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FULL TRANSCRIPT and Video of Jean-Marie Eveillard's Interview with Consuelo Mack

CONSUELO MACK:This week on WealthTrack, a rare interview with Great Investor Jean-Marie Eveillard. First Eagle’s legendary value investor on the turbulent and shifting economic currents flowing around the world, from the U.S. to Europe to the Middle East to Asia and his personal strategies to navigate them, next on Consuelo Mack WealthTrack.





Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack, at the Museum of American Finance in the heart of the Financial District on Wall Street. In case you didn’t know it already- its hard to miss- the market is still in a danger zone. That is the sobering reminder recently brought to my attention by Wall Street’s long time number one independent research firm, ISI Group. According to ISI, almost all of the great financial crises in history have occurred between late August and mid-October. As their list illustrates, the five most recent market tsunamis past:

Black Monday in October of 1987;

The 1998 Russian/Long Term Capital Management meltdown;

The bursting of the NASDAQ bubble in 2000;

The subprime implosion in August of 2007;

And the September 2008 collapse of Lehman Brothers occurred in the transition period from late summer to fall.

And as we all know now, some leading European bankers and officials have been predicting the Eurozone’s sovereign debt crisis has the makings of another financial crisis of similar magnitude.

How do you navigate these kinds of landmines as investors? This week we decided to consult a legendary investor who has one of the best long term track records in the business. He is Jean-Marie Eveillard, now senior investment advisor for the First Eagle Funds, but until 2009 portfolio manager for several of its funds, including nearly 30 years running the flagship five-star First Eagle Global Fund, one of the pioneers in international investing. Eveillard’s exceptional track record and risk-averse approach earned him two Morningstar Fund Manager of the Year awards and its lifetime achievement award as well.

Jean-Marie is a deep value investor, with a history of investing against the herd. But unlike some of his peers, he is loath to place big bets that could result in large losses, even over the short term. Until the financial meltdown in 2008 when the Global Fund experienced a 21% loss, still far better than competitors and the markets, the Global Fund had suffered only two years of small losses. A student of financial markets and a well-known worrywort, Eveillard’s latest concern is the fragile state of recovery in the developed world. He believes we are seeing a fundamental shift in the economic landscape. I asked him what’s changed.

JEAN-MARIE EVEILLARD: Many academics, economists with Wall Street firms, didn’t see it coming. Because they looked at the ‘90s, beginning of the 21st century, and for 15 years, we had overall prosperity. The 2001 recession was very modest. For 15 years, we had low inflation, at least as measured by the Consumer Price Index. So, the authorities felt self-satisfied, very happy with themselves. What they didn’t notice was that the overall prosperity was built upon tremendous increases in debt. And, what they didn’t pay attention to is that, if you let the credit boom go on too long and be too strong, then at some point it will turn into a credit bust, just like night follows day.

And when the credit boom turned into a credit bust, it’s not just that the authorities didn’t see it coming. When they realized what was happening, they took steps, admittedly, to stabilize matters. The Federal Reserve took unprecedented steps, steps that had never been taken by the Federal Reserve since its creation in 1913. They ballooned the balance sheet of the Fed. They took short-term interest rates down to zero. Short-term interest rates have been at practically zip for almost three years now. And on the fiscal side, the government and Congress decided to increase government spending so that the budget deficit ballooned as well, and government debt, of course, as a result, you know, went up tremendously, to the point where, you know, recently, Standard & Poor’s decided to downgrade Treasury notes and bonds.

CONSUELO MACK:So, where has that left us? All of this intervention and this credit bust?



JEAN-MARIE EVEILLARD: As I said before, it has stabilized matters. You know, for a while, you know, beginning in 2009, the economy started recovering. It continued in 2010. But this year, the economy seems to be stalling a bit.

CONSUELO MACK:Now, was that a surprise to you?



JEAN-MARIE EVEILLARD: No, it didn’t surprise us much, and it should not have surprised too many people too much, because after all, in 2009, that’s when Reinhart and Rogoff published their book, This Time Is Different[img]file:///C:/Users/Admin/AppData/Local/Temp/msohtmlclip1/01/clip_image001.gif[/img], where they said, one major characteristic of a substantial financial crisis is that in the aftermath of the crisis, the economy is sort of weak-ish for a number of years.

CONSUELO MACK:So, do you think that we, in the United States, and possibly the developed world, rest of the developed world- I mean, we know Japan continues to be in its same kind of funk, but the last two decades now. But, do you think that is our fate in the U.S., and possibly in much of Europe?

