Monday, July 25, 2016

Commentary from CFA Institute seminar in Chicago

Marc Faber spoke at the recent seminar for the CFA Institute in Chicago, USA. Below is the summary.

Dr. Faber told the investment professionals gathered in Chicago that they shouldn't be prejudiced against gold. Although the typical investment pro keeps less than 1 percent of his or her portfolio in gold, Faber suggests 25 percent. He sees it as protection from a dangerous combination of tremendous government debt and massive bond-buying by central banks globally trying to fight off recession with near-zero interest rates. Besides gold, Faber has invested in Asian real estate and some stocks and bonds.

Money is made when investors dig through carnage, not when they buy something that's been popular a long time.

Currently, he sees value in the stocks of companies that mine gold and other precious metals. Agricultural commodities are also cheap, but not agricultural stocks, he said.

Long term, he thinks emerging market stocks will be more valuable than those in the U.S. and Europe because developing countries — especially in Asia — are growing while the U.S. and Europe are stagnant. But in the short term, emerging markets could be disrupted by geopolitical strife and global recession.

Many of the investing opportunities he spotted in years past are no longer opportunities, he said. Because central banks have been throwing so much money into the system, everything has become expensive — from stocks and bonds to real estate and artwork.

Typically, when investments become overly expensive, a downturn like the 2008 housing crash comes. Pros awaken some day, say the prices are crazy and start selling as a herd. But Faber is not predicting a sharp plunge is imminent. Rather, he says, the central banks are going to continue to try to stave off a global recession through ultralow interest rates. He is particularly critical of negative interest rates, which mean people earn nothing in government bonds.

While people may not feel like they are getting bloodied during this, Faber says they are. Interest rates, he said, are so low people can't make money in bonds so they keep buying stocks even though the prices are inflated. Central banks want rising stock prices to make people feel good and spend, but only 20 percent of people have stocks so the result is income inequality and resentment, he said.

"Young adults will earn less than their parents and die with less than their parents," Faber said, noting parents — when young — bought U.S. Treasury bonds paying 7 percent rather than bonds paying nothing today. They bought homes that appreciated greatly. Now, "young people don't have money to buy condos and houses," so they overpay on rent and are left without money to invest or spend.

He blames central banks. "It's ludicrous to think that slashing rates will get people to spend." When rates are low, he says, you feel insecure as savings earn nothing. So, "you save more."