Marc Faber, Editor, Gloom, Boom & Doom Report on how to cope with the selloff 2019. Excerpts from an interview with Nikunj Dalmia of ETNOW.
You like to predict trends and let us talk about trends. The first big trend is that global central bankers have started cutting interest rates again. When we started the year, the view was that central bankers would increase interest rates but now I guess the wind is blowing the other way?
Well, to be fair, most central banks never increased rates. The recovery in the world got underway in June 2009 and the ECB has actually kept easing, kept buying assets as did the Bank of Japan. The US Federal Reserve began increasing rates very slowly in December 2015 but it has recently cut rates again. Overall, the whole economic expansion since 2009 was accompanied by excessive credit growth, excessive leverage and large fiscal deficits and ultra expansionary monetary policies, ultra considering the strengths of the economy.
Last time when interest rates started moving down and when we had negative interest rates in Europe, money moved back into emerging market equities but that is not the phenomenon. Suddenly soft commodities are moving higher and investors are revisiting gold. Could the cycle turn with historical correlations not holding true any more?
The emerging markets overall, not India specifically, peaked in 2015 and since then, they have been in a bear market and have grossly underperformed the US. So regardless of what you think, I believe that an investor should rather look at emerging economies at the present time than at the US stock market which looks very expensive -- just the fundamentals of equities -- and the US dollar looks to be on the high side.
Do you think the joker in the pack could be US President Donald Trump because he is committed to keep the US economy alive and kicking? So, the administration is frankly bothered about stock market movement. Is that a good safe picture for investors to have?
Yes, first of all I have to say that Mr Trump changes his views about five times a day, but he is kind of desperate to get re-elected in 2020 and that is not that far away. We have the election in a little more than a year and to be re-elected, he has to show a strong economy and not a recession in the US.
The US is an asset driven economy. We have an unusual situation in most western equity markets, though not in India, where it is not the economy that drives the stock market but it is the stock market that drives the economy. If the stock market goes up, the economy has performed okay, if stocks drop 10-20%, we will have recession. We are not down 10% from the peak though we are down modestly.
So Trump is very conscious about the stock market and he believes that the Federal Reserve by cutting rates could essentially boost equity prices. I am not so sure about that because the equity market nowadays looks at different factors than just monetary factors. If you just looked at monetary factors, the Japanese Nikkei should be the strongest stock market in the world and it is not or European markets that have had negative interest rates for a very long time, should be the strongest markets but they are not.
What kind of environment do you think we are in? In the last 10 years, we have seen decent return in equities as an asset class, commodities have done well, gold prices have also bounced back. Many experts are saying that is the longest monetary expansion the US markets have experienced ever and this is not going to continue endlessly. Are we nearing the beginning of a sharp decline for the US economy and the US stock markets?
Well you stated exactly what has happened; we have the longest economic expansion on record and we have the longest ever bull market in US stocks. So, we are nearing theend of the economic expansion and the stock market cycle. You will probably hear from some market commentators that bull markets do not die of old age, they die of something different, tight monetary policies or a fiscal shock or a political shock or what not.
But the conditions today are that investors are heavily invested in equities in the US. They are bullish, otherwise you would not have all these IPOs of companies that do not make any money and they immediately go up in the secondary market and you would not have the high valuations among FAANG stocks. There is a lot of optimism about US equities and cash levels are low. So, any disappointment could lead to a longer term decline in the market.
I do not believe you will get the crash like in Argentina where essentially in dollar terms, the stock market performance was down 37% and the currency was down so altogether more than 50% in one day! That is a crash, 50% in one day. I do not think you will get that in the US.
You have not shied away from calling a spade a spade, which is that when you have understood that there are asset bubbles in global financial markets, you have gone on record and have said go short sell stocks. What will be your favourite trade for the next three years -- long or short, if long yes, if short where?
Before I answer this question in detail, I have to state that in my view if you are a prudent investor you are not going to make a lot of money in equities over the next three years. Maybe one company will go up 10 times and 900 companies would not. You have to take big risks if you really want to make a lot of money. My return expectations are very low.
In Europe, in 2017, the Austrian government issued a 100-year bond. The coupon was 2.10%. It was issued at a 100, the interest the 2.10% which is not a lot but people buy these bonds and you are not going to make a lot of money out of these bonds. Now you made a lot of money by buying US treasuries over the last six months. The stock market in the US is not higher than it was in January 2018. In other words, 18 months ago we have been trading sideways and that maybe the pattern that we have to look for.
So in terms of return expectations, investors have to really lower their long term expectations. I think gold is okay. In the near term, it is overbought I think we will go down may be $50.
Last time we saw a significant decline in the US dollar was in 2012 and in 2013, money moved back into commodities. That was one asset which saw large inflows out of dollar. What are the chances that this time around history may not repeat itself, given that China is slowing down and trade war fear is real?
