early 1990s there was little buying of U.S. equities; frequently foreigners were net sellers of U.S. equities. In other words foreigners were bearish about U.S. equities when they were inexpensive. But suddenly in the last three years they turned very bullish and actually continued to be very bullish. Since the spring of 2000 as the market went down they piled in even more into equities and in bonds and also in direct investments.

And here I just like to mention one point, which I think, is very important.Why did foreigners buy so many U.S. equities? Was it because the U.S. economy was better, more productive, growing more rapidly than other economies? Or did the U.S. have very good public relations and therefore foreigners piled into the U.S. and because of the piling in, did that money contribute to the superior growth?

If you look at Asia between ‘94 and ‘97 the only reason Asia was still growing is that foreigners sent money into Asia. If that foreigners hadn\’t brought in the money the Asian economies would have a slump or I mean they would have a recession but no crisis after 1994. I think in the U.S. one thing is clear to me.The rate of increase of foreign buying of U.S. assets will slow down and even if it stays at the present high-level but doesn\’t grow anymore, it means the U.S. economy will not grow as much you know as a trend as before. But if the foreigners lower the purchases of U.S. financial assets and direct investments then obviously the trade and current account deficit in the U.S. will have to go down by definition.And then you have a slump in the U.S.. I tell you if foreigners turned bearish on the U.S. for whatever reason, the U.S. is going to collapse. But I mean big time. Big time. Greenspan can then print in as much money as he likes.

[Read article in Forbes Global for Dr Faber’s comments on Greenspan’s policies]

Q: He is still bullish. In fact at the Senate committee meeting yesterday he was still bullish about the U.S. economy.

A: But what can they be? You think they can…

Q: You know, you were mentioning about the current account deﬁcit. What would be the triggers to capital outﬂows from the US? Would it be the dollar going down? And how?

www.capitalideasonline.com Page - 8 Mr. Chetan Parikh and Mr. J.Mulraj of Capital Ideas Online interviewed Dr Marc Faber . A: I don\’t know what the catalyst will be but something will be the catalyst one day. I mean…

Q: Are you bearish on the dollar as a result of that?

A: Yes, but problem with bearish on the dollar is let\’s say how can you be bearish on the dollar against the yen?

Q: Against which assets?

A: Yes now the Euro — I think the Euro is maybe undervalued against the dollar by 10-20 percent, but believe me the Europeans — they cannot aﬀord the Euro to go up against the dollar by say more than 10-20 percent. So in the end all currencies will be bad. And there\’s why I believe eventually the currencies will depreciate against the price of gold.

Q: You had predicted in fact gold at $3000 an ounce.

A: Yes.

Q: Do still hold onto that, if so, what is that time frame?

A: I mean I don\’t know when the price of gold will reach $3000. You know I mean I don\’t think the world will go truly back to the gold standard but there are several factors that support the gold markets such physical demands, physical supply, the large short position outstanding and such. You know as I travel around the world ago to all these investors conferences, I always ask people what do you own and so forth and in the early \’80s, people would have owned gold and gold shares and oil shares and today when I go to even conferences where there is more kind of the bearish people maybe amongst 2-300 people if one person owns gold and gold shares, that\’s the maximum.The world is heavily underweight in gold. And I think particularly in the environment where you have this easing, this massive easing by the Central Bank and you have the political uncertainty I think an individual should have maybe you know 5 percent of his assets in gold and gold shares.

And I just like to point out, India has say a billion people. They buy annually close to 900 tons of gold. In other words here you could say each person, man, woman and child buys a gram of gold per annum more or less. If the whole world bought just one gram of gold per annum it would be almost three times the annual supply. So I think at once stage purely statistically seen, gold will rise.

There is another point in Japan and China — yellow gold is not in fashion at the moment. Here white gold is in fashion and silver. But you don\’t know maybe next summer people like again yellow gold.

www.capitalideasonline.com Page - 9 Mr. Chetan Parikh and Mr. J.Mulraj of Capital Ideas Online interviewed Dr Marc Faber . And ﬁnally you know Central Bank\’s argument I really feel — ﬁrst of all I talk a lot to economists, whereas 2-3 years ago everybody said no, never gold.I see a little bit shift of sentiment amongst economists that well, you know maybe the gold standard wasn\’t that bad after all because at least the gold standard has automatic stabilizers. And you never get into kind of situation where Argentina is in at the present time. You not such kind of imbalances are solved sooner and so I feel that maybe I am sure that this Greenspan will bring the world in an incredible mess. For sure.

