According to Gary Moore, who serves as a media
spokesman for Sir John Templeton, the legendary investor “…Surprised
even me [a few weeks ago] by suggesting that we avoid [U.S.] stocks
altogether as the money that was in tech has moved to cheaper
stocks around the world…John primarily suggested sovereign
debt from Canada, Australia and New Zealand. He’s been there
the past three years, principally in Canadian zero coupon treasuries.”
When a reporter who wrote the article “"Templeton
Feeling Bearish,." (Sarasota Herald Tribune,
Oct 14, 2003) asked about the prediction that the dollar would
slide 40% in a special Economist report, Gary Moore assured
the Herald Tribune reporter that he had the feeling that
Sir John wouldn’t waste much time arguing with that prediction.
However, it is more Sir John’s style to say, “The
odds are better than even…” rather than give a specific
number. (Please note Gary Moore’s letter in the Appendix
of this article for more complete background on Sir John Templeton’s
views.)
The dollar index has already lost about 24% of
its value since Jan 2002. John Templeton’s continued dollar
bearishness implies that the unhedged gold stock index (HUI),
which is already up over 400% from its low in late 2000, could
run further. Precious metals have a strong historical inverse
correlation with the strength of the dollar.
Billionaire investor Warren Buffett said in his Oct 27, 2003
Barron’s interview
that he sold $9 billion in long term U.S. Treasuries earlier this
year and feels it is unwise to buy into the stock market at current
levels. He has $24 billion in cash on the sidelines. There is
no
evidence that he has sold the 129.7 million ounces of silver
that he accumulated
in 1997.
In regard to currencies, Warren Buffett wrote the article: “America’s
Growing Trade Deficit Is Selling the Nation Out From Under Us”
(Fortune Online Edition:
Sunday, Oct 26, 2003). He stated: “I am crying wolf again
[about the impact of mounting trade deficits, having first started
his warnings in 1987] and this time backing it with Berkshire
Hathaway's money. Through the spring of 2002, I had lived nearly
72 years without purchasing a foreign currency. Since then Berkshire
has made significant investments in—and today holds—several
currencies. I won't give you particulars; in fact, it is largely
irrelevant which currencies they are. What does matter is the
underlying point: To hold other currencies is to believe that
the dollar will decline.”
America’s Achilles Heel lies in the growing glut of dollars
held by foreigners as America’s balance of trade deficits
grow worse. Foreigners have bought 45% of America’s deficits,
typically buying US government bonds with their trade surplus
dollars rather than dumping them on the currency markets and driving
the dollar lower. They have allowed America’s trade deficits
to grow to 6% of GDP without forcing a currency crisis. Deficits
over 5% of GDP historically enter high-risk territory.
The U.S. Government and Fed response has generally been cosmetic
at best. From 1995 to 2000 U.S. Secretary of the Treasury Robert
Rubin used currency interventions to artificially strengthen the
dollar. The more recent funds rate cuts by the Fed down to 1%
serve to artificially stimulate consumption and support asset
bubbles amidst over 6% unemployment.
Deep structural problems make it unlikely that a declining dollar
will completely eliminate the trade deficits soon. Many Asian
countries inflate their currencies in line with dollar declines
and have vast pools of peasant labor always willing to work for
less. Many American business leaders focus on short-term profits
and neglect the reinvestment required to competitively advance
quality and innovation at home. Many American consumers are addicted
to buying more foreign goods with more debt.
A trap is about to close on foreign investors. Inflationary money
and credit supply growth and the government requirement to attract
investors to buy debt issues related to growing deficits will
inevitably cause interest rates to rise. A scenario of rising
interest rates, which hurts bond market values, will encourage
bond investors to sell in advance, which will in turn help to
drive interest rates higher. A falling dollar, related to money
supply growth, will encourage foreign bond investors to sell in
advance before they incur currency exchange-related losses on
their dollar-denominated holdings. Selling US bonds and transferring
into other currencies will help drive the dollar even lower, feeding
a vicious circle.
Pressure is building to avoid being the last out the exit door.