JEAN-MARIE EVEILLARD: It’s possible, but I think what is more likely, because neither in the U.S., nor in Europe, investors and people in general are particularly patient, the pressure will be steady on politicians to, don’t just stand there. Do something. And so far, what they have done doesn’t seem to bear much fruit, but they’ll try again.

CONSUELO MACK:But what difference is that going to make in the outcome, the actual outcome, of what happens? The kind of results we get in the economy? It hasn’t made much difference so far, right? So is it going to make any difference in the future?



JEAN-MARIE EVEILLARD: One possibility is, Japanese experience. The other possibility is that another major crisis may erupt, because at some point, if the monetary stimulus becomes too much, then long-term interest rates will go up.

CONSUELO MACK:So, you’re no longer running the First Eagle fund anymore. You’re a consultant or advisor to them. But you are, you know, running your own money. So, you know, how are you positioning your portfolio? I mean, kind of for which scenario right now?



JEAN-MARIE EVEILLARD: Well, I also, I mean, personally, as a percentage of my financial assets, I have a large stake in the funds I used to run. But I have some money which I run. I have a personal account. But I think it looks a little bit like the first Eagle Funds portfolios- in other words, a portfolio of equities. Because I think there are some equities- even though I may have sounded somewhat pessimistic from the top down, in terms of the big picture- nevertheless, I believe that there are some equities that are attractive, both in the U.S. and outside the U.S. Particularly in the U.S., in Europe and in Japan, you know, large-cap multinational stocks. And in Asia, stocks of companies that are particularly active in the domestic consumer market, because in Asia, I think governments understand that the export model, which has helped them so much over the past 10 or 20 years, now does not apply anymore, and that they have to move towards an economy that’s based more on domestic consumption, as opposed to exports.



So, there are equities which I believe are attractive. Would it be only because there will be repeated attempts to stimulate, including for, you know, monetary stimulus. And equities, yes, they’re financial assets, but to some extent, they’re real assets, and to me, equities look- at least some equities- look a lot better, not necessarily over the next six to 12 months, but look a lot better than bonds. Not just bonds in the U.S., but bonds almost anywhere. And with a position in gold, as protection against- as Peter Bernstein used to say- protection against extreme outcomes. As some kind of an accompaniment to the equity portfolio, just in case the international monetary system, or what passes for a system today, goes haywire.

CONSUELO MACK:So explain, you know, why gold, even at these levels, I mean, why you wouldn’t- or are you trimming positions, since it’s appreciated so much over the last couple of years? Or…



JEAN-MARIE EVEILLARD: Matt McLennan has trimmed positions and I was in complete agreement with him. Because, as the price of gold was going up, then the gold as a percentage of assets was going up as well. And I think he likes the idea of keeping it, you know, at around 10 or 11% of the assets of the Global Fund and the Overseas Fund.

CONSUELO MACK:So is that something that you established basically as kind of a benchmark holding as well, around 10% of the portfolio? Or did you have one?



JEAN-MARIE EVEILLARD: It can be more, it can be less. But I think his 10 to 11% is perfectly reasonable. And now, it’s a fair question to ask: hey, you know, 10 years ago, gold was at $250, $300 an ounce. Today it’s $1,850. Is gold too high? Gold has no intrinsic value, and that’s why many investors decline to even consider it. Although, one could say, at the same time, that a dollar bill in a wallet has no intrinsic value either. It’s worth what the government tells you it’s worth. Currently, above-ground gold globally, that’s about $10 trillion. About five trillion is jewelry, but one trillion is central banks, a little more than one trillion, that own gold in their vaults. A little more than one trillion is in the hands of private investors. And the rest, fabrication and other things.

CONSUELO MACK:So, about $10 trillion is what’s out of the ground in gold. Right. Globally.



JEAN-MARIE EVEILLARD: That has been taken, over the centuries, out of the ground. And since gold is practically indestructible, it’s still there. The 10 trillion, unfortunately, I forgot. I’m getting old. I forgot, because I knew the number associated with financial assets for the world bonds and stocks. It’s many times the 10 trillion.

CONSUELO MACK:Oh, many.



JEAN-MARIE EVEILLARD: Right. So from that standpoint, you know, I don’t believe that the price is too high. In fact, you know, one argument was, in one line, was, too much paper, too little stuff. Paper being debt at all levels, and stuff being gold. And I think we’re still in a world where there is too much paper, and additional paper being created every day. More money being printed. Too much paper, too little stuff.

