 "Prefer to stay in cash; crude oil most attractive among commodities: Marc Faber")
As equity and commodity markets come to terms with the key economic data and policies from major economies across the globe amid possibility of winding down of the US Federal Reserve’s monthly bond buying programme, Marc Faber, a renowned global investor and author of The Gloom, Boom & Doom report tells Puneet Wadhwa in an interview that investors should now pay more attention to the economic developments in China that are likely to have a meaningful impact. Though cautiously optimistic on the prospects of emerging markets, he would prefer to wait and see on how the economic policies play out. Excerpts:
Market expectations about the pace of the US Federal Reserve’s quantitative easing (QE) have been erratic given the wide divergence of views in the FOMC and the mixed signals that the economic data has given. What is your assessment of how things stand at the road ahead, especially after the recent FOMC and ECB meetings?
Well, everybody has different views. However, in my opinion, I think that the US Federal Reserve has lost control over interest rates. If you look at the recent asset purchases of $85 billion a month, despite this asset purchases, the yield on the 10-year Treasury note has been rising now for more than a year.
From 1.4%, it has now risen to 2.7%. So, we have a huge increase in interest rate already despite US Fed’s buying of treasury and mortgage-backed securities. So, I think it is not important to watch what the Federal Reserve is doing than actually watch what the markets are doing. Obviously, in the past, such interest rate increases have had a negative impact on asset markets.
What is your interpretation of how things are shaping up in the euro-zone, West Asia and Japan? What are the likely implications for the global markets, especially after what happened in Egypt and Greece’s bailout?
In my view, the euro-zone is not going to grow. We had the exports figures coming out of Germany. On the contrary, it is more likely to contract than grow going ahead. Having said that, it actually doesn’t matter whether it contracts or grows – basically there is no economic growth in Europe for the time being.
In the case of Japan, we have had essentially very little growth and some deflationary pressures until last October after which the Bank of Japan (BoJ) embarked on monetary easing policies. Since then the Yen has weakened considerably and the stock market has risen sharply.
I think that the policy decisions in Japan are quite dangerous because it essentially gives a green signal to other countries regarding monetary easing. If there is have low economic growth and if the share market is not performing well, then most likely the currency will go down. This will help economy temporarily and lift asset prices.
Have the quantitative easing measures / stimulus by various central banks done an irreversible damage to the long-term prospects of global economy, markets (equity and commodity)? Why / why not?
There are people believe that Ben Bernanke and other central bankers have saved the world’s financial system. I am not saying that they are wrong but I am suggesting that the crisis occurred in the first place because of the expansionary monetary policy – principally by the US Federal Reserve since the 1990’s.
In other words, each time there was a crisis – be it S&L (savings and loans) crisis, LTCM Hedge Fund crisis, Mexican peso crisis which is also known as the Tequila crisis – ahead of Y2K, monetary policies were eased and liquidity injection occurred. And then we had the Nasdaq collapse in the year 2000.
The US Federal Reserve then again embarked on extremely expansionary monetary policy, which created a gigantic credit bubble and home prices surged.
When this came to an end, that’s when the crisis actually happened. Had the US Fed not pursued very expansionary monetary policies and paid attention to excessive credit growth, there would have been no crisis.
How are you evaluating the emerging markets (EMs), especially India as things stand?
The EMs have grossly underperformed the US since the last two – three years already. In fact, if you look at India, the Indian market in US dollar terms is now down 41% since 2008 because at the time the rupee was at 39 levels against the US dollar, which is now over 60. So, the EMs have performed very badly.
Should one buy the US markets or move back to EMs over time?
I think it is too early to buy EMs as the currencies may still go down and the EMs may still under-perform. Personally, I would rather look at buying EMs as compared to the US markets, but not necessarily now.
Which economies within the emerging market pack look more attractive and why?
I am not yet sure what I will buy. As mentioned earlier, I would prefer to wait and see how economic developments and policies shape up. In fact, investors should pay much more attention to the economic developments in China rather than focus on what Ben Bernanke says.
