The gold market is very interesting because it consists of a very limited number of people who are “gold bugs” as they call them. And these are people that will accumulate gold, physical gold and gold shares and so forth, but this is the minority. And then there are the gold detractors. These are mostly fund managers and so-called central bankers. And central bankers are not particularly smart. And then there are people who simply haven’t heard about gold as an investment… and don’t forget that in the U.S. 50 percent of the people have no interest in investments for the simple reason that they have no money. You could show them any proposal for an investment, they wouldn’t be interested because they have not the money to invest in the first place.
But in general I think that people will gradually wake up to the fact that in absence of knowing how the world will look like in five or ten years, you need some diversification and in this environment, I think that some people will say “well, let’s own some gold.” Most people will only own five or ten percent but some people will own 20 percent and I think that if the whole world decides to own, just say three percent or five percent, and the fund managers who are very anti gold see gold prices running up again… the whole investment business has become a momentum game….. so if they see that gold is moving up in a convincing way they’ll buy gold.
So, my sense is that you need some gold strength and then people will come in and buy gold simply because it moves up. I buy gold all the time, of course within my asset allocation.
I also have shares and bonds and real estate, but I always buy some gold to maintain the proper weighting.
At the beginning of the year so many people have started to write reports about the surprise of 2017 and projections of 2017, so everybody has a view, nobody knows precisely and the lot will depend on central banks’ monetary policies. I don’t believe central banks can tighten meaningfully, maybe optically they do some, but in general I think they’ll keep money printing on the table as far as we can see, in other words, for the next few years. And eventually it will be friendly for precious metals and hard assets.
Number two, hard assets such as precious metals are at the historical low point compared to financial assets, so I think that’s going forward there’s a huge discrepancy in the performance between financial assets which has been very good since 2009 and gold which has been more mixed… it’s also up but it’s been more mixed especially after 2011… that these hard assets will come back into favor.
So, if you’re asking what is my expectation for the rest of 2017, I think that gold shares are an attractive asset class. I think precious metals can easily move up another 20, 30 percent, possibly 100 percent or so. In general, I would say American investors should take the opportunity that the dollar is strong and that asset prices, in other words stocks and bonds in the U.S. has been strong to reduce their positions in the U.S. in terms of equities.
The other day, I was interviewed
by CNBC. One of the participants on their
panel asked me whether I believed I was providing a service to investors by warning them that stocks could decline by between 20% and 40%, or even more. He further questioned my morality in dissuading investors from buying stocks that were being touted as a once-in-a-lifetime opportunity to make money following their March 2009 lows. Aside from
the inaccuracy of the interviewer’s statement that I had been keeping investors out of the market, I was taken aback by the notion of a CNBC employee talking about morality. Every year, I attend several conferences and Hillary Clinton about ethical behavior, Trump about modesty and unpretentiousness, Bernanke and Yellen about “honest money”, and mobster Whitey Bulger about mercy. (Federal prosecutors indicted Bulger for 19 murders.) Still, the question prompted me subsequently to contemplate whether periods of high monetary inflation (printing money) make people wealthier in real terms. Last month, I explained that it is an irrefutable fact that inflation-adjusted millennials earn less, and have less wealth, than the baby boomers had
at the same age.
Also, it is true that US household wealth is at an all-time high – certainly in nominal terms. But, as I have explained in the past, the distribution of wealth has become more unequal, with the 0.1% (the super-wealthy) doing extremely well, while the median household’s or asset owner’s wealth has declined by close to 40% in real terms (adjusted by the CPI) from its peak in 2007. I now wish to make some further observations about the increase in household wealth, in both nominal and real terms, of the 0.1%.
The Wealth Illusion
Say I own a nice property in Beverly Hills, Newport Beach or Palm Beach. I bought the property 15 years ago
for US$1 million. It’s now worth US$10 million. Over the same period, the CPI is up by 25%. Therefore, adjusted for inflation, my house has appreciated by 75%, correct? Not so fast. First of all, the cost-of-living increase over that period of time
has been far greater than the CPI indicates (and includes taxes, home maintenance costs, school fees for my children, salaries of my housekeepers – that is, unless I’m a member of Congress who employs illegals).