CONSUELO MACK:So your personal view of gold, aside from First Eagle, would be an excessive amount of gold to own, as far as a percentage of your investible assets?



JEAN-MARIE EVEILLARD: I think once you get to 20 or 30%, it’s quite a lot. Although, admittedly, you know, if there is major trouble in the international monetary system, you know, if you have a, you know, portfolio of equities which is-- because I think what’s appropriate is to have about 70, 75% in equities, maybe 10 to 12% in gold, and the rest in cash, just to take advantage of opportunities. I mean, cash by itself, either in dollars or in euros or in yen, is a terrible asset, because it yields nothing. And in Europe, in Japan and in the U.S., they keep printing money. So if it yields nothing and they keep printing money…

CONSUELO MACK:This is a change. There are sea changes going on in this country, and globally. So, where are you seeing opportunities, whether we like the changes or not, they’re a reality. So, where are you seeing opportunities? Are there being opportunities created for a value investor, globally, by these changes?



JEAN-MARIE EVEILLARD: Yeah. I think the key question is whether we are still in the post-World War II economic and financial landscape, or whether we are in a new, undefined, possibly threatening landscape.

CONSUELO MACK:And your answer to that is…?



JEAN-MARIE EVEILLARD: My answer to that is, I don’t know, but because, as Ben Graham used to say, “The future is uncertain;, only God knows and he ain’t telling.” So I see that there is a possibility that we are in a new, undefined landscape. And that’s where gold comes in and, you know, provides possible protection, just in case something bad happens.

CONSUELO MACK:So, let’s talk about the multinationals. So, you still think, as a value investor, that there are some values to be had in the large-cap multinational space.



JEAN-MARIE EVEILLARD: Some. Right.



CONSUELO MACK:Some. I mean, not a lot. You’re not seeing tremendous value when you look around the world globally? Is it…



JEAN-MARIE EVEILLARD: No. And, you know, if you take the U.S., I think Robert Schiller is right. He does what Ben Graham used to do, which is, he takes the price-earnings ratio, but the earnings are the cyclically…

CONSUELO MACK:Right. The last 10 years, I think. And he averages them, right. His CAPE ratio.



JEAN-MARIE EVEILLARD: And in that respect, the overall stock market does not look particularly cheap.



CONSUELO MACK:No. I think he says it’s, like, moderately expensive. It’s--

JEAN-MARIE EVEILLARD: That’s right. The only major stock market that’s truly cheap continues to be Japan, of course. But…

CONSUELO MACK:So, individual securities, which, and we’re talking about what you’re investing in personally. Give us some names of companies.



JEAN-MARIE EVEILLARD: You know, I hesitate a bit to mention names, because, you know, somebody once told me, “How come you don’t run a more concentrated portfolio?” Because our portfolio is fairly diversified. It’s not diversified in the sense that some portfolios are diversified, where they are sort of quasi-indexed. They are very close to the benchmark. That has never been our case. How come we don’t have more concentrated portfolio? Number one, because I’m not as smart as Warren Buffett. And number two, because truly, people say, “Well, why don’t you just invest in your best ideas?” But I don’t know in advance what will turn out to be my best ideas. So, that’s why we’re diversified. So I hesitate a little bit to mention names, because I would have to choose among-- right.

CONSUELO MACK:Right. So, are there companies that exemplify the kinds of, you know, are there names of companies that kind of exemplify the kinds of investments that you’re making, yes.

JEAN-MARIE EVEILLARD: I think the stock may be somewhat too expensive. Colgate-Palmolive, for instance. It’s a highly profitable company. The business has been extremely stable. It’s highly profitable to some extent, because when they buy toothpaste- Colgate is involved in much more than toothpaste- but when individuals buy toothpaste, if they initially decided that they would buy Colgate, they continue to use Colgate for the rest of their lives. Maybe because it has to do with the fact that, you know, it goes into their mouth, and they’re not particularly interested in having a private label toothpaste…

CONSUELO MACK:But they’re brand loyal.



JEAN-MARIE EVEILLARD: Yes. There is a great brand loyalty. But as I said, I mean, it’s to illustrate it, and they’re all over the world, including in South America, in Asia. Because I think we have to keep in mind that, from a long-term standpoint- and, you know, China, India, Brazil, they will have bumps along the road, of course. But from a long-term standpoint, there is very little doubt that the East is rising and the West is declining. So, one way or the other, either directly by buying stocks in those countries, even in so-called emerging countries, or by buying stocks of American, Japanese or European companies that have major exposure to Asia and South America. So, those are stable businesses, highly profitable, exposure to emerging countries.