We have to distinguish between commodities.Some commodities like copper, nickel, zinc, aluminium, steel depend on the economy of China to a large extent. On the other hand, gold is not an industrial commodity and it does not depend on the demand from China. It depends on investor sentiment towards gold and it depends on essentially central banks’ monetary policies. If they print money, then it is likely that gold will go up in the long run. In the short run, it does not have much of a correlation and that commodities are going to go up this year. Some have actually bottomed out. The agricultural commodities like soybeans, corn, wheat and coffee are attractive, but if you invest in these commodities, timing is very important because the rollover of futures in very expensive and if you buy an ETF, the rollover for futures every month is incredibly expensive. So, for an individual to play the commodity markets is not so simple, the best is probably to buy plantation stocks.
Are you saying that you see a solid and a structural bull market in soft commodities whether it is sugar, cocoa, orange juice or soya?
Most commodities do not have structural bull markets. They move from a situation of oversupply like we have in sugar and then the oversupply leads to inventory liquidation, the reduction of production and then prices go ballistic and as soon as prices go up strongly, new supplies come in. An individual can buy a stock and if the management is good, they will grow the company overtime.
In the case of commodities, there is hardly anything as long term investing although and I do not consider precious metals to be commodities, I consider them more to be money. If you bought gold in 20 years ago in 2000, you have outperformed Berkshire Hathaway which is essentially controlled by Warren Buffett. Precious metals are from a longer term perspective relatively attractive but they do not perform as well as a stock market index over the long run.
1970s was broadly dominated by the Japanese, then between 1980s and 1990s, it was the US blue chips and rally in US internet stocks; between 2000 and 2012-13, it was the China/emerging markets. What could be that next big humming engine, the next big structural economy or market or destination in the global financial markets?
I understand everybody is looking for the next big investment scene. As I said, you will make more money in emerging economies than in the US in the next few years but I would also like to introduce the thought and this thought is that 1980 to today we have had huge asset inflation; look at Mumbai real estate prices, 1980 and today, you look at Delhi real estate prices, you look at Chennai real estate prices, Bangalore, New York, London, Hong Kong, Singapore, you look at stock prices 1980 to today, you look at bond prices 1980 and today all asset prices had huge moves, huge moves and this asset inflation could come to an end. The question is not which group will do best in future but maybe the question should be how do I lose the least money over the next 10 years?
A lot of people are wondering why someone would buy a bond with a negative yield, say you buy Swiss Franc bond you pay 105 and in 10 years it will pay you back say a 100. So it has a negative interest rate. Now the reason bonds in Europe trade at negative rates is that insurance companies and pension funds they are forced by government regulation to buy these bonds which is fraught to start with but in addition to that, if you are the salesman and you come to me say here is a bond, it has a negative yield, say 5% over 10 years. So, it is 0.5% per annum negative yield grossly. Then why should I buy it? But if you are a good salesman and say the whole world would likely collapse and stocks will be down 40%. Bonds will go down, a lot of currencies will collapse, the Euro may collapse, but maybe it is not all that bad to only lose 5% over 10 years on your money than to lose 40%!
You understand the reasoning and there is a group of people that buy these bonds. If you had come to me and said buy these Austrian bond 100 years at 2.10%, I would not have bought it, but in two years, it has doubled in price. So, it was a great investment.
Where do you think other immediate sensitive issues are headed? Brexit, the face of European Union, the way American and the Chinese are fighting. These are topics which are geopolitical and economic in nature which could have an impact on financial markets and global markets and global finances for the next 12, 18 months?
I do not think that Brexit is a big deal because the British economy is not what it was under the British empire at the end of the 19th century. Today Britain is an insignificant economy in the context of a world that has an Indian economy that is very large, the Chinese economy that is very large and these economies are still growing. They have some children sicknesses from time to time and setbacks but in general the Indian economy will grow as well as the Chinese economy with one proviso; we need peace. The US has a group of people the neocons they are in favour of creating trouble everywhere, not just in Iraq, Afghanistan and maybe Iran. They want to create trouble everywhere and so maybe one day someone will lose patience and there will be war, which the neocons like because in wartimes, people can make a lot of money. So, this is about money.
Obviously, for financial markets war conditions would be very bad because there would be a lot of defaults. Some countries would say well in this case I am not going to pay and then it spreads and so we need to hope that there will be peace.
Boom, Doom & Gloom where do you think there is a boom, where do you think the doom is about to start and where do you think there is going to be a lot of gloom?
We have more volatility so when we talk about boom it maybe a book for six months. You had the cannabis stocks in America and Canada; they were booming but now it is over. Since March of this year, bitcoins have gone up from 3,200 to over 12,000. Now they have backed off again somewhat but there was a boom. And then we have the boom in gold, surprisingly less in sliver and less in platinum. After a correction, the precious metals are still interesting because if you look at how the pension funds are invested, they own billions of dollars in Apple, in Amazon, in Netflix, in Google and the semi conductor stocks but billions, you ask them how much do you have in gold, most of them have not even 1% in gold. One day the trustees of these pension funds and endowment funds and family offices will ask the fund manager well gold shares are up 100% so far this year.