So, the real wealth increase, even measured by an index of consumption-related expenditures, may be far lower than that which is deflated by the official CPI. Furthermore, let us assume that I decide to sell my US$10 million house in Beverly Hills with the intention of buying another house in Palm Beach, Newport Beach, San Francisco, or an equivalent location. What will I pay for that house? I suppose it will be something like the inflated price at which I’m selling my existing home. I invite a statistician to explain to me what is a more appropriate index against which to measure the price of my house: the CPI, or an index of property values in an equivalent location?
Measured against the CPI, my house has appreciated; however, measured against a property price index it may have gone up somewhat more, or somewhat less, than the index, depending on how the prices of other homes comparable to my house have moved in the same location. Now, someone might argue that, regardless, I would have done very well compared to the median
US household and the 50% of Americans who have no assets at
all. That argument is correct. In an asset inflationary environment, asset holders do far better than people who don’t own any assets. (The same is true in a consumer price inflationary environment such as we had in the 1970's.) But my point is that, unless, after selling my US$10 million house, I move to an area that has appreciated only very little or has even gone down in price, in reality I have no net wealth gain. I concede that I could move to Mexico City, Rio de Janeiro, Bahia, New Orleans, Bali, Pattaya, Maputo, or a similar location, and purchase a house equivalent to the Beverly Hills house that I’ve just sold, but for a fraction of the price. In some places, I might even improve my standard
of living meaningfully. But in other locations, the environment may not be to my liking at all. The point I wish to make is that my wealth increase as represented by the Beverly Hills house is largely illusionary, unless I sell that expensive property and move to a far less expensive area. The same would be true of an investment in the stock market. In the 1970's, I could buy
the Dow Jones Industrial Average for less than 1,000. Now, I need to pay 21,000 for one Dow Jones, which is 21-times what I would have paid in the seventies. Over the same period of time, US household wealth has increased by about the same amount.
Naturally, the total return of the stock market (including reinvestment of dividends) over the same period
was far higher. The Dow Jones US Total Stock Market Index appreciated more than 100-fold between 1970 and 2017. The total returns of other indices such as the S&P 500 and the Dow Jones Industrial Average are of a similar magnitude, whereby value outperformed growth over the entire period.
There are several reasons why household wealth increased far less than the total return of the stock market. The main component of household wealth is pension fund assets (approximately US$22 trillion). Since pension funds hold a diversified portfolio of assets consisting of stocks, bonds, cash, real estate, alternative investments, etc., they underperformed the total return of
a stock portfolio. Households also have large real estate holdings in
the form of owner-occupied homes. Owner-occupied homes are a cash-flow negative asset (taxes, maintenance costs, mortgage payments, etc.). The value of these (cash-flow negative) homes has appreciated since 1970; however, they have appreciated (with few exceptions) far less than have stocks whose dividends were reinvested. The same goes for households’ holdings of bonds and cash, and their own businesses. The value of households’ direct ownership of equities increased at about the same rate as household wealth, but at a far lower rate than the total return of equities because households tended to be net sellers of equities. I assume that households felt increasingly comfortable holding the bulk of their wealth in pension fund assets and, therefore, reduced their direct ownership of equities.
Still, there is no question that
US household wealth has increased significantly since the 1970's. But can we say that the record US$89 trillion wealth of the household sector is an indication of how well the economy is performing? Furthermore, can we conclude that when a part of this household wealth is liquidated, a huge consumption
and economic boom will follow? The answer to the first question is simple. Most of the increase in household wealth accrued to a tiny percentage
of the population.
In fact, following the Trump rally,
the top 0.1% of households own
more than the bottom 90%. Also,
as I explained above, the increase in value of my Beverly Hills house is of limited utility if I wish to continue living in an equivalent house in an equivalent area somewhere else. We then need to consider the increase in the US population, which in 1970 was 205 million and is now 318 million.
Therefore, a better indication of American wealth than total household wealth would be per-capita wealth. Lastly, as I explained above, the largest component of US household wealth
is pension fund reserves, currently valued at US$22 trillion. But there are some question marks over these assets and whether they are really worth this amount. Last October, my friend Fred Sheehan explained just how underfunded pension funds were, citing the Commonwealth of Massachusetts Funded Ratios.