Q: Worse than Osama bin Laden?

A: Yes, yes that\’s it. Much worse. And so after that when the mess is complete, the politicians and the people will say money is too important to leave it in the hands of Central Bank asthe Central bankers have no better predictive power than my dog. So lets, you know, have a system again in place because at the moment we don\’t have a monetary system. We have you know — everything is ﬂexible. So let\’s have again an anchor.

Q: Central bankers have bigger appetite for food than your dogs.

A. Yes! For printing money.

Q: Mr. Gary Shilling has written a book on deflation. In which he has been predicting some sort of a deflation. If all this sort of credit creation that has already taken place and further continues to take place as to somehow support the markets in the U.S., there is a very likely risk of inflation rather than deflation. I mean you have had inflation in asset prices, but what about the broader economy?

A: Here the inflation-deflation issue is very complex because I give you an example. In Switzerland we have no inflation, but a very high price level. And in Latin America we had hyperinflation in the 1980s and a very low price level. So inflation you can have say — in Latin America what happened between 1980 and say ‘89 in Argentina\’s inflation accelerated at the end you had 800 percent inflation per annum, but the currency collapsed to such an extent that the price level in ’89 was dirt cheap. You know you could buy a whole building for one million U.S. in the center of Buenos Aires. The whole stock market was valued at 700 million U.S. So hyperinflation is a monetary phenomenon domestically which then leads to a total collapse in the currency. And therefore you get these distortions in hyperinflation times when assets become very very inexpensive on an international level.

And so if you say in the U.S. we could have recession with deflation or we could have a recession with inflation, but then the deflation occurs through the exchange rate.

www.capitalideasonline.com Page - 10 Mr. Chetan Parikh and Mr. J.Mulraj of Capital Ideas Online interviewed Dr Marc Faber . Q: The dollar drops in value?

A: Yes. As a foreigner you shouldn\’t be in these assets when you have either one. When you have recession with deflation in the U.S., you should own U.S. dollar bonds. When you have recession with inflation, you are better off in U.S. equities. You are not doing well, but you are doing better than in bonds. But the best is to stay out of any market that has recession with inflation. That is kind of the ultimate recipe disaster.

Q: Proﬁt margins are just going to get completely squeezed.

A: Yes. And also in the long run you know if something happens, the cost of that comes later, such as happened in the past in Germany after the Weimar inflation. By the way if you are interested in a good book: Russiano Turoni — he wrote the bookThe Economics of Inflation.And at the back he has all the tables — what happens in a hyperinflation times to stock prices in nominal terms and in real terms and adjust it for the exchange rates of the dollar into real estate and everything. This is the best book on inflation.

Q: In your May issue of your Gloom, Boom, Doom Report you have been bullish on the long-term outlook for the Indian IT industry, the consumer goods industry and healthcare products. Are you equally so now? Why?

A: Yes. I\’m — I mean I am very optimistic for India and software companies in the long run.I think this is an industry where India has a huge competitive advantage because I think there are some industries that have something to do with geniuses. And geniuses have nothing to do with education, it has to do with a game of numbers. In other words among a million people there is may be one fellow who can play the piano particularly well. It has nothing to do whether he is an academic, is he the son of a peasant, he can come from any walk of life. And so say if you have one genius among a million people than in India at least you have a thousand genius, in China 1200 and in Switzerland you have only 5. That you have to see.

And so the other point is what the Western countries frequently overlook. The Western countries, they have wealth. But the educated people in the Western countries — I mean really educated people, and people who are hungry is very limited, very limited. Because most people let’s say who have good education and can go to Harvard and suppose they also come from good families and they are very distracted because they already have money you know. Whereas here in India and in China, a guy who can go to good university he goes on his own merits. And this fellow is willing to work 80-100-200 hours a week, doesn\’t matter. Because that has his own — only ticket that he has got to improve his social position.