And Colgate is certainly not a great bargain, you know, at $90 or so a share. So I mention the name just to illustrate. But that’s the kind of securities I’m talking about. Now, it’s not necessarily consumer-related stocks. In Germany and in Japan, for instance, in terms of what they call industrial technology, they have extremely dominant companies that can be industrial technology, where you have companies that have a genuine franchise, and what Buffett calls a moat, or competitive advantage.

CONSUELO MACK:Again, such as what?

JEAN-MARIE EVEILLARD: Fanuc in Japan, which makes robots, known for robots, but also actually makes most of its money with software for machine tools, and truly dominates worldwide the field. So, those. And there are quite a few. In Japan, we’ve done and we continue to do a lot of work in Japan, because as I said before, it’s truly a cheap market.

CONSUELO MACK:Or it’s being shunned by, right, by most other investors.



JEAN-MARIE EVEILLARD: That’s right. Because it’s been so disappointing for so long.

CONSUELO MACK:So, we always ask our guests for the One Investment for a long-term diversified portfolio. And you’re not allowed to recommend your own funds that you’re invested in from First Eagle, but you are here because of your track record there, so they speak for themselves. So what would it be?



JEAN-MARIE EVEILLARD: I think I would still say gold. Again…



CONSUELO MACK:The bullion, the metal.



JEAN-MARIE EVEILLARD: Yes. Although, certainly not junior mining stocks.

CONSUELO MACK:So you want a producing gold mine stock.



JEAN-MARIE EVEILLARD: Yes, that’s right. Major gold-mining stock. A combination of bullion and all the ETF and gold-mining stocks. Right.

CONSUELO MACK:So, Jean-Marie, one last question. Given the state of the world today, and this global slowdown that we’re seeing, and as you said, the rise of the East and the decline of the West, as far as your investment stance, are you more defensive? Would you be more defensive now than you’ve been in the past?



JEAN-MARIE EVEILLARD: Yes. And it shows in two respects. One, the gold position. And two, you know, some cash, because maybe there’ll be opportunities to buy equities at lower prices. I don’t know. But some cash, to seize opportunities if they show up.



CONSUELO MACK:So, more to seize opportunities than as a defensive position.



JEAN-MARIE EVEILLARD: Well, it’s also a defensive position. In fact, I would argue that cash is the combination of gold. If one looks at gold as a substitute currency, then one should look at it as cash, except that cash in a currency that can not be printed. So a combination of gold and some cash, yeah.



CONSUELO MACK:Jean-Marie Eveillard. It is such a pleasure to have you again on Wealth Track.



JEAN-MARIE EVEILLARD: Consuelo, it’s always a pleasure to be here.



CONSUELO MACK:So, thank you very much.



JEAN-MARIE EVEILLARD: You’re welcome.

CONSUELO MACK:At the conclusion of every WealthTrack, we give you one suggestion to help you build and protect your wealth over the long term. This week’s Action Point agrees with Jean-Marie’s One Investment recommendation. It is to invest a portion of your portfolio in gold, and gold-related investments, up to 10-12% is his recommendation.

Over the years on WealthTrack, guests have called gold an insurance policy against “extreme outcomes.” It certainly has worked out that way. Bullion is up seven fold from its 20 year 1999 bear market low, delivering compound annualized returns of 18% versus the S&P 500’s paltry 0.7% average through recessions, the bursting of the tech, credit and housing bubbles and offering a safe haven through the recent sovereign debt crisis. High performing mutual fund manager, John Hathaway of the Tocqueville Gold Fund calls gold and gold mining stocks a “golden mulligan.” For non-golfers, that means if you don’t own it yet you have another chance. Hathaway points out that gold bullion is currently under-owned globally at only 1% of the world’s financial assets, as are gold mining stocks.

However since 1999, gold mining shares have underperformed the metal by a huge margin. Tocqueville’s Hathaway says that divergence has created an “extraordinary opportunity” and that gold mining stocks offer inherent advantages over the metal itself: dividend income, growth, and takeover potential. Both the Tocqueville Gold Fund and the First Eagle Gold Fund, which Jean-Marie used to run, have excellent long term track records and own both bullion and gold mining stocks.

About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

Visit Jacob Wolinsky's Website


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