In this respect, it’s interesting to note that The New York Daily News recently carried an article about
the Teamster Local 707’s pension fund (see February 26, 2017), which has encountered serious financial problems. According to the Daily News, one trucker reported: “It’s a nightmare, it has just devastated all of our lives. I’ve gone from having $48,000 a year to less than half that.” Again according to the Daily News, another Teamster pensioner, Narvaez, explained that:
...like 4,000 other retired Teamster truckers, [he] got a letter from Local 707 in February of last year. It said monthly pensions had to be slashed by more than a third. It was an emergency move to try to keep the dying fund solvent. That dropped Narvaez from nearly $3,500 to about $2,000.
The stopgap measure didn’t work – and after years of dangling over the precipice, Local 707’s pension fund fell off the financial cliff this month. With no money left, it turned to Pension Benefit Guaranty Corp., a government insurance company that covers pensions.
Pension Benefit Guaranty Corp. picked up Local 707’s retiree payouts – but the maximum benefit it gives a year is roughly $12,000, for workers who racked up at least 30 years. For those with less time on the job, the payouts are smaller.
Narvaez now gets $1,170 a month – before taxes. Ex-trucker Edward Hernandez, 67, went from $2,422 a month to $1,465 last year. As of this month, his gross check is $902. After federal taxes, it’s $721 – but he still has to pay state and city taxes.
“We have guys on Long Island who are losing their houses,
the taxes are so high out there,” Hernandez said. Milton Acosta, 75, was a dockworker in Local 707. He retired at age 62, figuring his union pension of $2,300, coupled with his Social Security, would keep him and his wife afloat. Now his pension is $760 a month after taxes, he said.
As heartbreaking as their stories are, they are not new to Thomas Nyhan, executive director and general counsel of the Central States Pension Fund.
The same crisis now hitting Local 707 has been stewing among numerous Teamster locals around the country for the past decade, he said, and that includes in upstate New York. The trucking industry
– almost uniformly organized by Teamsters – has suffered enormous financial losses in its pension and welfare funds due to a crippling combination of deregulation and stock market crashes, Nyhan said.
“This is a quiet crisis, but it’s very real. There are currently 200 other plans on track for insolvency – that’s going to affect anywhere from 1.5 to 2 million people,” said Nyhan. “The prognosis is bleak minus some new legislative help.” And it’s not just private-sector industries that are suffering, he added.
“Municipal and state plans
are the next to go down – that’s a pension tsunami that’s coming,” he said. “In many states, those defined benefit plans are seriously underfunded – and at the end
of the day, math trumps the statutes.” [Emphasis added in each instance.]
(As an aside, Illinois is facing the worst pension crisis of any US state, with unfunded obligations totalling US$130 billion, according to the state’s Commission on Government Forecasting and Accountability. That amounts to about US$10,000 in debt for each resident.)
I urge my readers to peruse once again Fred Sheehan’s report, entitled “Public Pension Recipients: Start Saving. You Are on Your Own”, in the October 2016 GBD report. I explained at the time that the shocking funding level and its deterioration (see
Table 2), about which Sheehan writes, is also evident in the corporate sector and in Europe. So, whereas prior
to the 2008/2009 crisis S&P 1500 companies were fully funded, today funding has dropped below 80% (see Figure 7 of the October 2016 GBD report). I also noted that I found the deteriorating funding levels of pension funds remarkable because, post-March 2009 (S&P 500 at 666), stocks around the world rebounded strongly and many markets (including the US stock market) made new highs. Furthermore, government bonds were rallying strongly after 2006 as interest rates continued to decline.
My point was that if, despite truly mouth-watering returns of financial assets over the last ten years, unfunded liabilities have increased, what will happen once these returns diminish or disappear completely? After all, it’s almost certain that the returns of pension funds (as well as of other financial institutions) will diminish given the current level of interest rates and the lofty US stock market valuations.
The Road to Perdition
The next time an economist tells you that the US economy is rock solid because household wealth keeps going up and is now almost US$93 trillion (following the Trump rally), keep in mind that this wealth is unevenly distributed (see Figure 2) and that the US$22 trillion in the form of pension funds is completely inadequate to meet those funds’ obligations to pensioners. Either contributions will have to increase massively, or benefits will have to be cut, as we have seen in the case of the Teamster Local 707’s pension fund. I should also like my readers to reflect on the hardships that have to be endured by retirees if their benefits are cut by more than 50%, as we have seen in the examples quoted above by the Daily News. Furthermore, if, as Thomas Nyhan states, there is a quiet but very real crisis “that’s going to affect anywhere from 1.5 to 2 million people” (probably far more than that number nationwide), consider what the impact on consumption and the US economy will be.
