Faber - Liquidity growth essential to sustain bull mkts
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The US Central Bank is widely expected to raise rates by 25 basis points on Thursday, the dollar has been gaining ground in recent days as investors losing their appetite for risk. Investment Guru, Marc Faber gives his views on the current global market scenario.
He believes that acceleration of liquidity growth is essential to sustain very strong bull markets. When liquidity growth slows down, markets can slump, he adds.
Excerpts with CNBC-TV18's exclusive interview with Marc Faber:
Q: Do you think that investors are losing their appetite for risk?
A: I think what has happened is that the rise in interest rates is symptomatic of relative tightening. I wouldn't call it a tightening in earnest because the rate of inflation is probably somewhat higher than the Fed fund rate in the US. Credit growth actually accelerated in the first quarter of this year in the US very sharply and so we don't have an absolute tightening.
However, liquidity in the world is not growing as rapidly as before and the market started to sell-off from a technically weak position, which is what I would call an impulsive downward move. This may continue for a while and I may add that frequently markets change direction and one doesn't know exactly why they change direction, this may only come to foreground six months hence.
In other words, market can go up and one doesn't know exactly why, but then suddenly six months or a year later you know why, because there was such an improvement. Equally a market can begin to sell off for reasons that we don't know yet exactly, but that will come forward in the future.
Q: So you are basically saying that 'boom markets' need liquidity in order to be sustained and right now with interest rates going up liquidity is going down, so does that mean that possibly we are on the cusp of a bear market?
A: I wouldn't say that you just need liquidity; you need an acceleration of liquidity growth to sustain a very strong bull market. When liquidity growth slows down you can have a slump.
For example in the Middle East, we had rising oil prices and rising oil production between 2000 and 2005, whereas we still have record oil prices and same oil production. So, in other words there is still plenty of liquidity in the Middle East, but it is not growing as rapidly as before. This implies liquidity is growing at a decelerating rate and so suddenly the markets in the Middle East were down 50%.
I think this is happening throughout the world, and there is relative tightening. There is an absolute tightening in Japan, in the sense the monetary base that doubled between 1999 and 2005 is now contracting.
Q: So now rates are about to go up in Japan? What does it mean, the Yen such a popular choice for carry trade, that is a huge source of liquidity drying up, which do you think will be the first asset classes to tumble?
A: In this environment, we have to look back at what happened since October 2002, when these bull markets in assets began and we should probably stay away for the time being. Here I am talking about the next 3-6 months and thereafter we will have to review the situation. But let's say the markets that went up the most and became the most popular, for example these bull markets like BRICs, Brazil, India, China and Russia, these markets went up dramatically with the exception of China.
India, since 2003, quadrupled to its recent high and now obviously is vulnerable to a significant correction. It doesn't mean that bull markets thereafter cannot reassert themselves, that is possible but I would be careful of markets like Brazil, India, and Russia, since these markets had these huge moves. I would be equally careful in the US, of midcap stocks, the Russell 2000 (The Russell 2000 Index offers investors access to the small-cap segment of the US equity universe.), which made new highs, the value line index .
Q: So anything that shot up over the past couple of years since 2003, you think now is a good time to get out of?
A: When markets begin to decline in an impulsive fashion such as we had recently in the US and in other markets, one just doesn't know if it is a correction or is it something more serious, namely a bear market. A correction would be defined by, 'a market that goes up like India to 12,600 and drops to around 9,000 and subsequently in the next 6-12 months makes a new high around 14,000, 15,000,' that would be a correction.
A bear market would be defined as 'an Indian market that went to 12,600, drops to around 9,000, rebounds and then goes down again and doesn't make new highs for the next 6-12 months.' That I would consider a bear market and one doesn't know in the world, whether we are not faced with something more serious.
I would also emphasize that the best time to buy stocks is obviously when the global economic outlook looks disastrous. The best time to sell stocks is when everything is booming such as now. Because a booming global economy drains money out of the financial markets into real economic activity, namely down payments for condominiums, capacity expansion, building of entire new cities, and so forth. So that is not particularly a good environment for financial assets.
Q: A few years ago you told everybody to buy gold, you were right. Then you went and told everybody to sell gold because it is going to go below USD 600 . Where to from here?
A: I would like to put this in the context that I think long-term gold is relatively attractive. But obviously like so many other commodities it overshot in just a speculative pinch when it went to USD 720 recently. Now that money has relatively tightened and that interest rates have gone up somewhat and the US dollar has stabilised, I think that the gold price obviously had the declined to around USD 530 and now it has rebounded to USD 580. I think it can go back to around USD 485.20.
Then I will definitely be a buyer of gold through the longer-term. I wouldn’t necessarily sell my own gold positions because I hold them as kind of an insurance policy against irresponsible Central Bankers that sooner or later will print money. They can tighten for a while now and try to gain credibility but I think in the case of the US in the long run the Federal Reserve will essentially increase the supply and the quantity of money. That will lead to essentially a higher gold price over time. Not to mention the Asian Central Banks that have a very low exposure to gold. They will over time I suppose also increase the portion of their reserves that they will hold in gold.
Q: How serious do you think investors should take the recent break that we have seen in commodity prices in general?
A: We had more than 20 years of a bear market in commodities that ended between 1999 and 2001, then essentially 5 years into bull market for commodities. I think a significant correction was overdue. You shouldn’t forget that the price of copper for instance went from 60 cents a pound to over USD 4 a pound in 4 years. So you can have a significant correction. I would like to add that for instance in the last great bull market for commodities, wheat, corn and sugar already peaked out in 73 and thereafter allthough other commodities went up, these commodities didn’t make a new high. My view is that the global economy now will slow down and that you shouldn’t be in industrial commodities, since they are now more vulnerable.
