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It’s always good value listening to the thoughts of Marc Faber, otherwise known as Dr Doom. The eternally bearish investment guru can always be relied on to pour cold water on market exuberance, no matter how buoyant things might look.
He notes the S & P 500 is getting very close to the all-time high of 1565, but he’s not big on equities full stop. “If you look back at equity performance over the last 15 years, it has not been good. The Dow hit 1100 in March of 1999 and we’re only getting close to 1,4000 now,” he reminded RTHK listeners. In fact, equities have done miserably in the last 15 years, he concluded. So isn’t it about time that they are the place to be? Not really, he said, pointing out that the Dow Jones and S & P Stock performance, dividends included, averages out at a pretty unexciting 6 per cent per annum.
When you print money, he sighs, it tends to go to the people closest to it, so the rich guys get this money at the expense of people at the lower end. But he doesn’t think we’re anywhere near the 16th or 3rd centuries where massive social upheaval erupted. But when food prices go up, you get more social problems. Not so much for the partner at Goldman Sachs because as a percentage of his total income food expenditure is maybe 3 per cent, “unless he is a heavy cocaine user.” But in India people spend 50 to 60 per cent of their income on food, so when food prices rise, it hurts the lower income recipients most.
“I’m saying this not because I have a grudge, I’m in the financial sector, and a prime beneficiary of money printing, but I don’t like it from a society point of view because it creates an increase in the wealth inequality and it leads to social problems, such as we now have in the Middle East, as an example.” Faber thinks printing money is a bid thing, because if you print money, something will go up. But now he’s rubbing his hands in glee. “Now I think we are getting into bubble stage and I love it, because it means there will be a crash.”
Predications for 2013
Faber says he really doesn’t know how the year will finish. We have to be realistic, he advises. It’s tough when there is heavy intervention by governments in the free market, “and to term what governments are doing as intervention is very polite, I could say manipulation, because if you artificially suppress interest rates, then somebody could accuse you of being a manipulator of markets.” The difficulty is the zero interest rates, especially when real household inflation is 5 - 10 per cent, if you include insurance premiums, professional fees, taxes, energy, rents and property prices.
So with zero interest rates the purchasing power of money slumps. So it’s dangerous to hold cash. At the same time with zero interest rates, it’s very difficult to value anything, he believes. But he’s still long on some shares, but doubts they will go up a lot. “But I feel uncomfortable holding all my money in cash, so I still hold gold.” Looking back to March, April and May 2012, the mood turned very negative because of Europe. “And for the first time in my life I started to buy some European stocks, tempted by markets in Portugal, Spain, Italy France and Greece which were either at or below the 2009 lows. Since then these markets have bounced by 30 to 40 per cent and Greece has doubled in price. “I always say if Greece can double in price, any garbage in the world can double in price,’ he observes. So never mind the quality, it’s the price that matters. That would seem to be his message.
“The worst asset has a price at which a purchase is advisable - it can go up.” But six months ago the best asset to own was the most widely held hedge fund stock - Apple and it tanked 37 per cent. “Now it can rebound but I’m saying it doesn’t matter what you buy, it’s the price at which you buy something that matters,’ he told radio listeners succinctly. He thinks markets have adjusted already, in terms of upside. He has stern words on free money. Money for nothing - zero interest rates – leads to excessive speculation and volatilities in the market place.
Actually, he says, inflation is a very interesting phenomenon, because if you increase the quantity of money, prices will go up - sometimes for wages and sometimes the symptoms of inflation come up in consumer prices and sometimes in commodity prices or real estate prices. “And so we distinguish between consumer goods inflation and asset price inflation.” Today we have higher consumer price inflation than what governments admit - but we have very high asset inflation, “and every inflation comes to an end and I am of the view that some asset prices will probably come down quite a lot, if not right now, then in 2013 or sometime in 2014. Although with all the money printing I would feel uncomfortable not to own any asset.” So he has still got some shares in Singapore, Malaysia, and Thailand and though he bought in Europe, he would not buy any more now. Specifically, he’s long on Swire Pacific, Hang Seng Bank and Sun Hung Kei. “Yes I bought it when they had this problem wit corruption, I think they should get a medal for that.” As ever, he’s long on gold, vowing never to sell it, though he thinks it may go down further.”
As for commodities – agricultural commodities are reasonably inexpensive and oil can probably move up somewhat more, he thinks. “I’ve been several time to the Middle East lately and I think this is really a very dangerous region – essentially a time bomb.’ That sounds like the Marc Faber we know and love.