We are seeing that war between Russia and Ukraine and the effect it has on the energy market. There’s the new oil shock and that is impacting equity markets. What is your view on that big global trigger?
I think the recent decline has been expected by numerous observers because the economy in the US is not doing particularly well. We have artificially low interest rates in Europe and in the US and in most other countries. The rate of inflation in the US is between 6% and 12% depending on the person, depending on the household. And the Federal Reserve is still discussing whether they will increase interest rates by a quarter or a half a percent! In the ’70s when inflation rates were as high, we had the Fed rate of over 8%. So it shows there is a disconnect between the Federal Reserve and the real economy.
Then we have these geopolitical problems and in every speech I have been giving, in the last few years, I have said that in investments one proviso for success at the present time of relatively high valuations is peace in the world. And now this peace in the world is no longer guaranteed. A journalist who is well known in the UK said the conflict in the Ukraine is the most useless conflict we ever had. There is no reason for either side to go to war and this would be essentially my opinion that this war is not about freedom of Ukraine and people or anything, but it is designed by some neocons in the US and some people that are interested in war and Russia that is more belligerent and does not like this NATO expansion.
So anyway, this conflict has now been used as an excuse to knock down markets which were as I explained before essentially stretched, overvalued and vulnerable to a setback because of tightening monetary conditions.
Whichever way it is, the war is raging and we are seeing the impact on the markets. Moscow is saying we will cut off gas supply to Europe; America is saying we will take Russian oil out of the global energy mix. This war is really on top of investors’ minds. Till we have clarity on that, is what we are seeing in the markets going to continue?
Well the damage to markets has been done unevenly. If you own Russian stocks, they are next to nothing at the present time. Will they ever be worth anything? Who knows! But collectively, if you look at European markets, they are all down 10-15%. So the damage has been very considerable. The only sector that I can say which has really benefited from all this but that is not good economically, especially not for the poor people, is the commodity sector, the agricultural sector and oil and more recently, precious metals and precious metals stocks.
So if you were invested in precious metals, you are partially hedged. I have always argued for the last 30 years that you need to own some gold, silver and platinum as an insurance against the political problems and chaos in the world. But if you own only 5% of your assets in gold and 95% of your assets in stocks, the hedge was too small. Only people who had a meaningful position in oil and gold, have offset the losses they had elsewhere.
Do you see what is playing out right now is at best a knee-jerk reaction or do you think oil prices or the entire energy basket is going to remain at elevated levels?
Oil prices were in a rising trend because of environmentalists like Biden. The first day in office, he shut down the Keystone pipeline. Now he is begging Saudi Arabia and Venezuela and Iran to supply more oil. Sometimes as an independent observer without sympathy for the Americans or less sympathy, you have to say the American policymakers are brain damaged, they pursue policies that are contrary to their interests and those of the ESG crowd in Europe, the greens, the so called environmentalist extremes who are actually socialists and not so green. But that is a different subject. They insisted on closing down nuclear power plants also.
Now you have to consider this. If you close down nuclear power plants and pursue energy policies that actually demand more energy, where do you get that energy from? From Russia. People do not realize that if you have an electric car, you need electricity to power it in order to recharge the battery. But the electricity is generated with natural gas, coal, oil, with solar and wind power. Wind power is very inefficient as a source of energy. The best is nuclear but that they do not want.
The other thing also is whether oil prices being at these elevated levels makes other commodities or greener fuels for that matter more attractive and gives way for greener fuels to come in and perhaps be swiftly adapted to?
I have seen studies that are very detailed. I can tell you that if you convert all the cars in the world to batteries tomorrow, it may have a horrible environmental negative impact because you need lithium, all kinds of rare earth material, copper and certain parts of that battery cannot be recycled. This is another story. When one billion Indians will turn up with the used batteries the recycling will be a disaster.
I am all in favor of doing the best for our environment. We should not throw plastic bags along the streets and we should try to be clean and friendly towards the environment, there is no question about it. But everything has to make some kind of economic sense in terms of cost and efficiency. The best as I said is nuclear energy but the environmentalists do not want it.