And so I think that we have here a major change that — you know under communism people didn\’t have — they had the opportunity to become educated because the system was such that if someone was good at gymnastics — gymnastics special school; if someone was good at mathematics and so forth. So the

www.capitalideasonline.com Page - 11 Mr. Chetan Parikh and Mr. J.Mulraj of Capital Ideas Online interviewed Dr Marc Faber . educational system was quite good but problem was that they couldn\’t develop their own initiative. Now when Communist went and when the policy of isolation went in India, they still have the relatively good education, but they now also have the element that someone has the chance to become the richest man in India from a low class. Before that was impossible. And for India the examples of the software industries, a ray of hope that this oligopoly of rich people is broken for ever.

And I think from there there will be also revolution against the government because you have to see everybody is saying that the government is terrible in India. But actually that the rich people they actually fostered the government because it was a cozy relationship and now with these new industries coming up and the entrepreneurial class, I think there will give a hard time to the government oﬃcials. They\’ll tell them stay out of our backyard.

Q: A question, Dr Faber. You mentioned that you know you have 1000 people, one person is a mathematician so the numbers would suﬃce. But there is a lot of export of talent that is taking place to the United States. Silicon Valley has a lot of top class Indians. They are creating wealth in the U.S., not in India. Ultimately they might. I don\’t know whether they will. But lot of them have created wealth over there. Do you get concerned about this brain drain?

A: That\’s why I think Silicon Valley is not even an American institution. It\’s a Chinese and Indian institution. But you know Adam Smith pointed out that it\’s very important for the government to be a good government. Essentially to stay out of economics and just to create a system where the laws are fair and where you have security and to look after the armed forces. And if the people go to America and stay there, it is because there they can make more money. But I think that may change one day and if you have a billion people, don\’t worry — they go to America. There is a whole army of other people. Okay, the next army also goes to America — next army.But eventually out of a million people that go to America 500,000 will come back or 300,000 or 200,000. It is still better than if nobody goes and nobody comes back. So I am actually in favor of this what people call a brain drain because eventually the brain drain, the guy who is in Silicon Valley and becomes rich, he supports his brother\’s children here and says why don\’t you come over? Then one day he says okay, now I want to do something for India. He does something for India.

I\’ve seen with Hong Kong Chinese. They have made money and then they went back to China and invested in China. Taiwanese the same and so forth. So this process in the near term you could debate yes it is negative or is a positive. On balance even in the near term I think it is positive. I think the Indian software industry would never have developed if nobody had ever gone to America. But I can understand that people talk about the brain drain and in some countries probably worse than here in India because at least here in

www.capitalideasonline.com Page - 12 Mr. Chetan Parikh and Mr. J.Mulraj of Capital Ideas Online interviewed Dr Marc Faber . India people do come back. In Africa they go and never come back. But I am convinced eventually this move to Silicon Valley — actually I think this Silicon Valley one day will be like Manchester — insigniﬁcant. Well, just think of Bangalore, who had heard of Bangalore ten years ago?

Q: Yes, that\’s right.

A: Nobody. Even five years ago, nobody talked about it. And now I mean this is a big thing. And Delhi also and other places in the world also. And in China who spoke about Shanghai ten years ago? I wrote the first articles about Shanghai ten years ago. Then people say oh, but they have no chance to develop, it\’s so bureaucratic and this and that.Actually Bombay should get the government of Shanghai for three years. They should hire them just for three years. They would come in and bulldoze all the stuff that is useless, put up the buildings and you know first they would empty these buildings and then they would fill up.

Q: In the January issue of Financial Planner you have said that you believe that the Indian software industry in the long run may put U.S. software companies out of business.

A: I hope.

Q: Do you see them moving up the value chain realizing the full potential?

A: Yes, I think for sure. I also think you know this whole outsourcing business is a big threat for the Western companies because through outsourcing obviously you share technology and the fellow who produces the shoes for Nike and sells it to Nike for $10 and Nike puts a brand on it and then sells it for $100. He will say I\’m stupid or what? I\’ll put the brand on it and get the higher margin. And the guy who does the software for the other companies in America and get paid this much and the other one charges the companies this much, one day he will go to the customers directly.So I have no doubt that here what will happen in the next 10 years is you will have global brands coming from China and from India and other emerging economies.