There is another point I need to explain. Let us assume that I belong
to the 0.1% and that I have assets
of US$100 million. Because of the Trump rally, I make a profit of
US$5 million within a month. Will
it change my consumption? Maybe at the margin (the trickle-down effect), but very little overall, compared to a thousand lower middle-class people suddenly making an additional US$1,000 each. In that case, it’s
likely that the 1,000 people who
enjoy a sudden “monetary” windfall of US$1,000 will spend most of it. Therefore, if wealth is concentrated
in the hands of very few people, as
it is now, the economic impact of household wealth rising is minimal. In other words, the level of household wealth is a very poor indicator of how the economy is really performing. This is especially true in a money-printing environment.
In this context, I need to clarify another matter. Most economist s
have argued that inflation is low and growth is anaemic because the velocity of money has been declining since
the late 1990's. These economists will argue that when the velocity of money picks up, inflation and growth will accelerate. But how can velocity accelerate? The top 0.1% of asset holders (the super-rich) will unlikely spend their wealth if they liquidate some assets. Let’s say that Warren Buffett makes another US$1 billion because of the Trump rally. Will he spend that money? It’s unlikely. He might reduce his equity exposure and build up his cash holdings or buy some other assets, but his billion- dollar capital gain isn’t going to cause him to go out and buy another 50 tailor-made suits, neckties and sets of silk pajamas. In other words, the Fed and other central banks can further increase their balance sheets, which will boost asset prices still higher. However, it will only worsen the wealth inequality because only the existing asset holders will benefit, and it will further deflate the velocity of money.
There are, however, three ways in which the velocity of money could be increased. A complete collapse of asset markets would bring about deflation and improve the affordability of goods, services and assets for the median household – certainly relative to the 0.1%. In this scenario, the velocity of money will increase, but I very much doubt that the increase in velocity would bring about stronger growth and higher inflation.
A massive dose of helicopter money dropped on the 50% of Americans who are struggling and have no assets would probably be the most potent tool for boosting the velocity of money, inflation and economic growth – that is, temporarily. I say “probably” and “temporarily” because it is far from certain that this intervention would improve “real” economic activity and “real” growth. Also, “Helicopter Money One” would have to be followed by “Helicopter Money Two”, and so on, which
would have numerous very negative consequences (a collapse in the dollar, very high consumer price inflation rates, further increase in wealth inequality, etc.). The third option
for boosting the velocity of money would be to expropriate a significant share of the wealth of the top 0.1%
of wealth owners and distribute it to the 50% who are the lowest-income recipients. Again, this would boost consumption only temporarily and it would be a complete disaster for the overall economy. Disturbingly, this
is what will be the ultimate outcome unless an authoritarian dictator seizes power, in which case the outcome could be even worse.
Let me explain. Should the economy weaken and enter another recession (which is inevitable, sooner or later), QE4 will be a given. The result of QE4 would be more of
the same: rising wealth inequality
as asset prices continue to increase (this time, very selectively) whereby the median household is left further behind. Therefore, the next step
by the interventionists will be – possibly simultaneously with QE4
– helicopter money. However, make no mistake. Helicopter money whose objective would be to kick-start the economy would be almost instantly captured by the powerful corporate sector and the asset owners, because the increased consumption would increase consumer prices and boost corporate profits. In other words, unless the interventionists with
their fiscal and monetary policies engineer an asset price collapse (about the last thing they will do intentionally), the top 0.1% will continue to gain at the expense of just about everybody else. Don’t misunderstand me. I am not blaming the 0.1% for snatching an increased share of the income and wealth pie. They were in a better position and more able to take advantage of globalization and monetary inflation than the vast majority of Americans. Moreover, their wealth allowed them to manipulate governments, their agencies, the lawmakers and regulators, etc. (especially central banks and treasury departments) for implementing policies that would greatly benefit them. Thus, their share of the wealth and income pie exploded.
I admit that the statistics compiled by Thomas Piketty and Emmanuel Saez should be taken with a grain
of salt, but the expansion of CEOs’ salaries relative to the salaries of workers does support the fact that the 0.1% have done very well compared to workers (see Figure 7). According to the Bureau of Economic Analysis, CEOs of the largest US companies now earn more than 300 times
what workers earn, compared to
CEO salaries of less than 30 times what workers earned in the 1970s. (The Bureau of Economic Analysis computes CEO annual compensation by using the “option realised” compensation series, which includes salary, bonus, restricted stock grants, options exercised, and long-term incentive payouts for CEOs at the top 350 US firms ranked by sales.)
