|Gold (spot, per ounce)||$1,619.30|
|Mapletree Comm Trust/MCT||S$0.92|
|Frasers Centrepoint Trust/ FCT||1.63|
|Mapletree Logistics Trust/MLT||0.98|
|Ascott Residence Trust/ART||1.06|
|Cache Logistics Trust/CACHE||1.03|
Are things really as bad as they look?
FABER: The global economy has slowed considerably. Europe is in recession, and growth in U.S. GDP might owe more to statistical aberrations than reality. In Asia, the Chinese economy has been decelerating sharply, which impacts China's trading partners and industrial commodity prices. Lower demand for commodities hurts commodity producers, whether in Argentina, Brazil, Africa, or Russia.
Will things get worse before they get better?
Yes, possibly much worse. Central bankers will argue that more stimulus is needed. But the crisis has occurred in large part because governments have grown excessively large. The private sector produces growth. When government is 40%, 50%, 60% of the economy, the economy won't perform well. If you cut government spending meaningfully, you produce more growth, although this can be painful in the near term. Canada took this course in the mid-1990s. The outlook is grim for the federal deficit in the United States. Regardless of who wins the election, there will be compromises. But spending cuts will be back-end loaded and tax increases will be postponed. We won't see a federal deficit below a trillion dollars for a long time.
What will the stock market do for the rest of this year?
Most markets peaked in May 2011. The S&P 500 fell to 1,074 by Oct. 4 from 1,370. Then we had a strong rebound with the index making a new high at 1,422. This high wasn't confirmed by other indexes, such as the Value Line Index, the Russell 2000, and the Dow Jones Transportation index. The S&P 500 is vulnerable at this level. I anticipate further weakness in the second half of the year. Corporate profits will disappoint. Some 40% of S&P 500 earnings come from overseas, and a large proportion are generated in Europe.
There is no resolution to the problem in Europe because no one wants to accept austerity. The best outcome for Greece probably would be to exit the euro zone. But the new Greek drachma would depreciate by 50% to 70% against the euro. The Greeks don't want their pensions paid in a depreciating currency. Nor do they want austerity, as their pensions and government salaries would be cut by 50%.
How will the stalemate end?
The breaking point could be three, four, five years away. The world is heading toward a major crisis. In the meantime, central banks can continue to print money and markets might move up. Since 2009 stocks around the world have more or less doubled. But the economy hasn't performed well, and the typical household hasn't been helped. With quantitative easing, money flows into the hands of relatively few people. I am very negative about the outlook longer term.
It is safest to buy U.S. Treasuries because the U.S. can print money. It will pay the interest. But you are earning only 1.6%, and the cost of living is increasing by about 5% a year around the world. You are getting a negative real return.
So you're recommending equities, despite the poor backdrop?
I still like my January investment picks. As a group, Singapore REITS look OK. Among them I like Mapletree Commercial Trust [MCT.Singapore], Frasers Centrepoint Trust [FCT.Singapore], K-REIT Asia [KREIT.Singapore], Mapletree Logistics Trust [MLT.Singapore], Ascott Residence Trust [ART.Singapore], Cache Logistics Trust [CACHE.Singapore] and Parkway Life [PREIT.Singapore].
I am also warming to gold shares. Gold corrected to $1,522 last December from $1,921 in September. It rebounded to $1,795 in February and is back down around $1,600. The correction could last longer, but given that governments will print more money, gold is relatively effective as a currency. My preference is physical gold, but I would also own some gold shares, which have been decimated. Goldcorp [GG] is attractive because most of its properties are in the U.S., Canada, and Mexico. The company isn't exposed to regimes that are talking about nationalizing resources. In general, stock markets are oversold. The U.S. government-bond market is overbought. The U.S. dollar is overbought, and gold is oversold near term.