Marc Faber: Current era of negative rates "a historic first"

Seeing how the real standard of living took a plunge after the worldwide financial crisis, it is unsurprising that the public has voted for Brexit or elected Donald Trump as President of the United States, investment guru Marc Faber said at the International CEE Investment Conference, organised by CFA Society Poland and CFA Institute last weekend. Faber expressed concern over negative interest rates, admitting he was at a loss as to what could bring the era of negative rates to an end. Another topic on the conference agenda was the growing role of politics in the global economy, and how the proliferation of political ideologies is increasingly becoming a cause for concern even to rating agencies when it comes to upgrading or downgrading a particular country.

The world economy, as Marc Faber sees it

Renowned Swiss-born investor Marc Faber, as celebrity speaker at the conference, discussed the following issues:

  • Governments are playing a more and more important role in the life of each country. Their increasing weight in relation to the economy results in more regulated environments.
  • Eight years have passed since the worldwide financial crisis; despite the economic rebound witnessed since then, the global economy remains weak and wobbly.
  • The current young generation is the first one in the developed world (US, Western Europe, Japan) that is not going to live in a growth environment and will have to accept the reality of a lower standard of living than their parents had, Faber stressed. In contrast, in emerging economies and post-Communist countries, the current young generation is the first one that will have a better standard of living than the previous one.
  • It is widely believed in Western Europe that emerging markets lack strong brands and companies on a stable footing, despite the fact that the industrial output of emerging countries has doubled since 2003, coupled with an increased role and weight in global trade.
  • For instance, China accounted for only 2% of the world's total consumption back in 1970, which rose to 4% by 1990, followed by a massive surge to 37% at present, Faber noted. The breakdown of trade statistics shows that China is now purchasing 47% of the world's metal output, an incredible increase from 2% in 1970. China's target markets are changing as well; Chinese exports have shifted away from the US and the EU and have increased towards manufacturing countries, which goes hand in hand with their role as buyers of raw materials.
  • Among the issues associated with zero interest rates, Faber underlined the fact that this is the eighth year of ultra low interest rates, an environment that has boosted government expenditure. The latter, however, has not solved the underlining problems; aggregate global debt is at record-high levels, which acts as a barrier to real economic growth.
  • After the global crisis, it became apparent that gradually decreasing private sector debt was coupled with significantly increased government sector debt. Meanwhile, people were seeing a gradual erosion in their standard of living in real terms, which gave rise to growing discontent. In Faber's view, it is little surprise that this situation led to popular choices such as the Brexit vote result or the election of Donald Trump as President of the US.
  • Another thing fueling discontent has been the rising cost of rental property in the US during the post-crisis years, with tenants forced to spend an increasing share of their income on housing. In many US states, housing costs today exceed 50% of the average income level. In the UK, where roughly 60% of those under 35 were owner-occupiers in 1997/1998, the percentage rate fell 23% by the year 2013; meanwhile, the percentage rate of young people living in rented property jumped from the earlier 20% to 53%. These trends have added to the growing discontent.
  • Such a long period of zero interest rates is unprecedented in history on a short-term basis; even Faber himself is puzzled by question as to what it would take to end it. In Sweden, for instance, the gross savings rate has been on the rise despite decreasing interest on bank deposits - that is, the exact opposite of what you could reasonably expect given the interest rate environment.
  • Talking of investment, Faber pinpointed Indochina as the region with the brightest future outlook (including Myanmar, Cambodia, Thailand and Vietnam). Patterns of growth have changed; between 1950 and 1990 Japan was in a high growth phase; after that China took the lead until 2007. Nowadays the same can be observed in South-East Asia.
  • In Faber's opinion, anyone looking to invest these days should seek to answer questions and problems such as: How is it possible to invest in a world of slow economic growth? Where will central banks' inflation-generating moves lead? Does it make sense to talk about tightening monetary policy in a zero-interest environment? How much longer will the deflation of asset prices continue, and which markets are capable of generating value compared with others these days? Faber is optimistic for gold, arguing it should form a 20% component of a good investment portfolio. As a reserve, he prefers holding bullion to purchasing indirectly via ETFs, but maintains that exchange-traded gold funds are not a bad thing either.

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Marc Faber. Photo by Tomasz Pikula

Role of politics growing in global economy

Politics is playing an increasingly important role in the world of finance and economics, according to Warsaw Stock Exchange co-founder Wieslaw Rozlucki. After Donald Trump's victory in the US presidential elections, everyone was expecting the worst, which did not happen, he noted. In Rozlucki's opinion, the reason why markets responded so calmly to the events is that perhaps the leading financiers of the world were actually thinking in a way that was different to the one shown to general public. Politics has always played an important role in emerging economies; these days, however, its role has reached similar dimensions in the developed world as well, Rozlucki argued. He is of the view that the impact of Brexit was correctly assessed by the market - it is little wonder that seller pressure was great in the days following the vote; on the other hand, market response to the outcome of the US elections was misguided, the US situation is fraught with major problems that markets have apparently have failed to recognise so far, he emphasised.

How do rating agencies handle national political trends?

In a panel discussion about building political risks into risk assessment models, James McCormack, Managing Director and Global Head of Sovereign and Supranational Ratings at Fitch Ratings, proposed that the proliferation of populism and growing ascendancy of populist candidates might have arisen as the combined result of several global factors: economic stagnation, increasing income inequality, and the growing discontent of the populace are all fertile ground for such ideologies. At the same time, credit rating agencies must tread carefully and not allow their impressions of a country's politics govern upgrade or downgrade decisions. While the phenomenon of the rise of populism does have real importance to rating agencies inasmuch as its impact on the political environment is concerned, rating decisions are based on a country's fundamentals , McCormack argued. For instance, Trump's victory is to some extent a cause for concern amongst rating agencies, specifically because of the economic measures he had proposed.

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Participants of the panel discussion. Photo by Tomasz Pikula
Commenting on the situation in Hungary, Dmytro Sologub, Deputy Governor of the National Bank of Ukraine, who was part of the panel discussion, opined that investors and rating agencies had found it very hard to warm to the economic policy changes Hungary implemented in recent years; in his view, it has taken - in fact, is taking - a long time to understand what exactly is going on behind the scenes. More or less the same can be said about Turkey, he added.

What is the impact of the US presidential elections on the financial markets of Central Eastern Europe?

The earlier fears surrounding Trump's victory now seem exaggerated, the expected market apocalypse has failed to materialise, the participants of the next panel discussion pointed out. Most of the policy changes promised by the next American President are unlikely to happen, or at least not in such a radical manner as had been expected earlier, the panel concluded.

Another question is how the new policy measures under Trump's presidency will affect the value of the US dollar. The increasing US yields presage growing demand for the dollar, which will drain emerging currencies of liquidity. There is an increasing shortage of the US dollar is worldwide, and if Trump succeeds in realising his dream of American companies re-investing profits at home, the financial sector could experience a dollar shortage crisis sooner or later.

As regards the regional state of affairs, it was mentioned in the panel discussion that the reason Hungary's Prime Minister Viktor Orbán has welcomed Trump's victory with so much enthusiasm is that the incoming US President shares his views on migration, while the EU itself is divided over the issue.

This article is sponsored by CFA Society Poland and CFA Society Hungary.

Cover photo credit: Tomasz Pikula

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