Arab states are talking about selling their oil in euros rather
than dollars; in fact, Saddam Hussein was the first to switch
to euros before he was deposed. In addition, Russian President
Vladimir Putin touched on the euro issue in his Oct 9, 2003 meeting
with German Chancellor Gerhard Schroeder in Yekaterinburg.
If foreigners stop sopping up excess dollars as a global reserve
currency and wash them back at the U.S, this will add to inflation
and higher interest rates in America. According to the IMF,
dollars currently account for 68% of global reserves vs. 13% for
the euro.
The Fed may have to dramatically hike interest rates to lure
foreign investors back, and create even more money to cover continually
growing federal deficits where it cannot find enough lenders.
The dollar may continually decline to new lows in a pattern characteristic
of many Third World countries.
Considerable evidence backs up Templeton’s preference for
the Australian dollar as a refuge, even though it has rebounded
over 40% from a very depressed base vs. the US dollar since Jan
2002.
According to the “The
Big Mac Index” (The Economist, April 24, 2003),
“Among rich economies, the most undervalued currency is
the Australian dollar. The Aussie dollar [was back in April] still
31% below PPP (Purchase Power Parity) against its American counterpart.”
The Australian Governments debt
is only 18% of GDP, a better credit risk compared to “official”
US government debt of over 68% (not counting horrendous “off
balance sheet” obligations such as Social Security). Australian
trade deficits are smaller and more manageable.
Last but not least, the Australian dollar has historically correlated
strongly with global commodity prices. 65% of Australian exports
involve commodities. Chinese economic growth actually helps Australia
by putting upward pressure on commodity prices.
According to Gary Moore, “[Sir John Templeton has] also
been interested in another hedge fund…that invests in companies
producing natural resources... it's not hard to see that he thinks
the development of China and India is going to put upward pressure
on the natural resources produced by Canada, etc., an idea that
he and others have expressed for years. Add in the strip mall
[one of his real estate ideas] and foreign bonds and you get a
falling dollar, which has been John's primary theme the past few
years.”
The Fed has increased the money supply over 10% a year over the
last five years, and other central banks have followed suit. According
to global investment guru Dr.
Marc Faber, we are now experiencing a global “reflation”
trend
similar to the stagflationary 1970s, in which excess liquidity
flows away from over-inflated stocks, bonds, real estate, and
other “paper” assets and into “things”
such as commodities.
According to Dr. Faber, money supply and credit-related inflation
will ultimately win out over concerns about “deflation”
related to asset price bubbles, Asian imports, and politicized
low-ball government inflation statistics.
Precious metals expert David
Morgan advises riding the precious metals and commodity bull
market for however long it takes until the Fed decisively arrests
rapid monetary expansion. The commodities trend of the 1970’s
lasted over eight years until tightening by Fed Chairman Paul
Volcker
pushed three month T-bills to a high of 16.3% in 1981 and finally
caused a trend reversal.
Financial commentator James
Puplava believes that we are only in the first phase of a
multiphase
commodities bull market, and that the establishment remains in
denial. Wall Street insists that the old 1995-2000 bull market
has been reignited and will keep going. Bush administration neoconservatives
promote more open-ended military projects while Bush himself has
advocated
a $400 billion drug prescription program on the home front.
In view of the underlying economic dangers, perhaps the Financial
Times had it right in a May 2003 editorial
that declared, “The lunatics are now in charge of the asylum.”
APPENDIX:
The following is an e-mail sent to me by Gary
Moore on October 29th to clarify the October 14, 2003 Sarasota
Herald Tribune story "Templeton
Feeling Bearish"::
Bill: as there's been some confusion over this article and its
unexpectedly been picked up around the country, let me do my best
to clarify.
First, who I am? I am indeed an investment advisor, but I've also
written four books about Sir John and/or his ideas and serve on
the board of advisors of his foundation. My most recent book,
Faithful Finances 101, and my previous book, Spiritual
Iinvestments, were published by John's foundation press.
Over the years, I've often served as an intermediary with the
media, see past articles about John in Money, etc. but
John is now past ninety and only wants to talk about spirituality
and religion, which have always been his primary interest in life.
Still, I feel his financial views are quite important and John
has allowed me to keep people up to date on them. (Only yesterday
I emailed him to see if he now wants even me to stick to spiritual
matters.)