Above, I mentioned that wealthy people, including the CEOs of major companies, were in a better position and more skillful at taking advantage of globalization and monetary inflation than the vast majority of Americans. Monetary inflation, the secular decline of interest rates after 1981, the process of outsourcing, clever lobbying, etc. all contributed to rising corporate profits, which in turn allowed executives to boost their compensation without any objection from shareholders. In fact, we can see that CEOs’ compensation increases mirror the increase in the S&P 500. I want to stress that I have no idea whether CEOs should earn 30 times more than workers or 500 times more. (I also earn more than 500 times the salaries of my housekeepers in Chiang Mai, which difference can be partly explained by them earning a Thai local salary whereas I have an international income.) The fact is that, in a market economy, the market will determine the “price” of CEOs and of labor. But, as I said above, I suppose that wealthy people and corporate leaders (especially in the financial sector) were in a position to manipulate the system, which enabled them to heist a dis-proportionally large share of the economic pie. When money printing began to accelerate in and after the late 1990s, the financial sector managed to raid almost all the central banks’ newly printed money and some more ... with impunity. (According to the organisation Americans for Financial Reform, “in the 2015–16 election cycle, Wall Street banks and financial interests reported spending over $2.0 billion to influence decision- making in Washington. That total — of officially reported expenditures on campaign contributions and lobbying — comes to more than $2.7 million a day. It also works out to over $3.7 million per member of Congress.”
We have a system in place that is based on fiscal and monetary policies, and laws and regulations, that favour the corporate elite, the largest corporations, the captains of finance, and the 0.1% in general, because they are the asset holders. This moneyed class will not give up its privileges voluntarily. The privileged class will
do everything in their power to keep these favourable conditions in place, which would include money printing in one or another form if there is a recession or if asset markets decline meaningfully (say, to the February 2016 low of 1,810 for the S&P 500).
As I said, I’m not discussing these issues because I have some rancour about these “conditions” from which
I actually profiteered greatly. I am discussing them because I believe
that an unstable system in which
the majority of people lose out to
the privileged few is simply not sustainable and will end either with a Bernie Sanders-type socialist gaining power or with the establishment of a dictatorship. Democracies promised a level playing field in society, but that certainly does not seem to be in place nowadays. I suspect that we have never yet had a level playing field, but I feel that we are reaching a tipping point where something is likely to give, and I am afraid that this “something” could be the inflated asset markets.
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The Euro having declined so much against the U.S. dollar, if there is further weakness in the Euro; European stocks will adjust on the upside and foreign companies from Asia… China, Japan and the U.S. will increasingly acquire European companies and European assets.
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 to lose money with the exception in my view, that mining stocks will perform reasonably 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. They have dividend yields of between four and six percent, the Euro is weak or has been weak and is at the low level and these yields of four to six percent are very attractive considering the bonds yield in Europe.
And so, I think that this year European stocks and especially the stock I mentioned, infrastructure plays, utilities and also food (stocks) will way out perform the U.S. I also happen to think that there will be more and more American companies and foreign companies that will be interested to acquire European companies.
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.
The emerging markets had under-performed the US meaningfully since 2011 and so it is a very mixed bag. The European markets -- by and large and certainly in US dollar terms -- are not at new highs. India after its very good performance so far this year has grossly outperformed the US this year. We have to be very careful. Some markets will continue to go up and others will go down and within markets, there will be some stocks that will go up and other stocks are probably extremely expensive and extended and will go down.
Already a year ago, I mentioned that if I had to invest the money for 5 or 10 years, my belief was that India would outperform the US because the US is a highly priced market. It is now 54% of global market capitalisation and India relatively would outperform the US for many years. So yes, I would say, already for 18 months or so. my view has been that you will make more money in emerging markets and last year some emerging markets in Asia significantly outperformed the US.
We were up between 15 and 25% in Indonesia, the Philippines, Thailand, Vietnam while the US hardly moved up. So far this year, despite all this hoopla (about the US market, most of the European markets have outperformed the S&P and emerging markets. Practically every emerging market has outperformed the US.
Recently PWC published a study about the long-term outlook of the global economy and about the ongoing shift in the balance of economic power in the world which essentially showed very clearly how some countries had become very important economic powers over the last 20 to 30 years including China and Vietnam and also India to some extent.
