Robin Griffiths: Markets in Bubble Territory
Q: Mr. Griffiths, were are the markets right now?
A: We’re in a bubble right now. All Western markets went into what I call a secular downtrend in the year 2000. In real purchasing power parity terms without exception, including the S&P 500, they are lower now than they were in the year 2000. And they will continue lower until at least 2020. That’s the earliest you are allowed to become bullish again about anything in the Western world.
Q:You are talking about inflation adjusted returns?
A:Yes. Of course the S&P 500 is higher now but that’s entirely because of $85 billion a months of money coming into the market from the Federal Reserve. There is nothing else going on. The big call is there isn’t any economic recovery; there won’t be any economic recovery. House prices have already rolled over; the Conference Board’s consumer confidence is already lower. It’s a partial recovery; you mustn’t use the word growth.
Q:Could you call it stability?
A:I think that’s fair. We should say that. Things aren’t completely collapsing. I don’t think many Western economies are actually in depression, i.e. shrinking. But we are in a low return era. Anyone who thought they’ll get 20 percent [inflation adjusted] return holding an equity portfolio, they can forget that, that’s not the normal. Two and half to three percent is probably pretty good going nowadays.
Q:Which countries are the best?
A:America and Germany are the ones that are growing. Everybody else is just tumbling around in the basement. Britain is one that is relatively better off. We are not brilliant but we are at least in a relatively good place. For historical reasons—we had an empire once—the stocks that are in the UK index are considerably more international than in any other markets. So you are going overseas when you are buying the British portfolio.
Q:What’s your take on inflation vs. deflation?
A:If you talk about printing money, then you always think it must cause inflation. In fact, the greater risk is we are in a deflationary environment. There are many more cities in America that look like Detroit, which is clearly in a depression.
Q:What about the other countries?
A:If you look at the rest of the Western countries, their stock-markets are miles lower than they were in the year 2000. They are having a bounce, a partial recovery. Greece, Spain, Italy and to some extent France. They are nowhere near making new highs and they won’t make new highs.
Q:What needs to happen for things to get better?
A:The mountain of debt needs to be written off or paid back. At this moment, there is no sign that this is going to happen. At the moment the solution to getting out of debt is you borrow more money. Eventually if you keep doing that, you trash the value of your currency. China and other emerging countries are not going to accept that?
Q:But isn’t China the real number one when it comes to money printing?
A:Yes, I agree, but it also owns a lot of dollars. But they are still on target to become the number one economy at the end of this decade.
Q:What happens then?
A:Another ten years after that, India will overtake it. It’s demographics is the reason India needs to overtake. China has an aging and shrinking population, India is the [opposite]. It’s very noticeable. Jim Rogers for example was over here [London] last weekend and I met him. I had to point out to him that the Chinese stock market is 65 percent off its highs. The Indian market is at a new all-time high right now.
Q:What about the rest of Asia?
A:The growth of the people and the planet is in the Asian region one way or another. And it’s up to us to find the right way to invest in that. The Western world is totally urbanized. It’s brought the people in from the country, we’ve had the industrial revolution, we all leave in cities. We have gone as far as we can go on that one. In most Asian countries, especially India and China, the urbanization rate is only 30 – 40 percent now.
Q:What’s the economic driver of urbanization?
A:This goes right back to Adam Smith. For thousands of years, people lived in villages and they lived and died in walking distant or a horse ride from where they were born. They grew food, so they were farmers. Starting in Britain roughly 200 years ago, they’ve started to move into the cities. They specialized in what they were really good at, so that the whole economy had a multiplier effect from the specialization of labor as opposed to everybody inefficiently growing their own food.
Q:Where is the market going next?
A:We would normally have had a seasonal setback in some Western stock markets—you normally get a seasonal dip in late October—we did not get it because of [the Fed’s Quantitative Easing]. Because QE is continuing and will continue until at least Janet Yellen is in charge, we are going to run on upwards for a bit longer. It’s a bubble of course, and you just have to accept that in a bubble it can go higher. The risk is that you are going to have a very nasty set-back in 2014.
Robin Griffiths is the Chief Technical Strategist at investment advisory firm ECU Group. He previously held the same position at HSBC Investment Bank for 20 years. He also publishes a market newsletter service called World Investment Strategy