Moreover, the uptrend is still intact and the latest shakeout looks like a routine bull-market pullback rather than the start of a bear market.
Long-term investors should be buying China as it is the next great country of the world. There are plenty of companies in China that don’t have any dealings with the West and with growing domestic consumption these businesses should reward shareholders over the medium to long term.
Would you say that the rally in emerging markets is primarily because of all the currency being printed the world over finding its way into these stock markets? Do you see a crash coming in the Indian and the Chinese markets in the days to come?
Look. Money printing is nothing new —- it has been going on since gold was removed from the monetary system in the early 1970s. The reason emerging stock markets are doing well is due to the fact that these economies are in a much better position than the developed nations in the West. Today, the West is choking on debt, its banking system is fragile and its households are over-leveraged.
On the other hand, Asia is sitting on massive reserves; the region has a high savings rate and domestic consumption is on the rise. So, investors are obviously pouring their money in the safer parts of the world. As far as a crash is concerned, we don’t claim to be short-term market forecasters but our view remains that the markets will continue to rally until the central banks start raising interest-rates. We don’t see that happening for at least another year.
The western economies continue to print money big time to try and pump-prime their economies. Opinion seems to be divided on what impact this would have in the days to come. However, you recently wrote, “It is my contention that we will get neither hyperinflation nor deflation.” Why do you say that?
Central banks are inflationists; nobody can argue this fact. Rightly or wrongly, they have decided that the solution to every problem is the printing press. Since the implosion of the credit bubble last autumn, Western central banks have desperately tried to combat the deflationary forces by printing money and eventually, this increased monetary base will result in high inflation. For the time being, monetary velocity (the rate at which money changes hands within the economy) is low and as long as this remains the case, we won’t get high inflation.
However, once the economy stabilises and demand returns, we will see very high inflation. We don’t expect hyperinflation because we don’t think that investors in US Treasuries will just sit and watch as Mr Bernanke introduces a trillion-dollar bank note. However, we do concede that the cost of living in most parts of the world will probably double over the coming decade.
Over the last six seven months, there has been a lot of talk about green shoots sprouting in the Western economies. How credible is that belief?
There has been some improvement after the global economy fell off the edge of a cliff last autumn. For instance, there is some indication that American housing is bottoming out and the unemployment rate is close to peaking. However, we are still concerned about the rising foreclosures in the West and nobody really knows how this will play out.
Have financial institutions seen the last wave of trouble?
Make no mistake; it was the foreclosure avalanche triggered by the subprime mortgage resets, which caused the credit crisis. Although the bulk of the subprime resets are now behind us, billions of dollars worth of Alt-A and Option Adjustable Rate Mortgages are coming up for resets between now and 2011. So, it is probable that the second wave of foreclosures will cause even more problems in the banking sector. Accordingly, we are not investing any capital in banks.
One impact of the global slowdown has been demand destruction. But even with that, you remain bullish on the price of oil? Why?
Demand destruction is a myth. For sure, global oil demand has declined by 2.7%, but this can hardly be classified as demand destruction! Consider this data:
According to the US Department of Energy, liquid fuel demand in the developed nations peaked in August 2005 at 41.89 million barrels per day.
Since then, it has plunged by 3.6 million barrels per day to 38.27 million barrels per day. However, you may want to note that despite these tough economic conditions, consumption has been extremely resilient in the emerging world. For instance, demand in the developing countries peaked in October 2008 at 46.33 million barrels per day and it is down by only0.36 million barrels per day!
We are amazed that the worst global recession in decades has barely managed to shrink energy demand in the developing world. Whilst this is wonderful news for the energy investor, it is a terrible sign for society.
The grim reality is that global oil production is peaking and the daily flow rates will probably decline over the medium to long-term. So, supplies will fall at a time when demand is rising and this is why we are very bullish about the price of crude oil.
What’s your prognosis on India? Which are the sectors you are bullish on? The last time we spoke, you said “I like infrastructure, power and the beaten down property development companies.” Do you still stand by that? Do you feel that the Indian stock market has gone up too far too soon?
This may not make any sense to you, but we are bullish about Indian equities. However, we are not so positive about India’s future. If our view is correct, some Indian companies in the sectors mentioned above will probably make a fortune over the next decade. So, they will be great investments for their shareholders.
However, India has numerous problems and we suspect it will be extremely difficult for the Indian government to solve these massive issues. So, in the long run, although some Indian companies should do very well, life for the average Indian may not improve to the same extent.
We have some exposure to India and we will remain invested for the entire business cycle. If and when the market corrects, we will probably add to our positions.
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