Jean-Marie Eveillard's Market Outlook: Lousy for Bonds, Maybe Better for Stocks
At 71, Jean-Marie Eveillard is one of the most famous investors of his generation. He had a superb record managing the First Eagle funds and its predecessors for three decades. He now serves as senior adviser to the funds. Eveillard is a value investor but one who has always kept an eye on the big picture as well as on individual securities. Here is an excerpt of my recent conversation with him:
STEVE GOLDBERG: How did we get into the current economic mess?
EVEILLARD: Remember when everyone called Alan Greenspan “the maestro”? He kept monetary policy too loose as the real estate bubble inflated last decade. He failed to see the 2007-08 crisis coming. Nobody looks at Greenspan as the maestro today. If I were him, I would be in the basement of my home, and I would not dare leave it.
Carmen Reinhart and Kenneth Rogoff wrote a book called This Time is Different. It looked at financial crises throughout history. They concluded that in almost all instances in the aftermath of a financial crisis there is a prolonged period when the economy does relatively poorly.
What happens next to the U.S. economy? Can we hope for a normal recovery? I’d discount the idea of major deflation of the sort we had during the Great Depression, because the authorities can always create inflation. It’s possible that we get something akin to what Japan has experienced over the past 20 years, but I think Americans are too impatient to allow that to happen.
Most likely, we will get continued attempts to try to get the economy going. The attempts won’t succeed in terms of creating 2.5% to 3% annual growth in gross domestic product over the next five years. But they will keep us out of a major recession.
The economy will either be stagnant or moving up a little, maybe 1% to 2% or so, on the back of repeated attempts to stimulate it. Central bankers will keep pumping up the money supply.
At least in nominal terms, this could be good for stocks. Some of the money printed by the central bankers should end up in stocks. Even if you get a pickup in inflation, which I think will become a bigger danger, some stocks could still do well. Warren Buffett did well in the last half of the 1970s buying service businesses with low capital costs that had the ability to raise prices.
But this kind of environment could be bad for bonds. There is a big risk of investors in bonds taking flight. After a 30-year bull market, Treasury notes and bonds are an accident waiting to happen.
What about Europe? The original sin of the euro zone has finally become clear. You can’t have a monetary union without some kind of fiscal union, too. In the euro zone, monetary decisions are made centrally, but every country has its own legislature that makes its own budget and tax decisions. That’s not workable.
The Germans and the French and the Greeks and the others are not about to say “let’s have a fiscal union.” So I think they keep kicking the can down the road. The Greeks push the Germans to bail them out, the Germans resist for a while, and, in the end, the Germans capitulate.
But at some point, they run out of road. The German people aren’t happy with this situation. They are the ants, the others are the grasshoppers. I don’t know how this ends. Maybe the Germans will keep capitulating, and maybe they won’t.
The latest agreement [announced on October 27] again gained the euro zone some time, more time than usual, maybe a couple of months. But many details have not been worked out yet. And I don’t see that this agreement is a resolution of the problem at all.
Where should people invest these days? In the long term, emerging markets will be the place to invest. But there will be bumps along the way, and corporate governance is still bad, particularly in Russia and China.
There are indirect ways to invest in emerging markets. Look at high-quality global businesses that do a lot of business in Asia and South America. These large-cap stocks have not done terribly well the past few years, but they lost much less than more-cyclical stocks did in the 2007-09 bear market. These stocks are perceived as kind of dull. Big caps have been neglected. I personally own Microsoft (symbol MSFT).
You would think a value investor such as yourself would be attracted to Japan. Valuations for some world-class businesses appear to be suffering, mostly because they are listed on the Tokyo Stock Exchange. These companies are doing lots of business in China and other Asian countries. They’re good businesses at valuations that we find appealing.
Why own gold? We started the First Eagle Gold fund in 1993, which proved to be six or seven years too soon. There’s no intrinsic value to gold. But there’s no intrinsic value to a dollar or a euro or a yen, either. Gold is a substitute currency. Long term, my attitude is that even at $1,800 an ounce, there’s still too much paper money and too little gold. The major currencies are all suspect. Everyone should own some gold.
Steven T. Goldberg (bio) is an investment adviser in the Washington, D.C. area.