Investment Guru Marc Faber is not worried about economies across the world falling short of their inflation targets, or even deflation.
The U.S. Federal Reserve wants to see inflation rise “because it has a completely wrong view of economics, the author of the Gloom, Boom and Doom report said on BloombergQuint’s weekly series Thank God It’s Friday. Lower inflation will improve affordability, spur consumption and thereby strengthen the economy, he added.
Here are edited excerpts from the conversation.
What’s your view on the state of the U.S. economy and do you believe that the Fed is in a position start unwinding its balance sheet in 2017?
I think that the economy is basically weakening. We have car sales that are essentially down year-on-year. The housing market has been strong. But now housing sales are also weakening. And loan growth has slowed down considerably. Consumption is sluggish. Restaurant receipts are all down year-on-year and since 2015...now in the first quarter, we will have the reconstruction from Hurricane Harvey. So, maybe there’s going to be a slight pickup. But if you look at the ten-year treasury yield, at the beginning of the year, many strategists who had been bullish about treasury bonds, turned bearish and forecast a ten-year yield of 3 percent by mid-year or towards the end of the year. And here we are today at 2.12 percent.
The ten-year government bond in the U.S. suggests that the economy is weakening and not strengthening.
Inflation is falling short of target across the world, not just in U.S. What could be the implication for policies of various central banks?
It’s very good that inflation is not accelerating, in fact, I wished we had deflation. Because one of the problems both for the U.S. and other countries in the western world, also in Asia and the emerging economies, is that asset prices have gone up so much and the cost of living has gone up very substantially. That squeezes the real spending power of the typical household. This, I have maintained for the long time in discussions, particularly regarding India, where people have been arguing for years that the RBI is too tight and should ease more. But very few people in India own stocks and what is important is the stability of the Indian rupee and to increase the purchasing power of people, so they can spend more and improve their standards of living. By having inflation, home prices go up and then most people can’t afford them. Or insurance premiums go up and most people can’t afford to pay. Or healthcare costs go up. So, you don’t get a strong economy. What you really need is to improve the affordability of things and say there are some bright spots. You look at Amazon.com in the U.S. They have really lowered the cost of purchasing all kinds of goods for the typical household. So, that is a very good thing. This kind of deflation that improves the purchasing power of people.
I am not worried about deflation but, of course, what the Fed would like to see is inflation and even more inflation because they have a completely wrong view about economics.
How do you see markets like India, China and Thailand in your pecking order and what are the advantages and dis advantages of each of these markets?
I think the beauty about Asia, in terms of being an active manager, is that markets do not move all in concert. There are some markets that are strong. Let’s take the Indian market. It bottomed out in September 2013 after around 17,000 on the Sensex and since then its up more than 80 percent. Many other markets since 2013-14 are actually down. And so India had a huge move. This wasn’t the case for China until recently. Recently, China has been picking up. The economy looks slightly better at the present time because there is also a massive injection of liquidity both through the government and the banking sector. Suddenly now, western investors are realising that maybe we are being bearish about China. Yes, they have a credit bubble but so does the whole world. Maybe the Chinese credit bubble can be managed whereas in other countries the credit bubble may be a bigger problem particularly with respect to pension firms and unfunded liabilities. So, the money is suddenly flowing into China and, I have to say, I am not quite bullish about China. But, more than a year ago, I started recommending Macau gaming stocks, asset play on the Chinese recovery. Most of these stocks have almost doubled in price.
More recently, I increased my positions in China. I had some stocks but I have increased positions because I think that the money flows will shift from other countries in Asia into China.
What’s your view on the Narendra Modi government in India and its reform agenda? Do you expect to see more hard-hitting reforms coming from this government?
In principle, the intentions are good but the intentions of Mr. Trump are also good but he can’t really do very much because of Congress. We have to realise that the Modi government has huge obstacles to overcome and that his policies cannot be implemented in the right way and successfully. In particular, what has been disappointing in the case of India is that capital spending hasn’t really picked up much. That is a puzzle to me - why capital spending is still relatively weak. But I may say that the capital spending in other countries is also weak but it is very strong, for instance, in Vietnam, Cambodia and parts of China. So, that is somewhat of a disappointment for me.