You know Red Bull is one of the most successful brands in Europe, its a drink. Ten years ago nobody had heard about it. So was an Austrian, he went to Thailand and in Thailand they had this Red Bull. So he got the license to produce it is Europe. The Thai family here, they never had thought it has value outside Thailand — these Austrian guys built this business. It\’s a big competitor to people like Coca-Cola. And you will see in ﬁve-ten years time, I mean what was Seiseido ten years ago? What was Samsung 15 years ago? Here these brands will come up…

Q: But we haven\’t seen any Indian brands or any eﬀort to build Indian brands on a global scale. No Indian

www.capitalideasonline.com Page - 13 Mr. Chetan Parikh and Mr. J.Mulraj of Capital Ideas Online interviewed Dr Marc Faber . brand comes as top-of-the-mind recall — if you think of any product.

A: But I think the problem of India is towards — you know there are many problems, butthe ﬁrst problem is India has one of the worst public relations. You look at India. This is such a wonderful tourist country. But if you would throw the question in to the audience in Europe and say “How many people of you want to go to Asia on holiday?” Everybody says “Yes, I want to go to Asia on a holiday”.Where “ you want to go?” First thing is maybe Japan, Thailand, Hong Kong, Singapore but nobody would say India. But India is a much much better tourist country than are any of the others.But by far! The best is probably Sri Lanka because they have the beach, they have their temples and they have you know the parks but you know politically it\’s not very advisable at the moment, although I went. And the same is you know in many areas, India has just bad PR. Although for the stock market, the capital market you know there is as much fraud elsewhere as in India, but in India they always get the bad press!

And the corporate governance here is probably much better then in China, but the Indians get Andit. the Indians I think, the groups because they made such a hell of a lot of money domestically, they never had an interest to go overseas. Here they were minting money with this cozy arrangement with the government. But the new entrepreneurial class and specially now if competition comes in also from Chinese products, I suppose they will to think a bit harder. Before they could just like buy Bombay Times, sit there and just harvest the goods.

Q: No, but global competition has been there since the \’90s, for ten years now and yet we see little movement towards establishing a global brand by Indian houses.

A: It all depends what industry — there are still duties you know on a lot of products.

Q: There is still no awakening to the realization that we must try and build an Indian brand. But what Dr Faber, you are saying has a lot of truth because if you look at the Indian drug industry there are a lot of price controls. Proﬁts were controlled in India. People started looking at export markets. That\’s where the Indian companies are now trying to you know etch their global footprint.

A: No, I think some — you know some — I mean in the software industry I think there will be some Indian branding over time you know and then I would say Infosys has come from nowhere to become lets say a reasonable blue chip in the software industry.

Q: It\’s the closest to becoming a global brand.

A: Yes, and I think there will be the others that can do the same. But you know,on the manufacturing side I

www.capitalideasonline.com Page - 14 Mr. Chetan Parikh and Mr. J.Mulraj of Capital Ideas Online interviewed Dr Marc Faber . doubt that Indian industries will be very competitive. I see some potential say for lets say more artistic professions. You know media, possibly media and the big industry that this country has to exploit is tourism. Then they could — you know here you could have a also very good medical services like in Europe what happened is the rich people all moved to Spain and the real estate in Spain went up almost towards 1000 times from 20 years ago and there were huge colonies of retirees. I always tell the Asians that you should do one business is get retirees communities from Europe. With 2000 U.S. dollars pension they can\’t live well in Europe, but here they could live life very well. Very well, with servant, massage, everything.

Q: Old age homes could be a big business?

A: Yes. And hospitals you know if someone is sick — my mother went to a hospital in Switzerland — 500 U.S. dollars a day. But no doctor, no pill, no anything — that is just the basic rate for the room. In Thailand you get the best for $100 a day and that is really the very best.

Q: Indian doctors are good.

A: Yes. If I was in insurance company and insuring sick people, I would tell — buy them the tickets, send them to Asia, operate and send them back.

Q: What do you think can cause India to change? Just one set of factors could be the Indian outside India but internally the government is as insensitive as ever.

A: Yes, but I think I\’m a bit more positive on changes in India than a lot of people are. I just think it takes more time. I think that changes are under way, but because of the structure of the society it takes longer. You know, Communists had many bad things, but the good thing was everybody was made equal for a while. And there\’s not much class distinction in China. Of course you have a power distinction, the party and the others but not really class distinction. And I think here you have a structure of society that was diﬃcult or bad for capitalism to start with. And you know in the last 15 years many things have improved and I\’m sure the improvements will continue and there will be growth, but it\’s just going to be more slowly.