It is not only about oil, agri commodities have shot up quite smartly as well. Do you think the inflation is led by oil and not by others and that is going to continue to remain elevated?
Yes. And sadly here I have to make a social observation because I live as a dual personality; on the one hand I am an investor and so if the Fed prints money, I could applaud it and say yes, my assets go up in value; my real estate, my gold portfolio, my stock portfolio and so forth.
But as a social observer, I have to say the monetary policies have been a disaster and are boosting the rate of inflation. I would say we can measure inflation in different ways but the probably the best way to measure the impact on ordinary people is to look at the price of necessities like food, energy, shelter, rents and so forth. These prices are going up much more than wage increases in the western world right now and that will create real terms inflation adjusted. If prices go up 10% per annum, this year we have an index of 100, next year it is 110 and my wage goes up by 3 or 4%, then in a year’s time I am 6% or 7% or 5% poorer in terms of income and this is squeezing now the lower classes.
The war in Ukraine is decided by people who sit in a comfortable chair in front of TVs watching football games and the people on the ground in Ukraine suffer. This is what modern warfare is like. In the old times, the Indian kings, the maharajas and so forth were leading their armies.
It seems like the markets have really forgotten about the rate hikes that was one of the biggest talking points in January. Do you think that hyperinflation will now lead to talks about rate hikes again on Wall Street?
Covid is bad but just wait until it is over then they will invent something else to intervene into the economy and to distract the attention. People will say it is a conspiracy theory – but my theory is that in 2018-19, the economy began to slow down and they had to print money massively. Covid was a very good excuse to print massive amounts of money, to get rid of Trump and also to increase fiscal spending massively.
Fiscal spending expansion and money printing is one of the best recipes for inflation that is for sure. Anyway, that is what they have done. Now after two years of Covid, the public got tired of this Covid and there are so many studies coming out that essentially raise a lot of questions about the origin and so forth and the policies. So they got rid of Covid. In other words, Putin got rid of Covid and now they have the Ukraine war and that distracts the attention from the failure of domestic policies in the US. We shouldn’t forget that!
What is happening when the US equity markets as well as emerging markets as investors press the sell button? Would you say that an ETF basket is an attractive option or are you talking about the super cycle of commodities and this is the time to be in the commodities market?
Well nothing will be the same. The lead of the US market since 2009, especially after 2015 vis-à-vis other markets, has never before been so wide. In other words, the US market has been soaring while the other markets have been moving sidewards or down. Emerging markets and Europe have never been this cheap compared to the US and if the conflict dissolved tomorrow, I would buy Indian shares and not US stocks.
You just said that if indeed the war stops, you are going to buy India as opposed to even US equities. What makes you bullish on India? What has changed in India for you over the last few years for you to have that kind of conviction?
It is surprising that in India so many people are critical of Modi and overseas investors and observers of the Indian social conditions and the economy and political conditions all applaud Modi. I also think he has been the best that could have happened after the horrendous Gandhi dynasty. This is my view. As an investor and as a social observer, the country is in a much better shape than 8 -10 years ago.
Where do you stand when it comes to the value versus growth debate because recently it is value investment which has been won?
Growth has been outperforming value for the last 10 years or so but massively value compared to growth has never been this low and this is regarding your first question at the beginning on what to do with commodities.
Commodities have gone up a lot but inflation adjusted and compared to say US stocks, they are still very low. If one looks at the weightage of energy within the S&P index, it is very low and that is why I am hesitating to say well after the conflict dissolves. But this is a very big question mark because it may never be solved. It may become another Afghanistan for the next 10 years or so. Who knows? I am not predicting and saying this is good and this is bad. I am just observing that it could last a long time because there are so many very difficult elements involved in Ukraine, it is not just Ukraine-Russia.
Anyway my view is you should be in value stocks. The next big upward move in the market even if it is a down move, value will outperform growth.