Globally, the flow of negative news has seen some easing recently as the US and European central banks have extended support in terms of buying more bonds and keeping the interest rates low. With these developments in mind Jitendra Kumar Gupta spoke with Marc Faber, a renowned investment expert and Editor and Publisher of “The Gloom, Boom & Doom” report, to understand his views on the current global situation as well as on the Indian markets, gold and other asset classes. Edited excerpts:
John Bogle of Vanguard Group recently said that it’s urgent that people wake up as this is the worst time for investors that he has ever seen. Do you think on similar lines or there is some positive news for the investor?
I can say one thing that today the uncertainty is much higher than in the past. We continue to have central banks running the expansionary policies in terms of fiscal and monetary stimulation, which has led to the asset price inflation. This creates very high uncertainty because you do not know how much more money will be printed in the US. Uncertainty arises because of these reasons. The interventionists want to stimulate the economies by manipulating the markets particularly the interest rates. They are creating higher economic and financial volatility than in the past.
But, why does the world go so gung-ho about the US and Europe bond buying if that is going to result in more sovereign debt?
Central banks are buying the bonds to manipulate the asset markets and bring the interest rates down. Essentially the quantity easing policy is supposed to be independent. Actually, it is closely related to fiscal policy. In the sense, these programmes and the monetisation are designed to purchase the government bonds. Indirectly these Central Banks viz, the US Fed, ECB and others, which have large fiscal deficit, are monetising the deficits and piling up more debts. With these measures that they are taking they are postponing the problems rather than curbing them. In this process, the debt levels will only go up and certainly the sovereign rating of the US debt will come down at some point in time.
If we go by the popular belief that it is not in the interest of the politicians to curb deficit and limit debt considering the vote bank politics, how are we going to see this postponing of problems actually coming to an end?
Bernanke has been printing money and even if Mr. Romney wins the election the next Fed chairman will also do the same. Not just the US, money printing will go on in Europe, China and other countries. This will erode the purchasing power of paper money. We do not know exactly what will break this system, but basically in my view we will have another systemic crisis at some point in time in the future. Whether the catalyst for the same would be geopolitical events, a crash in the Chinese economy, or another failure of private sector or government sector, I do not know. But, the trajectory, especially the piling up of the debts in the US and Europe, is not sustainable in the long run.
If the problems in the Europe continue, slowdown in the US, Japan and China is sticky, where do you think asset prices are heading for the next five years?
Over the next five years or so we will witness a slow growth or no growth in the Europe coupled with continues drop in the standard of living, both in the US and Europe. This will require money pumping or printing of money to support the economies. However, a large part of this will flow into assets and erode cost of living. So, in the interim we will have assets prices moving up but I would say in the long term we will have far better opportunities compared to today. But, I believe that eventually we will have a systemic crisis and everything will collapse. That I think will provide better opportunity to invest.
If future is so uncertain how much would you advocate to invest in equity?
I still hold 25 per cent in equity. One might argue it is very low, but some of my investments in like Gold and Debt have equity characters. If the equity markets go down the prices of these bonds will go up and in other words the yields will move up. Further, if the equities go up the prices of the gold too will move up along with the liquidity pumped in by the central banks. I do not know how the world would look in five years’ time. One day there will be a deflationary collapse that will blow all the levers and deflate assets prices. But before everything collapses we could go up in equity markets and in other assets market so I want to have them in my portfolio. In fact to me, if you buy equity, precious metals, diamonds, paintings, real estate everything will go up somewhat more. But I believe in the event of collapse you will be able to buy most of these assets at lower prices than what they are now.
Do you think the Sensex can make new historical high this year?
I do not think so. But if the government continues to pursue expansionary monetary policies and disregards the inflationary symptoms--we already spoke about the real estate prices going up in India and becoming unaffordable hurting many people--there could be some gains but even in that case also I do personally believe that Sensex could not make new highs.
Is India's economic downturn bottoming out with the hope of rate cut and voices of reforms making rounds?
I think the India economy will grow at a relatively slower pace for while because it is not just the policies that the government can take to boost the economic activities. Basically one of the problems in many countries including India is rising cost of living. This has led to many people being squeezed and the purchasing power being eroded significantly.
Indian economic growth has slowed from 9 per cent to 6 per cent. Why do you think there is still risk?
I have a slightly different view of economic growth. These statistics which are produced by the government are not very reliable source of gauging the slowdown. There is lot of improvement in the standard of living but at the same time the cost of living has gone up significantly. There is lot of leeway in other way how you calculate your expenditure index. I would argue in my view that inflation is much higher in India and China than what governments published. For the same reasons the economic growth in India should have been lower than what was published. We could see India's economic growth slowing down to 2 per cent. And I also feel that one would need to make an adjustment for the government’s debt. Understand that if you just grow because you borrow more and more money I do not call that as sustainable growth. For the real economy to grow one needs to see that the real income of individual is growing adjusted with the cost of living. Higher economic growth does not give any meaningful indications if the real incomes of the individuals are not growing.
If the cost of living is going up and inflation remains a structural issue in India, where do you think Indian investors could hide?
In the high cost environment, I think there will be a tendency for the rupee to decline in value. And I think the best thing to do in the long run or I would say the investors will be better off in equity than in fixed income securities. They will be better off in precious metals and real estate than say compared with the fixed income securities. But in the interim there could be wild fluctuations in some of these asset classes. The investors should be prepared to deal with the fluctuations.
You talked about real estate do you think there is scope at these prices to invest in Indian real estate?
It is difficult to predict the real estate market of a country as large as India since there are so many variables and factors that influence the markets. Additionally, there are different segments and markets within the real estate, which individually have different drivers. But in general, India will have more shopping centers, more housing requirements, more office space, entertainment complexes and demand for other commercial activities. So that offers an opportunity in the long run. But I suppose that prices in some pockets like Mumbai are on the higher side or high and could correct in the time to come.
What about the gold, should one buy?
I think we peaked out at about a year ago where the gold went to $1,921 and then corrected. Now we currently above $1,700. I think in the near term we could see some correction. I do not know how high the gold will go. Whether it will go to $2,000 or $20,000 I do not know precisely. In the event of systemic failure it can go higher and higher. You will have to ask Mr Barnanke and Mr Draghi precisely how much money they will print. The sky is the limit.