My sense is if the Chinese economy slows down, the whole of Asia will slow down very meaningfully. Besides, other emerging economies that supply resources to China will also be severely impacted.
So overall, between the EM pack and the developed world, which economies would you bet on from a 6 – 12 month perspective?
Well relatively speaking, I think that the US may outperform the EM pack but it doesn’t imply that the US will go up. It may actually go down less than the EMs. I prefer to hold cash and will invest in EM economies only if there is a good opportunity.
Can you elaborate on your views on China and its implication for the global equity and commodity markets?
Well, basically whether China grows at 10% as it has in the last 20 years or even at 4% or less, it will have a huge impact on the demand for raw materials, particularly the industrial commodities like iron ore, copper, bauxite etc.
Currently, China is growing at 4% per annum; then in such a scenario, pricing of commodities will remain relatively weak. Thus, the commodity producing countries like Argentina, Brazil, Africa, Central and West Asia, Russia will have less income. As a result, they will have less purchasing power for goods manufactured in the western world and in China. So, possibly as a result of the Chinese slowdown, we will be in a period where economic growth will badly disappoint.
Would you expect this correction in EMs to also create a flutter in the EM currencies and bond yields as we trudge deeper into 2013? Is more pain in store for the Rupee?
Most Asian currencies have been weak. If India continues to have large fiscal deficit and relatively expansionary monetary policy, I think that the rupee will continue to weaken.
What has been your asset allocation strategy over the past one year and do you see this changing over the next 12 – 18 months? Which geographies and asset classes could see a higher allocation?
I feel reasonably happy to hold a lot of cash and I hold it US dollars currently. I don’t like the US dollar, but I think among the ugly sisters, it still is the prettiest one! We had a very sharp recovery in markets from 2009 lows. I would prefer to wait for a really good investment opportunity.
Among commodities, gold and crude oil have seen a massive slide since the past few months. Have we hit bottom or is there more on offer over the next few months? What about base metals / industrial metals?
Well, I think gold has declined into buying range. Personally, I think one should watch the developments in West Asia with extreme concern. It is a complete mess. The western world is shipping weapons to the so-called freedom fighters in Libya, Syria who can use them against anyone.
We are the brink of a civil war in many countries in West Asia. This, in turn, can lift oil prices. Among all the industrial commodities, I think oil is the most attractive as things stand. A rise in oil prices will not be good, especially for India.
Market expectations about the pace of the US Federal Reserve’s quantitative easing (QE) have been erratic given the wide divergence of views in the FOMC and the mixed signals that the economic data has given. What is your assessment of how things stand at the road ahead, especially after the recent FOMC and ECB meetings?
Well, everybody has different views. However, in my opinion, I think that the US Federal Reserve has lost control over interest rates. If you look at the recent asset purchases of $85 billion a month, despite this asset purchases, the yield on the 10-year Treasury note has been rising now for more than a year.
From 1.4%, it has now risen to 2.7%. So, we have a huge increase in interest rate already despite US Fed’s buying of treasury and mortgage-backed securities. So, I think it is not important to watch what the Federal Reserve is doing than actually watch what the markets are doing. Obviously, in the past, such interest rate increases have had a negative impact on asset markets.
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What is your interpretation of how things are shaping up in the euro-zone, West Asia and Japan? What are the likely implications for the global markets, especially after what happened in Egypt and Greece’s bailout?
In my view, the euro-zone is not going to grow. We had the exports figures coming out of Germany. On the contrary, it is more likely to contract than grow going ahead. Having said that, it actually doesn’t matter whether it contracts or grows – basically there is no economic growth in Europe for the time being.
In the case of Japan, we have had essentially very little growth and some deflationary pressures until last October after which the Bank of Japan (BoJ) embarked on monetary easing policies. Since then the Yen has weakened considerably and the stock market has risen sharply.
I think that the policy decisions in Japan are quite dangerous because it essentially gives a green signal to other countries regarding monetary easing. If there is have low economic growth and if the share market is not performing well, then most likely the currency will go down. This will help economy temporarily and lift asset prices.