Gold on the other hand is not an industrial commodity, it is much a currency, as a commodity it is jewellery. It would seem to me that in this environment we will face first tightening and then money printing. Gold will be relatively resilient having also risen much less than say the price of oil or price of nickel and copper over the last couple of years.
Q: Why is copper seen as a proxy for largecap resource stocks?
A: Basically copper is a proxy for industrial production and the proxy for the incremental demand that has come from China. It has some other peculiarities. There are some supply constraints in the copper industry; it is very difficult to find new copper mines and to bring them on stream and so forth. If we look at copper the question obviously would be for an investor to either buy physical copper or also in the case of gold to either buy physical gold or to either buy mining shares in that produced copper or produced gold.
I would only buy gold and copper mining shares that own the reserves in politically very stable country such as Canada, Australia, the United States and even with some reluctance for the simple reason that globally we have a move in countries that have resources such as Venezuela, Bolivia, Ecuador, even Mongolia to tax mining companies much more heavily. In other words it is very difficult to justify for free port, if I come over to earn billions of dollars and the worker at Grasper in Indonesia, they earn their USD 80 a month. So the local people want a bigger stake in their resources, which is absolutely normal, and in my opinion quite fair. So the mining companies may actually not realize the expected profits in the future whereas the physical if they are supply constrains or disruptions because local people would choose to say block the shipments of copper then you could have a rise in the physical price of a commodity. But not in the rise in the share prices of that commodity.
Q: Where does silver fall in this spectrum?
A: Silver is to some extent an industrial commodity more so than gold. But at the same time the supply like gold is relatively limited compared to the supply of money a Central Bank can ‘ print ‘ to use the word of Mr Bernanke. They have the printing press so I could say that in the long run it is very clear that gold and silver will maintain their purchasing power, whereas the purchasing power of paper money especially of USD will diminish overtime. That doesn’t mean to say that the dollar will collapse tomorrow against the Euro. I think for the next 3 months due to the interest rate increase in the US the dollar may actually hold here or may be even rally somewhat against the other paper currencies.
Q: You have a segment in your report called ‘an attempt to structure a shorter-term investment strategy’, a lot of people are scratching their heads and wondering what to do next, what is your advice?
A: I think if one looks at the last four years, we had a significant outperformance of foreign assets vis-à-vis US assets. In other words foreign stock markets, especially emerging markets and Europe outperformed the US stock market, foreign bonds, so one takes everything together. The US performance has been very disappointing compared to foreign markets. I now think, rightly or wrongly because this flight to safety may not be so safe as people believe, this flight to safety is more out of very overbought markets such as BRICs countries and some of the Latin American markets, Eastern European markets, but less so in Asia, into the US.
One must not forget that US bonds have been very weak and in other words interest rates have gone up a lot and sentiment has been extremely negative about bonds. In fact until yesterday the bond market declined eight days in a row, which is most unusual. So I think we have a shift back into the so-called “safe haven”, the United States, but it may not prove to be very safe.
Q: What is your view of the South-East Asian market especially Singapore for the next 3-6 months?
A: I think, Singapore had made a big move and then obviously came under heavy profit taking. From a longer-term perspective I like Singapore shares, I think this is the strongest economy in the world, financially the most stable economy; it has the probably the world’s most desirable currency. This is because basically the Government has no debts, has huge surpluses and Singapore is a small country that actually functions unlike some other countries that have continuous political bickering and problems.
I am long-term very optimistic about Singapore. Can the share market go down a further? Yes. The Real Estate Investment Trusts, REITs, in Singapore are very attractive because they are tax free on dividends. I also think they might go somewhat lower but longer-term I would use any weakness in Singapore essentially as an buying opportunity, I would rather be in Sinagapore REITs for the next 30 years than a US government 30 year treasury bonds.
Q: How will gold, the dollar and gold mining stocks fare over the medium and near-term?
A: Basically, we had this big bull market in gold 2001 onwards and we have recently gone to as high as USD 720, and the correction is now underway. I think this correction is not quite over yet and I wouldn’t be surprised to see gold between USD 480 and USD 550. However, in the long run gold will outperform US financial assets and since year 2000 the Dow Jones has lost half its value compared to gold. The US dollar has lost more than half its value against gold and I think that trend will continue, so if the question is how do you maintain your purchasing power then I think it is quite a desirable investment to hold some gold. I don’t think gold will go down to where some observers predict that the deflation is that it will drop to USD 250. If gold is USD 250 then the whole world will collapse.
Q: What is your short-term and medium-term outlook for the Japanese economy and for their stock market?
A: I think it is important to always distinguish what an economy is doing and what shares are doing. I think the Japanese economic recovery is for real but as I pointed out earlier, my personal expectation is for global slowdown. So the Japanese economy, that is also partly driven by exports may also slowdown somewhat. But let's say the trough of the Japanese economy has been reached in 2003. We are in a long-term recovery phase, where by we can forget about expecting Japan to ever grow at 5-7% as it did in the 1960s and 1970s, that is simply not going to happen.
Growth in Asia has shifted out of Japan, South Korea, Taiwan into China, India, Vietnam and to new centres of rapid economic growth. But the Japanese corporate sector is doing well. There has been de-leveraging, the stock market is likely to outperform the US in the long run, but it had a big move and I think it could correct to say 12,000. |
