Friday 29 Mar 2024
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This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on Sept 28 – Oct 4, 2015.

 

While the US dollar has strengthened considerably, its run is not expected to continue over the long term, says contrarian investor Dr Marc Faber. He suggests looking at undervalued Asian stocks that pay good dividends.

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Personal Wealth: Do you think the volatility in the global markets will continue for the next 12 months?
Dr Marc Faber: I believe that one of the objectives of central banks, or that’s what they say, is to reduce economic and financial volatility. But if you look at the last 15 to 20 years, volatility in everything has increased dramatically. First, we had the Asian bubble and then the Asian financial crisis in 1997/98. Then, we had the Nasdaq bubble, which collapsed in March 2000. After that, we had the housing bubble. This led to the [global] financial crisis of 2007/08 and the first decline in US home prices since the Great Depression. 

Following that, we had this colossal credit bubble and all this liquidity which flowed into different economies, asset classes and sectors at different times. So, you had the boom in commodities until 2008. Some continued to boom until 2011, and then they collapsed. Then, you had the boom in China, driven by credit until 2009. Now that’s over. Then you had the boom in Brazil, Russia, India and China until three years ago, and that has also collapsed. So, this liquidity bubble creates more volatility, not less. 

In my view, we had a lot of volatility in the world already before the end of August [when global stock markets fell]. But in the US, the market kept going up gently with relatively low volatility. Now, the US is adjusting to the reality that global growth is going to be negative or very disappointing.

I believe volatility will stay high going forward. There are different ways to measure volatility — it can be upside or downside volatility. In the past few days, we have seen the market tumble and make sharp rebounds. Markets are again relatively weak.

 

Do you see a financial crisis happening in the next 12 months? 
They may be able to postpone it once again, but there are lots of cracks already in the system. And unlike 2007, this is one of the problems that Malaysia faces. First of all, households are quite indebted — big household debt. Number two, my impression is this is a global problem as well. Young people, [when] they finish university, school and apprenticeship, for them to buy a house is very difficult when the prices are high compared to their income. Who can afford that? Then they have to borrow money. They are already in their twenties and highly indebted. This means they have less money for other stuff. In the US, they are deciding to stay with their parents; they don’t move out. They don’t stay with their parents because they like it, they stay because they don’t have the money to go somewhere else. The home ownership rate has gone down, so it is a symptom of how things are not so good. 

All these problems will erupt into another crisis, but people who think the global economy will suddenly have the growth rates we had between 2001 and 2007 are dreaming. It is not going to happen anytime soon. China, which is the engine of growth, is not going to be growing anytime in the future at 8% to 12% [per annum] again. It is over. If it can grow at 4% or 5%, I think that would be the maximum.

 

You were quoted recently in the media saying that the US markets are at a tipping point. What are your views on the global economy?
[While] every economic downturn and every crisis is somewhat different from the previous one, they are all preceded by excessive credit growth. That is one of the features of every crisis. They are also preceded by excessive speculation and by easy monetary policies — in other words, expansionary monetary policies. Global debt as a percentage of global gross domestic product today is 30% higher than it was in 2007 and the quality of the debt is very low. So, my sense is that there could be another crisis that could be very serious. 

Don’t forget that in 2007, before they slashed interest rates, the Fed funds rate was still 5.25% and long-term government bonds were yielding 5% to 6%. Now, we are down to rock-bottom bond yields and we have zero-interest rate policies around the world. We have seen that in Japan for the last 20 years, and in Europe and the US for the last six years. So [when] the next crisis comes, the question then would be what ammunition is there left. 

Now, what they can do, and I am not saying that it will help, is to introduce negative interest rates. So, you have a bank deposit of a million dollars and they charge you to hold that million dollars at, say, 3% per annum. But that may lead to more speculation and not more economic growth. 

Wealthy people have a very high saving rate. They earn, say, US$10 million but they don’t spend US$10 million because they can only eat so much every day. That is not particularly good for economic growth but it came about because of money printing. The wealth inequality and income inequality became more pronounced with money printing. When you have a lot of money to print, wealthy people do well in high inflation economies. That has quite a high probability in Europe and in the US. If you look at the composition of wealth since 2007, the median income is down, but the 0.01% have become filthy rich. It is okay, I am not complaining. I belong to that class as well. But from an economic point of view, it is not desirable. 

What the central banks and governments can devise is a wealth tax [so that they need not] admit that they screwed up and made a mistake. Why is the economy not doing well? The rich took all the money, they will say. So we have to [introduce] a wealth tax on these rich people and that, in my view, will not help. If you collect 20% of all these rich people’s money, in comparison to the sovereign debt, that would not be very helpful [in solving the issue].

 

You have mentioned that Indochina is a promising region to invest in and peace is the main factor. What about Malaysia? Is the political situation here considered stable? 
The answer is in an environment such as we have globally, there is less political stability … The governments will from time to time change and this is also good for a country. You shouldn’t have a political class that is always in power. New people should come in and that creates a better environment that is more conducive to society. It is like you have the Clinton and Bush family forever. It is better to have changes there. Compared to [other] Asian countries, Malaysia is relatively stable. But my impression of Malaysia, and I have some investments in Malaysian stocks, [is that] it is not a very dynamic economy. It suffers now from two factors — low commodity prices and shrinking industrial production in the world. That is having a negative impact on its growth. 

[In the same vein], I had discussions in Europe with an academic. The economy in Europe — it’s true, we have no growth. We have contracting incomes for many people. But the quality of life for most Europeans have improved. So in economics, it is not the quantitative issue that counts, but the qualitative issue. [For example], you build roads and give the children good education. These things may not immediately show up in the GDP or long-term statistics, but they may have an impact on society that is desirable and may also have long-term benefits. So I will say that GDP is very difficult to measure because you are taking apples and oranges, and certain things are difficult to measure. But in the long run, Malaysia has reasonably good potential. My sense is that the government is too much involved in the economy. 

 

Should it take a step back? 
Well, you see in Thailand, they accused the military recently of having no plan. I said thank God they have no plan. Because if they had a plan, for sure it would be a bad plan. In Hong Kong and Singapore, they have always had a very small government. That, in my view, is very favourable for economic growth. 

 

So, it should be a free market where you just allow things to happen? 
Yes.

 

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