You may know that in late 99, John grew quite bearish on U.S.
stocks, and even shorted tech. Forbes reported that he
made over $100mm shorting internet [stocks] alone. Still, he suggested
we own some stocks around the globe, such as U.S. REITs
and inexpensive stocks in the developing markets. But when I took
his cousin to see him a few weeks ago (who wanted to know where
to put some money should he sell his business), John quoted that
the Nasdaq has again risen until it is 92 times earnings, which
I knew.
But he then surprised even me by suggesting that we avoid stocks
altogether as the money that was in tech has moved to cheaper
stocks around the world and they're no longer cheap (your readers
should clearly understand that John's Calvinistic morality does
not encourage him to buy even fairly priced stocks in the hopes
that they'll become expensive stocks to be sold to the naive.
During his long career he has only purchased cheap stocks at points
of "maximum pessimism" to later sell at fair prices.)
When I suggested there are still a very few cheap stocks in the
developing markets, John basically indicated not enough to fill
a mutual fund, his preferred mode of investing even today (which
he has mandated that future trustees of his foundation to follow.)
Still, John does invest in a hedge fund run by a mutual friend
named Dr. Jane Siebels of Green Cay Asset Management in Nassau.
It is always "market neutral" by owning relatively inexpensive
stocks around the world while shorting relatively expensive stocks.
John's bearishness on residential real estate has been well documented
in other publications. However, when prompted by his cousin, John
did say that his cousin might invest some money into conservatively
structured strip malls anchored by defensive grocery stores and
drug stores. To me, that again indicates he expects at least some
inflation.
Yet John primarily suggested sovereign debt from Canada, Australia
and New Zealand. He's been there the past three years, principally
in Canadian zero coupon treasuries. Yet he's also been interested
in another hedge fund run by Jane that invests in companies producing
natural resources. Add those two together and it's not hard to
see that he thinks the development of China and India is going
to put upward pressure on the natural resources produced by Canada,
etc., an idea that he and others have expressed for years. Add
in the strip mall and foreign bonds and you get a falling dollar,
which has been John's primary theme the past few years.
Still, John did not predict a 40% decline
in the dollar. Even when predicting a rising stock market during
the eighties and nineties, John was always careful to say, "The
odds are better than even..." the only real mistake our reporter
friend made was to take that prediction from a special Economist
report that I faxed to him and attribute it to John. Still, I
assured the reporter than I had the feeling John wouldn't waste
much time arguing with that prediction. The reporter would have
clarified that small point had John and I been able to talk to
him but we were at Harvard for our foundation board meeting and
couldn't get back to him immediately. We didn't know that he had
already requested space for the story, sensing its importance.
The primary point is still valid: some of us who have been very
close to John for many years know that John is indeed getting
older but we still respect his views so highly that we've been
seriously reducing or liquidating the stocks we still own and
moving the money to foreign government bonds, hedge funds and
conservative REITs. As always, we know that John might be wrong
this time. but we too have learned to play the odds. Your younger
readers who do not remember Sir John well might be interested
in those lessons.
In 1982, I wrote an article for the New York Times Group
about why Sir John and I thought the odds were good the market
would triple to the 3000 level during that decade. I wrote a book
in 1990 about why we thought it would multiply again during that
decade. when Forbes wrote its cover story in 1992 about
"Templeton falls off the mountain," I wrote a letter
to the editor, which he published, in which I said, "Bet
against Sir John if you want; not this guy." John had his
best year ever in 1993.
Simply put, with our current account deficits and China and India
coming on, I again agree that the odds favor foreign bonds, a
couple of conservative REITs and a hedge fund than stocks at this
point in history.
Gary Moore
Bill Fox is VP/Investment Strategist and
private client money manager, America First Trust. Bill welcomes
phone calls and responses to this article. His web site: www.amfir.com.
Address: VP, America First Trust, Reg. Rep., Sammons Securities
Co., LLC P.O. Box 820669, Vancouver, WA 98682, telephone: 360-882-5369,
toll free: 866-945-5369 (866-WILL FOX), email: wfox@sammonsrep.com.
Securities offered through Sammons Securities Co LLC, member NASD
and SIPC.
at the Battle of Cowpens, S. Carolina, 1781