But it may take some time before it comes about. In the meantime,
there may be good money to made on stocks in Asia and European debt
crisis countries. Property in the US and other countries where the
banking and property market is squeezed may also provide good returns.
This was the message from profiled investor, Marc Faber, at a
recent Bank Credit Analyst (BCA) conference in New York.
We, like Faber, believe, perhaps unsurprisingly, that equities as
an asset class may give good returns going forward. As we have
indicated previously we believe that a lost decade in the stock
markets will be followed by a decade favourable for shareholders.
We also think that there are significant opportunities to be found
in the global property market for active managers with a fundamentally
sound investment philosophy. That is why we are launching a global
property fund, SKAGEN m2, which will invest in property shares across
the globe. Read more about the fund here.
Whether there will be a new financial crisis and when this will
potentially take place, we dare not speculate on. Financial crises
come and go on an irregular basis.
Pending the next financial crisis Faber recommends investing half
one's financial assets in stocks and property equally. The remaining
fifty percent should be split between physical gold, cash and bonds.
When it comes to equities, the places to look are Asia, the crisis
countries of Greece, Portugal, Spain and Italy as well as France.
According to Faber, there are a range of cheap companies in the
above-mentioned European stock markets, regardless of whether the
eurozone continues in its present form or not.
As regards property, Faber believes that going forward pressured
creditors will be forced to offload a lot of assets at the worst
possible time in Europe, and not least in the US.
Faber, who was one of the speakers at SKAGEN's New Year's
Conference in 2009, has for the past few years held a gloomy outlook
on the future and most asset classes. The exception has been physical
gold, which he believes is the best currency to be holding as all the
large paper currencies are rotten.
Faber also pointed out that physical gold should not be stored in
the US or Europe, but rather in Asia, He sees a risk of Americans and
Europeans being tempted to suck up all the gold they can lay their
hands on and keep it in private hands, although admittedly bought at
the relevant market price. This would have the effect of pushing up
the price of gold significantly and in so doing devaluing debt. In
Asia, where debt is not a problem, this will not be the case and there
gold will be safer.
Debt bubble will burst
Faber is concerned about the enormous amount of debt that has built
up relative to a country's value creation, GDP, in the US as well as
in several other countries. This debt bubble will end up bursting, the
question is when. And when it happens we will be faced with a
full-blown financial crisis. Before that time, a lot of money will be
printed by the central banks, was Faber's clear message.
And as long as money continues to be printed, bond yields will be
kept down. That is why Faber still recommends that a quarter of one's
financial investments is in cash and bonds. The future risk in both
bonds and cash is, however, extremely high according to Faber who
remains ready to sell at any moment.
Although interest rates will eventually rise, Faber believes that
the real rate in the US will remain negative for a long time to come.
When the note printing presses come to a stop, it will therefore be
particularly risky to hold cash and government bonds.
The Fed gets it wrong
Faber also lashed out at central banks, particularly the Federal
Reserve, which holds the view that inflation has long been low and has
therefore pursued a monetary policy of unjustifiably low interest
rates. Faber expressed it thus:
"It is a myth that inflation has been low for a long time.
Inflation can take many forms. At the end of the 1990s we had
inflation in stocks, which peaked when the Nasdaq stock exchange
crashed in 2000. Then we had high inflation in the property market,
particularly in the US, which peaked in 2007. We saw the same
phenomenon in the 1920s, with substantial inflation in both equities
and property. In currency we have persistently weak inflation. Now
there is high inflation in government bonds, particularly in the
US," said Faber.
Faber pointed out that if monetary policymakers only take into
account the inflation that takes place in what is in the so-called
official inflation index – whether cheese becomes more or less
expensive, for example – then things are going to go very wrong. We
have seen that time and again.
"With money being far too cheap, we have to have inflation
somewhere or another. Authorities and politicians ought to know this.
But they only care about the inflation figures they get from
bureaucrats which shows that there is no inflation. It's nonsense,
they don't know what they are doing. You could ask what the Fed were
smoking since they didn't see the credit bubble blowing up,"
concludes the strong-minded Faber.