But from a historical point of view who cares whether you go from here to here in ten years or here to here in 20 years? That trend is certainly here for an improvement. Having said that it\’s very seldom that population-rich countries become truly rich. You know you can have in a population-rich country 200 million that reach the middle class and they are relatively prosperous middle-class and hopefully you get the others to being employed in the service sector and so forth and they have a decent life. But whether you can lift everybody, that is not a plan that you can achieve in ten or 20 years. That is 100 years kind of an eﬀort, if possible — if at all possible. But it should be possible, I mean the economy here even if India would close all

www.capitalideasonline.com Page - 15 Mr. Chetan Parikh and Mr. J.Mulraj of Capital Ideas Online interviewed Dr Marc Faber . its borders theoretically by itself it could grow. The problem is that if you close the borders, there\’s no competition, so that is not so much incentive. You know the established groups they don\’t want to grow. They want to have the status quo.

Q: Individual freedom vs. state control for society good has always had a delicate balance. How badly to you foresee individual freedom being aﬀected in the future, both in terms of legislative provisioning to combat terrorism as we have seen in the U.S. and now in India, as well as in terms of technological advances that make invasion of privacy complete. At the end of 2001 are we entering 1984?

A: (Smiles) Hope not. We in the Western world were relatively privileged and in America because they have really lot of freedom in America basically of movements. In Switzerland you know you check into a hotel, you have to ﬁll in a form, the hotel sends one copy to the police. So theoretically when you go to Switzerland or I go in Switzerland the police basically knows at all times where you reside. If you rent an apartment in Switzerland, it is the duty of the landlord to inform the police that you have rented that apartment.

In America you can rent an apartment for three years, you don\’t need to tell anyone. Here you can move from one state to another, nobody asks. So I think in America maybe you know they will need to introduce more regulations that doesn\’t restrict but at least controls or at least where the government knows where — who is where. In America there is a huge population that nobody knows about– you know the illegal immigrants. They have been there for you know 10-20 years. Nobody knows where they are, there\’s no control. So that may change.

I think in our societies like India and Asia and Western Europe not all that much will change in terms of personal freedom. And in Switzerland we have democracy but very little freedom. You know if you have a tree in your garden and you want to cut it, you are not allowed. You have to ask the government. You have a ground in your garden, you want to put not the garage, just a parking space — you must get approval. So our society is highly regulated — actually so regulated that the freedom has been curtailed dramatically — dramatically. You can say we are already 1984.

Actually you know in the last century a very famous playwright wrote a piece about Switzerland being a prison, you know where there the guards are actually the prisoners. They guard each other. They check on each other all the time. And to some extent it is true.

Q: If it’s a prison then Switzerland is the most beautiful prison in the world!

A: Yes. Look, I mean freedom is like you know the Americans were bitching for years and years over Lee Kwan Yew. Of course it was a controlled democracy or no democracy but the freedom was when I stayed

www.capitalideasonline.com Page - 16 Mr. Chetan Parikh and Mr. J.Mulraj of Capital Ideas Online interviewed Dr Marc Faber . with my friend, he never closes the door of his house. The key is always in the door of the house. The car keys are always in the cars and the doors to the cars are always open. And when I go out at night I can drive way, come back, the gate is open. That is also some kind of freedom, that you have a society where the crime rate so low that you can do that.

In America, you have a house, you need 150 security installations. So that is also a restriction on your freedom. And in Singapore you know once I was speeding and then the police stopped me and then they said where is your driving license? I said sorry, I am coming from Hong Kong, I don\’t have a driving license here. And then they said well, where is the license for the car? I said sorry, this is my friend\’s car, and then they checked, they made a phone call and then they let me go. Here this is in a small society. In America they would have taken me to the you know police station or in Switzerland and given me a hard time. I suppose in a small society these things are possible, in a big society it\’s more diﬃcult.

But freedom comes on many many diﬀerent levels. The fact that you can go and vote doesn\’t necessarily mean that you are in a very free society. Or if you own here piece of real estate, you say I want to redevelop it and then the government says no, you cannot. Is that freedom? Or you have a business and you want to do something, the government oﬃcials says you can\’t do it, is that freedom?

Q: Dr Faber, I wanted to ask you two quick questions. I know you have been a strong advocate of the Austrian school of economics. What do you think of Keynes vs. Hayek as economists? Very brieﬂy how would you compare them? The second thing I wanted to ask you if you were to just give ﬁve or six books that are worth really reading is, which would they be?

