Marc Faber: Avoid the US and Invest in Emerging Markets in 2017
In an exclusive interview with Tanvir Gill of ET Now, Marc Faber, publisher, The Gloom, Boom & Doom Report, says he is sure, new US president Donald Trump’s policies will fail to lift economic growth rates significantly. Edited excerpts:
Tanvir Gill: Would 2017 be a happy year for markets across the world or would it be as dramatic as 2016? Do you think the markets can take a breather from the aggressive volatility that has hit us all of the last year?
Marc Faber: In general volatility will increase though volatility has been quite high in 2016. At the beginning of last year, we dropped to 1810 on the S&P and then we closed over 2200. So we had a big move in the market and then we had currency moves that were also very strong. Some currencies went down but others appreciated against the US dollar – bitcoins, the Brazilian Real and the Russian Rouble. It was a year where you could make a lot of money and also lose a lot of money depending on how you were positioned.
Tanvir Gill: What are your top three predictions for 2017?
Marc Faber: For the year, I do not know but for the near future, I have essentially three views. First of all, the US economy is like a supertanker or a sailboat. It is not easy to turn it around and come back to where you have been in terms of prosperity. In general, Mr. Trump’s policies will fail to lift economic growth rates significantly.
US stocks, compared to emerging markets or European companies or Japanese stocks, are significantly ahead of themselves. In 2017, emerging markets will outperform the US either by going down less than the US or by going up substantially more than the US. So I would essentially avoid the US and rather invest in emerging economies including India.
The second view I have is that recently investors have been obsessed with growth in the United States and with interest rates going up because the Fed has said that they would essentially increase the Fed fund rates three times this year but in the US, the treasury bond market is grossly oversold and for the next three months, we can have a rebound in US treasuries. Short-term and long-term interest rates in the US are going to ease again in the next three months. You could get the 5% to 10% upside move in US treasuries.
The third view I have is the whole world seems to think that the only way the US dollar can go is upward. I doubt this is to be the case. First of all, if you have a strong dollar, the trade deficit in the US and the current account deficit are likely to weaken as well as the economy. So, within the next three to six months or even already now, the US dollar has become rather vulnerable against foreign currencies. I would rather be short on the US dollar in 2017 than go long.
If I look at the sentiment of investors towards precious metals, it is actually puzzling because gold is up against the US dollar and gold shares were up on an average of 60 to 80% in 2016. But despite this performance, investors are very bearish about gold and gold shares. I would accumulate or recommend to accumulate precious metals stocks and the physical in 2017.
Tanvir Gill: Clearly then you are circumspect about the US economy and the markets. A growing camp, however, believes that the US has embarked on a new bull run and the last two months are testimony to that optimism. Do you think that under Trump, this is just a hope rally that will fizzle out or meet eye to eye with the reality of the US economy this year itself? You have stated that the US market is looking stretched and by March 2017, the US markets would have entered or completed actually eight years of a bull run. Typically, a bull run lasts about 4-4.5 years and may be stretched out to 5 years but a big camp in the market believes that this time around even though the bull run has extended itself the US market and the economy could be seeing what is typically called the super bull run. Many are drawing the comparison with the kind of bull rally the US markets witnessed in 1990s which lasted nine years plus. How do you rationalise that optimism which is fuelling US markets higher and fuelling the optimism on the US economy?
Marc Faber: Well first off all I am not interested what most people think because most people thought that Britain would reject Brexit and most people believed that Hillary would be elected in the US. I am not particularly interested in what the majority thinks. But I would like to say that when the market embarked on bull market in 1991, interest rates say on treasuries were still around 8-9% and we had a big correction in 1987 whereby the valuations of stocks in 1990 were not particularly high. Valuations of US stocks today are very high.
Also in the 1980s, do not forget the US market had significantly underperformed emerging economies in particularly Japan. The Japanese markets was the story of the 1980s. By early 1990s, the market in the US was relatively inexpensive compared to stock markets overseas but this is not the case at the present time.
If you look at that figures or charts that go back 30 years. the US market has never been this expensive compared to other markets in the world then it is now and I believe whether you are contrarian or not, eventually there is a reversion to the mean.
I believe the stock market in the US will either go down more than emerging markets because we are in a global bear market or emerging economies stock markets will go up more than the US if the super bulls are right. But we have very strong headwinds.
One of the headwinds is obviously if the economy strengthens a lot, I think that consumer price inflationary pressures will come up and that interest rates will go up. Once the 10 years yield goes to around 3%, the stock market will notice and those stocks will face this headwind of rising interest rates.
Secondly, do not forget if the US dollar is strong, it means that foreign earnings of American companies are translated into dollars in the US and so the earnings of multinationals will suffer. Also, if the US dollar is very strong , it is a symptom that global liquidity is tightening and when the dollar is very strong, usually stocks do not perform particularly well.
Tanvir Gill: Sure, but if you are bearish on the US, how do you rationalise the Fed hiking rates twice or thrice this year indicating to world markets that the US economy is actually doing fine? What would be the tipping point of a big sell off if indeed the markets are looking stretched? If that is your scenario then I also believe that you do not see a strong case for a series of rate hikes through the course of this year?
Marc Faber: Yes, it is possible I do not think it will happen because if I look at economic statistics that were published very recently, housing is not contracting but is not growing strongly either. Housing stats in November were down 18% month on month and down 6% year on year. Car sales in the US are weakening. Look around the world at the emerging economies. Most of the emerging economies are not really in recession with few exceptions like say Brazil but they are not growing rapidly either.
In some sectors of the economy, there is a recession — not pronounced depression — but business is lower than a year ago. In other sectors, it is flat but in general we have this asset inflation which has come essentially in many sectors of the economy to an end. Housing prices in San Francisco are no longer going up from an inflated level where well understood. Also in New York high end luxury is easing.
There are many symptoms that the economy is not strengthening but actually weakening and if interest rates go up substantially, that would choke off economic expansion.