Have the quantitative easing measures / stimulus by various central banks done an irreversible damage to the long-term prospects of global economy, markets (equity and commodity)? Why / why not?
There are people believe that Ben Bernanke and other central bankers have saved the world’s financial system. I am not saying that they are wrong but I am suggesting that the crisis occurred in the first place because of the expansionary monetary policy – principally by the US Federal Reserve since the 1990’s.
In other words, each time there was a crisis – be it S&L (savings and loans) crisis, LTCM Hedge Fund crisis, Mexican peso crisis which is also known as the Tequila crisis – ahead of Y2K, monetary policies were eased and liquidity injection occurred. And then we had the Nasdaq collapse in the year 2000.
The US Federal Reserve then again embarked on extremely expansionary monetary policy, which created a gigantic credit bubble and home prices surged.
When this came to an end, that’s when the crisis actually happened. Had the US Fed not pursued very expansionary monetary policies and paid attention to excessive credit growth, there would have been no crisis.
How are you evaluating the emerging markets (EMs), especially India as things stand?
The EMs have grossly underperformed the US since the last two – three years already. In fact, if you look at India, the Indian market in US dollar terms is now down 41% since 2008 because at the time the rupee was at 39 levels against the US dollar, which is now over 60. So, the EMs have performed very badly.
Should one buy the US markets or move back to EMs over time?
I think it is too early to buy EMs as the currencies may still go down and the EMs may still under-perform. Personally, I would rather look at buying EMs as compared to the US markets, but not necessarily now.
Which economies within the emerging market pack look more attractive and why?
I am not yet sure what I will buy. As mentioned earlier, I would prefer to wait and see how economic developments and policies shape up. In fact, investors should pay much more attention to the economic developments in China rather than focus on what Ben Bernanke says.
My sense is if the Chinese economy slows down, the whole of Asia will slow down very meaningfully. Besides, other emerging economies that supply resources to China will also be severely impacted.
So overall, between the EM pack and the developed world, which economies would you bet on from a 6 – 12 month perspective?
Well relatively speaking, I think that the US may outperform the EM pack but it doesn’t imply that the US will go up. It may actually go down less than the EMs. I prefer to hold cash and will invest in EM economies only if there is a good opportunity.
Can you elaborate on your views on China and its implication for the global equity and commodity markets?
Well, basically whether China grows at 10% as it has in the last 20 years or even at 4% or less, it will have a huge impact on the demand for raw materials, particularly the industrial commodities like iron ore, copper, bauxite etc.
Currently, China is growing at 4% per annum; then in such a scenario, pricing of commodities will remain relatively weak. Thus, the commodity producing countries like Argentina, Brazil, Africa, Central and West Asia, Russia will have less income. As a result, they will have less purchasing power for goods manufactured in the western world and in China. So, possibly as a result of the Chinese slowdown, we will be in a period where economic growth will badly disappoint.
Would you expect this correction in EMs to also create a flutter in the EM currencies and bond yields as we trudge deeper into 2013? Is more pain in store for the Rupee?
Most Asian currencies have been weak. If India continues to have large fiscal deficit and relatively expansionary monetary policy, I think that the rupee will continue to weaken.
What has been your asset allocation strategy over the past one year and do you see this changing over the next 12 – 18 months? Which geographies and asset classes could see a higher allocation?
I feel reasonably happy to hold a lot of cash and I hold it US dollars currently. I don’t like the US dollar, but I think among the ugly sisters, it still is the prettiest one! We had a very sharp recovery in markets from 2009 lows. I would prefer to wait for a really good investment opportunity.
Among commodities, gold and crude oil have seen a massive slide since the past few months. Have we hit bottom or is there more on offer over the next few months? What about base metals / industrial metals?
Well, I think gold has declined into buying range. Personally, I think one should watch the developments in West Asia with extreme concern. It is a complete mess. The western world is shipping weapons to the so-called freedom fighters in Libya, Syria who can use them against anyone.
We are the brink of a civil war in many countries in West Asia. This, in turn, can lift oil prices. Among all the industrial commodities, I think oil is the most attractive as things stand. A rise in oil prices will not be good, especially for India.