A: But I would say that you know the golden rule is that there is no golden rule. I think you know all economies have made a contribution to this theory and I\’m sure that in theory the Keynesian school is a very valid one but the problem is — lets say you have a trend line and along that trend line you could argue say the equilibrium line of growth is like this and then obviously you get these fluctuations around the equilibrium level. These fluctuations could be caused by external shock, on by inventions or innovations and so forth. In Keynesian economics if you want to avoid this one here, down here, at the bottom, through fiscal and also monetary measures then you should also take off the top here. And then you would just have this you know smoothening out, a flatter curve.But politically this top will never be taken off. That is the problem.

And so what happens is that politicians want to lop oﬀ the downside but not at the top. So what the result is that eventually inﬂation accelerates. In my opinion you know breakdown of socialism and communism has

www.capitalideasonline.com Page - 17 Mr. Chetan Parikh and Mr. J.Mulraj of Capital Ideas Online interviewed Dr Marc Faber . proven in the most dramatic way that the planning economy and the command economy doesn\’t function. But the world today believe that the central planners, the central bankers they can plan everything. No, but seriously I mean this is the inconsistency — inconsistency I am really concerned about. Because you go to intelligent people and they say well, ‘the Fed will not let it happen. The Fed will do this and the Fed will do that.’ But what can the Fed do? In fact they created the big bubble you know. How can they avoid to have an excursion into unpleasant times?

Now, you asked me to recommend about six books…

Q: Ah, six books. Just as a person who is interested in economics, in investing, I think…

A: Another thing, I would also read about The Psychology of Masses

What I think for a stock market investor a wonderful book by a wonderful man is Kindlebergers“Manias, panics and crashes”. It\’s a wonderful book, easy to read and in there he has a lot of interesting observations. And then a book that is out of print is Psychology of the Stock Markets. Very interesting.

Q: Who is it by?

A: I forgot the name of the author. It’s a very good book about bubbles and the tulip mania and so forth. And then I think quite a good book that just been published now is by Richard Bernstein. He is the strategist at Merrill Lynch.

Q: “Noise”?

A: Yes, “Noise”. It\’s a good book. You know that strategists now have never been as bullish as right now about U.S. stocks. According to the indications the margins will go down big time in the next 12 months. I mean maybe there are other indications that I know that bearish but when there\’s been an indication that suggests that the margins will become unattractive. It will be quite reliable in any case.

Q: He has written a book known as Style Investing also.

A: Yes.

Q: Diﬀerent styles, small stocks

A: And I think quite a good book is Charles D EllisInvestment “ Policy” And then I think for people, for anybody in business and actually also for an investor, a wonderful book is The“ Alchemist”. He is a Brazilian writer. It\’s a wonderful book a) in summing both in terms of history and b) it shows that if you want to become rich you have to endure lot of hardships it doesn’t just come like this and frequently you have to do

www.capitalideasonline.com Page - 18 Mr. Chetan Parikh and Mr. J.Mulraj of Capital Ideas Online interviewed Dr Marc Faber . things that are very odd. Here you have to follow your dreams, in other words you have to do something very unusual, because if you don\’t do it — if you do what everybody else does then you will be like everybody else — poor. Because the world\’s pyramid is limited. So to become rich you have to do something unusual. This book is about that and you know it\’s very very philosophically an interesting story.

Q: And you had mentioned a book on inﬂation.

A: Yes. “The Economics of Inﬂation” by Costantino Bresciani-Turroni (ASIN 0043320058). But you know a normal investor will not understand that. But someone who has some economic interest, he will understand that and its a very good book.

I would also say from a historical perspectiveThe “ History of Interest Rates”by Sidney Homer (ASIN: 0813516285) is quite a good book. And for the stock market you know there is good — I think for the stock market a good book is Joseph Granville\’s ‘The Stock Market teacher – technical analysis for the post crash period’. Its out of print so you would have to search for it. It\’s actually quite good because he analyzes like the cycles you know, bear market and bull market and in the 70s he was like God. And Robert Prechter’s book is quite good.

Q: On Eliot Wave principles?

A: No, not that.

Q: Okay, “At the Crest of the Tidal Wave” .

A: Yes, yes. I think it\’s not a bad book to choose for the history.

Q. Thank you, Dr Faber for the interview.