That study concluded that by 2050, India, purchasing power adjusted, could be the third largest economy or the even the second largest economy. If you look at what has happened in Europe and the US where despite all the fiscal stimulus and money printing you have essentially very anaemic growth and you look at China where you have around 6%-7% growth while India has over 7% growth, who knows?
Over the long term if you can grow even 5%, which in the global economy is a very rapid growth rate compared to Europe and the US, as an investor for the next 5 years, 10 years or 20 years, I would find ways to invest in India and in emerging markets in general.
The emerging markets that is going to grow probably the most is Vietnam and Indo-China, Cambodia Laos, Myanmar. But having the outlook for India and with the proviso that we do not get into a major military confrontation. If we have peace and are nor beset by any huge natural disaster like a pandemic, then I the outlook for the Chinese economy, for the Indian economy, for emerging markets in general is far superior to the outlook in our rotten western democracies.
We had a huge bull market in commodities between 1999 and in some cases 2008. For oil, it peaked out at $147 in July 2008, and for other commodities they continued to go up until 2011 and then commodities by and large declined sharply until the end of 2015, early 2016 when oil briefly went towards $30. Subsequently, we had a strong rebound in commodity prices principally because the demand from China stabilized and started to increase again. That drove some commodities up, plus in some cases there is the expectation that the shift to electric cars will increase the demand for copper very substantially along with increased defense expenditures.
Each commodity has to be looked at individually and some have rebounded and some have gone up dramatically. Zinc last year was up over 80% and others are still relatively depressed. Agricultural commodities are relatively depressed although the prices of sugar doubled last year.
But one thing I can say is that we are in a world where central banks in the advanced economies; Japan, the US, Europe have printed money.
The Reserve Bank of India has pursued a very good policy but the other central banks in the western world are basically money printers and they will continue to print money. If the economy weakens, they will go into the US QE4 and the Europeans did the same and the Bank of Japan the same.
Regardless whether the global economy picks up or not, I believe that commodity prices are at a relatively low level and I would rather invest in commodity related plays than in say financial assets and in companies that are valued at infinity.
Last week, I was interested in re-reading an article which had appeared last November (before the election) in The New York Times by Op-Ed columnist Nikolai Tolstoy entitled Consider Monarchy, America. Tolstoy is a historian and author of several books. He is also a committed monarchist.
Before rejecting Tolstoy’s views as outrageous I suggest my readers to listen to his arguments carefully. The reason I am discussing political systems is that I came across a study by PwC which paints a rather pessimistic picture for G7 countries (US, UK, France, Germany, Japan, Canada and Italy) relative to E7 countries (China, India, Indonesia, Brazil, Russia, Mexico and Turkey) for the future. The PwC study is entitled The long view: how will the global economic order change by 2050? Its key findings are as follows: emerging markets will continue to be the growth engine of the global economy. By 2050, the E7 economies could have increased their share of world GDP from around 35% to almost 50%. China could be the largest economy in the world, accounting for around 20% of world GDP in 2050, with India in second place and Indonesia in fourth place (based on GDP at PPPs).
A number of other emerging markets will also take center stage – Mexico could be larger than the UK and Germany by 2050 in PPP terms and six of the seven largest economies in the world could be emerging markets by that time.
Meanwhile, the EU27 share of world GDP could be down to less than 10% by 2050, smaller than India. PwC also projects Vietnam, India and Bangladesh to be three of the world’s fastest growing economies over this period.
The PwC study rightly says that emerging market investing requires the “patience to ride out the storms we have seen recently in economies like, for example, Brazil, Nigeria and Turkey, all of which still have considerable long-term economic potential based on our analysis,” but I should point out that we also had some storms in the G7 economies over the last 30 or so years (Japan post 1989, all markets post 2000 and also post 2007).
Also, whereas I do not believe that it is an ideal time to buy equities I equally think that relative to the US, emerging markets are about as undervalued as they will become.
Bloomberg recently reported that sales of art and antiques dropped 11 percent to $56.6 billion in 2016. The decline, on top of a 7 percent slide in 2015, wipes out the gains seen in 2013 and 2014, when sales reached an all-time high of $68.2 billion.
Noteworthy is that art sales are not much higher than in 2007 – ten years earlier despite a huge increase in purchases by Chinese collectors.
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