Today’s unrealistic bubbles are not created in shares or on the real estate market, or in the pricing of Chinese enterprises, rather the global liquidity itself and the unprecedented money supply is the bubble. The liquidity-bubble is due to the irresponsibility of the central bank leaders – said Marc Faber, one of the most respectable private investors, who was born in Switzerland, but has been living in Asia for two decades. He predicts that if the dollar keeps getting stronger, Fed will certainly treat it as an excuse for further broadening of the money abundance; since the economy of the United States will slow down within a year, and recession will begin. In spite of this, Dow Jones and the S&P has been performed remarkably, there has not been any price adjustment for four years. The change is growing close, and market players can feel it already, this is why the yield of American sovereign bonds is so high. In the first part of the interview, Marc Faber is optimistic about Europe and the prospects of developing markets, and in the second part, he talks about Russia. According to the interviewee, the (artificially created) aversion towards the latter will cease with time, and the Russian market will become popular again.
Péter Zentai: How can such a difference exist between the yields of American and European (sovereign) bonds – moreover, in favour of the American bonds?
Marc Faber: To be honest, this is a mystery for me as well. How is it possible that while a 10 years old American bond yielded over two percent, German and other significant European sovereign bonds had only half percent approximately? I am still wondering – however, there is an obvious explanation: in Europe, numerous pension funds and insurance companies are bound by law to buy sovereign bonds. In the meantime, ECB is buying sovereign bonds of Euro zone governments. By utilizing these two factors, European yields are artificially pushed low. However, by itself, this is not a sufficient explanation for the quadruple yield difference between the America and Europa.
However, I found another explanation, which is connected to America’s general state and its prospects. First of all, the international investors’ demand for American dollar is unprecedented; in the last few months, dollar has become significantly stronger against the euro at an alarming rate. Of course, this is absolutely contradictory to what happened on the sovereign bond market – that not the European but the yield of American bonds has increased, and this difference between Europe and America has become enormous.
However, if my belief that the American economy is going into recession in the foreseeable future is true, the behaviour of sovereign bond markets will become more predictable. Right now, only a 1.9 percent yield can be achieved with the 10-year-old American treasury bills – which might seem quite low, compared to how much yield American bonds used to generate – but this yield will not be so bad, once American bonds will start to drop, as a prologue of recession. This small, but stable yield is not so bad either, in the light of that Fed will not be able to increase interests; so compared to zero, this 1.9 percent is small, but nothing to be ashamed of…
Why is your opinion so negative on the American situation?
It has been six years since the boom of the bull market, and in two months, in June, we will ‘celebrate’ the sixth anniversary of the start of the American market’s recovery. If we look back into the past, and observe how bull markets developed in the United States after WWII, and the economic recovery connected to them, we can see that the recent stock market and economic boom has been lasting. Another aspect is that in the last six years, stock market has been performing better than the economy. Actually, the latter one has hardly moved forward, and it can stop at any time. There is no real basis for its momentum. According to my prognosis, within the next 12 months, America will sink into recession.
Will this reach the other side of the ocean? Will Europe follow America?
Not necessarily. For Europe, it is more important what happens on the emerging markets; especially, in China and other leading Asian economies. Compared to America, great European multinational companies are extremely exposed, their American presence is negligible.
Let’s talk about China! What do you think of the bubble which appeared in the Chinese share market? Do you think this is going to burst soon?
Chinese shares have not been very popular for years, and now there is a rally. Otherwise, I do not have a good opinion on China. I think the actual situation of the Chinese economy has been just as bad as some assumed; in this regard, my assessment has not changed at all in the last years. However, as far as I know the Chinese decision makers, once problems are getting worse, they will initiate monetary easing, and begin to liberalise the exchange rate movements of yuan.
Actually, the problem is not the price of the Chinese shares, but the global liquidity. The bubble is nothing, but the enormous money oversupply all around the world. The free money floods stock markets, prices are skyrocketing, excessive amounts of money is moving from one region’s stock market to another. The price-bubble is going to spread to the commodity markets, and it will raise crude oil prices, just like it did on the housing market. This can be observed in China. Liquidity is quickly flowing everywhere. Returning to the question, in China, the result of the liquidity bubble is the explosion of exchange rates on the local stock exchange. Since there are no alternatives in China: either the stock market or real estate… China being a ‘gambler’ nation explains this extreme fluctuation. Many Chinese people are drawn to the thrill of catching and getting on a moving train. They are pushing their luck – it is in their blood.
Lately, investors have been ignoring emerging markets and their stock markets that used to be popular. What can they expect if the American slow-down, that you predicted?
It is evident that stock markets of Brazil, Russia and other significant emerging countries performed well until 2011. They were more profitable than the Western markets; however, after 2011 it changed. Commodity prices dropped then started to fall. For four years, emerging countries have been underperforming, and there has been an uncertainty due to unpredictable exchange rate fluctuations.
I am not saying that this situation is going to change soon, like the Brazilian stock market will be more profitable again.
Let’s take me as an example: I am an international investor, who has enough capital. Let’s see what I can do with it. I can keep it in a bank or in cash. However, the problem is not only that it does not give much in return, but I also fear for my cash. It can be expropriated, it can be taken from me, the bank can bankrupt, or authorities tax my money so I make losses. So – contradictory to the public opinion – keeping wealth in cash is not quite free of risks.
I, as an investor, am rightfully reluctant to having too much cash. However, looking around in the world, what I see is that the American stock market is very expensive, just like the American dollar. As a result, I turn away from America.
Europe is the next: the stock market is definitely cheaper, and personally I think euro is relatively cheap. Buying European shares is absolutely better, than buying American, or keeping to cash. In fact, shares of any worthwhile European company generate multiple of the European base rate, especially the European sovereign bond.
However, if I look at the developing world and the emerging markets, my impression is: if there is going to be a recession in China – in the next 7-10 years –, these markets will develop faster and more effectively, than America, Europe, or Japan. Perspectives for growth are far better than in western countries.
I am not saying that the stock markets of developing countries are especially cheaper; but they certainly are under-priced. I would recommend investors, who want to feel relatively safe for the next ten years, to enter the emerging markets at the current prices, because they will perform better than America and Europe. However, the latter one will generate more profit.
If you are going riposte that emerging markets will also feel if there is twenty percent drop of S&P in the next half or one year – well, in this case, I will not disagree. However, it is debatable whether emerging markets would drop more than American indices. On the long term, they are going to win more.