Euro To Strengthen, Dollar To Weaken, Gold & Emerging Markets To Outperform
Mike Gleason: Well, to start out here Dr. Faber, before we get into some other stuff I wanted to hear your comments on the state of the U.S. economy. Now, it appears the Federal Reserve has finally gotten serious about moving rates higher at least modestly. U.S. equity markets seem to be discounting that fact, focusing instead on the so-called Trump trade. Markets are pricing in a huge infrastructure spending program and tax cuts stimulates that could overwhelm any modest tightening at the Fed. Now that efforts to reform healthcare seem to be failing we expected some of the optimism surrounding president Trump’s other initiatives would leak out of the stock market but so far that hasn’t happened.
Stocks remain near record highs and there isn’t a whole lot of interest in safe haven assets including precious metals. So, what are your thoughts here Marc? Is now a time to take some profits and move towards safety or is there still some good upside in equities?
Marc Faber: Well, I think that in terms of the economy I don’t think the economy is as strong as people believe or as the statistics would show and recent trends have rather been indicating some weakness is auto sales, not a particularly strong housing market and we have several problems as a result of excessive credit. So, I think that the economy is not going to do as well as people expect and concerning the huge infrastructure expenditure that Mr. Trump has been talking about, it is about a trillion dollars over ten years, maximum. In other words, a hundred billion a year.
In China in 2016 in the first ten months the infrastructure expenditures were 1.6 trillion, in other words 16 times higher than what Mr. Trump is proposing. So just to put this in a perspective. Now throughout Asia and the emerging world there will be a lot of infrastructural expenditures in the years to come. The question is will stocks go up because of that, maybe some stocks will go up and some will not. So, we have to be now increasing the selective in what we purchase in terms of equities. My sense is that the economy in the U.S. is weakening and not strengthening.
Mike Gleason: It is also possible markets aren’t responding to fundamentals and we ought to consider those ramifications. The advent of high frequency trading and massive intervention by central bankers could mean markets become more irrational than ever. It is possible for instance to see stock prices being bid higher despite slowing GDP growth, rising interest rates and congress failing to deliver fiscal stimulus here in the U.S. I mean, how artificial do you think markets are and to the extent today’s markets aren’t real, how much long will the central planners and bankers be able to maintain this illusion that they’ve created?
Marc Faber: Well, basically some people say that the central banks are out of bullets. This is not my impression. They can keep on printing money and boost asset prices where by not all asset prices will go up, some will go up and some will go down. But the point I want to make is the central banks are not really out of bullets. The economy, if it weakens some stocks will outperform others, in other words recently you’ve seen the weaker in automobile stocks, so there is still a selective process in the market. The stocks that have gone up the most recently are actually mostly companies with very little earnings, very high evaluations, Tesla, Amazon, Netflix and so forth and we’ll have to see.
All I can say is when I look around the world, I don’t see any particularly good values in the U.S. except in mining companies and I think some of the interest rate sensitive stocks are again relatively attractive because I expect the economy to disappoint, especially if the Fed continues to increase interest rates and so a short increase in interest rates could mean some further weakness in bond prices but eventually bond prices could rally again and this is my view that the U.S. by any standards compared to historical evaluations, compared to Europe, compared to Asia, compared to emerging markets the U.S. is very expensive. Now, can it go up another ten percent? Maybe 20 percent? Yes, between December 1999 and 2000 March 21 when the stock markets peaked out the Nasdaq was up more than 30 percent, but was it a good buy? No, everybody who bought at the time in the first three months of 2000 lost money.
So, my sense is that yeah people can buy stocks here but most of them are going lose money with the exception in my view, that mining stocks will perform reasonably well.
Mike Gleason: Let’s shift focus now and talk about what is happening elsewhere in the world, you’ve alluded to it in prior answers but you’re originally from Europe and now you live in Asia. Now, it’s easy for Americans to focus on domestic affairs such as the new president and lose track of important developments in other parts of the world. Can you update our listeners on developments you are watching in Asia? China in particular.
Marc Faber: Well, whether it’s sustainable or not the fact is that the Chinese economy has been improving recently, somewhat. Maybe it’s all driven by credit but for now they have stabilized the economy, it’s improving and it has had a huge impact on the prices on resources including copper and zinc and nickel and so forth and it has had a favorable impact on the Asian market. Earlier you asked me about the U.S… this whole euphoria about the performance of U.S. stocks, the fact is in Asia just about every market has outperformed the U.S. In Europe, just about every market has outperformed the U.S. measured in U.S. dollar terms. So, I think that the impact of an improving Chinese economy is being felt more in other emerging economies than say, in the United States.
Mike Gleason: How about Europe? The future of the European Union is in question with some important elections upcoming, banks there remain at risk and several if not most countries continue to struggle with slow growth and overwhelming debts. Give us your thoughts on Europe and how things might unfold there over the remainder of the year.
Marc Faber: Well, I’ve just written two reports recently highlighting that in Europe there are some companies, mostly utilities and infrastructure related companies that on a valuation screen appear relatively attractive.