The GDP growth in India has been slowing. The banking system is grappling with bad loans. Now there is a new worry that economic growth is not creating enough jobs. Is there anything about the macros in India that worries you?
I had argued for years that I would rather be invested in India than in the U.S. But I have also pointed out that it’s actually a miracle that India grows at all given the horrific bureaucracy India has. This is now really a case where it’s a miracle that India grows at all given the bureaucracy that it has. I tell you, this is about the worst encounter in the whole world.
What have you done with your Indian portfolio holdings in the last 1-2 months, have you booked profits or added possessions?
I hold Indian equities through the India Capital Fund which is run by my friend John Thorn. Aside from that, I would be, in India, more interested in real estate, not in the major cities but in secondary locations and resort areas because as India becomes more affluent, and I have seen this in Europe, people will have second homes. They will have beach houses, they will have homes in the mountains where in summer it’s cooler. So, this are things I would do. We have seen that some real estate stocks have done fantastically well recently. Indiabulls is up something like five times in just a few months. It’s not quite as strong as cryptocurrencies. But nevertheless, it’s a very strong performance.
What are the sectors that could be the next leaders for tomorrow?
I am not an expert on Indian investments per se. I am an economist and a global fund manager. So, India is not the main focus of my activity. For that, I have managers like the India Capital Fund that will select stocks individually.
If you ask me about the world, I think we had a very strong performance of technology and internet-related stocks, e-commerce and so forth. They had a super performance until recently. Now, more recently in the U.S., Facebook, Amazon, Apple, Google, Netflix are the kind of stocks that will not provide you a high return going forward. They will go down as they are quite vulnerable. First of all, there will be more international competition and secondly, the valuations are really high. When we look at sectors that have low valuations, I would say oil and oil-related stocks are relatively low. European stocks are relatively low compared to the U.S. Some Asian markets - Singapore, Thailand, Vietnam are relatively low compare to everything else, as well as Japan. Then we have the mining sector which had a horrific performance since 2011 and the speculators are now-a-days are no longer in gold, silver and platinum. They all migrated to cryptocurrencies.
But the gold sector is bottoming out. It is a very different type of asset class to own physical gold than to own bitcoins and other cryptocurrencies. I think that this sector will come back, as well as the underlying shares.
Give us your view on gold. You have also spoken about certain other agricultural commodities that may be priced at a lower level. What are these commodities?
The question related to two items, precious metals, that is, gold and then other commodities. I think gold has bottomed out about 1.5 years ago in December 2015. Then we had a strong performance in 2016 where we came back. At the end of last year, we were again at a relatively low level and stocks were depressed. Since then gold mining ETF is up more than 18 percent vis-à-vis DSNP which is up by 9 percent. There are many gold shares that are up between 30 and 300 percent. In my view, the media in the U.S. has a very strong bias for FAM and FAM-related stocks. The mining sector does not obtain or receive the necessary attention from the media in the U.S. So, people don’t know how well gold shares are doing. You take American Barrick, Newmont Mining..these are big companies. From December 2015 to today, they are up maybe by 300-400 percent. That people don’t talk about. They talk about Google, Amazon. But the strong performance of the mining companies over the last 2-3 years is not mentioned. Now they had a big move recently because gold broke out above 1,300 dollars an ounce. So, they are near term overbought. But any investor when he thinks through..in Jackson Hole, you encounter the typical group thinking phenomena. Yellen, Draghi and Kuroda talking together. Of course they coordinate monetary policies and of course they will print more money in the long run. So the purchasing power of paper money is going down and so I would own some gold. The new thing is the cryptocurrencies. That is a wonderful thing. Why do we have crypto currencies? We have it because an increasing number of people don’t trust paper money anymore and they don’t want money that is controlled by the central banks, that pollutes Jackson Hole.