Structured as a series of interviews with top investors, this book only served to remind me of a maxim that is too often forgotten. That is, never judge a book by its cover. Believe me, this one’s is none-too exciting, and in fact it put me off picking the book up for quite a few days.
Once you get beyond the cover, you are immediately plunged into brilliant in-depth interviews with some of the world’s most well known investors. Leo Gough pulls off the interviews with aplomb. He asks pertinent questions, and allows the investors to speak in a very appealingly free way.
What is this book and what is it not? This is a book for those who think about the markets – beyond next week. There are at least 10 good ideas in this book, although none of them have to do with individual stocks.
It begins with Gough tracking down Jim Rogers at a hotel gym in Xi’an in China and chatting with him throughout the day as they visit a Buddhist temple, the site of the ancient terracotta army and finally to dinner. Rogers – who made his money with Soros – later became famous for writing the book Investment Biker in which he scouted investment opportunities as he drove around the world on a Harley Davidson.
It is structured – as are all the interviews – as a Q&A.
They begin by talking about protectionism. "I have seen no instances where protectionism should be encouraged," says Rogers. "Even in America there is this ludicrous rationalization that we protect our sugar industry because of national defence. When we can’t think of any other argument to defend protectionism, they always resort to ‘national defence’, but why the sugar industry helps national defence is a mystery to me."
Rogers fears a resurgence of protectionism in the West. He adds: "You can sit down and say, look guys, why don’t we just take all the steelworkers in America and close down the inefficient steel factories? We’ll teach them new businesses, we’ll give them $50,000 a year, and if we can’t teach them anything new, fine we’ll give it to them for the rest of their lives. They’d be better off. We’d be better off, the country would be better off. You can explain that, you can even do the numbers, but then you go out and talk to the steelworkers and they get all emotional and they talk about their culture, their way of life."
He also pours scorn on the idea of the West knowing better. "Do you think we’re smarter than everyone else? When things are going right we think we’re smarter than everybody else. In the 1980s everybody thought the Japanese were smarter than everybody else. People said, you have to understand the Japanese market is always going up because they’re smarter. They do things differently than we do. They don’t put their trousers on one leg at a time. They wake up in the morning and somehow their trousers are already on."
He is not keen on Indonesia. "Indonesia isn’t a real country – it’s not going to survive as a country. It’s going to split up into – you pick a number. It comprises around 15,000 islands, but the Dutch sort of put them together and said, okay guys now you’re a country. One of the reasons I am not buying Asia in a meaningful way is because it is inevitable that Indonesia will collapse. When it does I’ll want to rush in. I try to understand history. Indonesia isn’t a real country and it’s going to collapse the way the Soviet Union did."
He is long term bullish on China, although he does not own any Chinese stock. "The reason is that all of China’s neighbours have devalued. China is now in a difficult competitive position, whether it knows it or not. They keep denying this and say they are not going to devalue. Maybe they won’t, but somewhere along the line they are going to have to float the currency. At that point the currency will probably go down. By the way, if does I would rush in and buy at that point."
He thinks interest rates are on a long term trend up. "I would strongly urge you to borrow as much long term money as you can right now. I don’t think we’re going to see these days again. Just the fact that you have it will be useful in a few years time when it will be much harder to borrow money."
He predicts a coming correction in US stocks. "Day traders are multiplying by the millions in America, because ‘stock always goes up’. I don’t know how it will end when the margin calls start coming."
Nor is he keen on the profusion of mutual funds: "Right now there are 9000 mutual funds in America. Surely, we don’t have that many smart 29 year olds? At the moment it’s like all of them are geniuses. Suppose I came to your door and said, ‘Look, my name is Joe Smith. I want you to write me a cheque for your life savings and give it to me and I’ll take it to Boston and invest it. But I am not going to tell you what I am going to invest it in. You’d probably slam the door in my face and call the police.
"The mutual fund industry has done a brilliant job of marketing. I know many people who say, ‘I don’t want to invest in stocks because that’s dangerous. I want to invest in funds because that’s safe.’ My only worry is when the day of reckoning comes, a lot of people are going to get badly hurt."
He predicts that America will not be the richest nation in the 21st century, in fact he predicts it will break-up. "If you were to say to Americans that, in a hundred years, there’s a very good chance that the country as we know it will no longer exist, you would be met with cries of disbelief and outrage. Americans are convinced that we’re better than any nation, any group, any political entity that has ever been. It’s conceivable that you could have a large part of the southern United States essentially saying, ‘Well wait a minute we don’t speak your language [we speak Spanish], we don’t like what’s going on, you’re going bankrupt and you stole us in the first place.’ People can always revert to history when they need an excuse."
Another brilliant interview follows with Peter Everington, the English fund manager who created the ‘Tiger’ fund and was first to spot the potential of Asia. He has been a long term partner of Jim Mellon and together they set up Regent.
The two men were based in the US in 1982 and were very bullish on America because of their views on demographics. They were big buyers of the market, even as it went down.
"There was a fellow round in those days called Jo Granville who was a sort of Dr Doom type and he had predicted that if the Dow fell below 780 then the next technical support level was basically zero. So on August 12, 1982 it hit 780 and it bounced, and I wiped the sweat from my brow and half an hour later it hit 780 for a second time. The screen lit up like a fireworks display as the program selling started to kick in. Within five minutes it was down another five points.
"To put this in context, in those days the Dow never moved more than three and a half points a day. Five points in five minutes was out of this world. I was as white as a ghost and turned to Jim and said, ‘what are we going to do now?’ There’s only one thing left to do, he said. We’re going to get on our knees and pray."
The market turned, and within three days the Dow was up by 100. "By the end of the year we had the best performing fund in the world, making 127% for 1982 as whole."
Gough turns the discussion to present day issues. Everington explains the Asian crisis as a function of Japanese policy. "From July 1995 the Japanese began printing money like it had gone out of style. The resulting easy money didn’t stay in Japan; it was exported end ended up substantially in the US dollar system, via the purchase of $400 billion of US treasuries by Japanese institutions in the 1995-97 period. That, I believe, has acted like a shot of morphine in the arm of the dollar system. The dollar system includes most of the world’s emerging markets because they are dollar based. I believe that it has created a huge bubble in the dollar system and that bubble is now bursting. It began with the collapse of Asia in 1997, then Russia in 1998, then South America; and then when the tidal wave began to hit America, Greenspan acted to prevent it getting in.
"I think that what you’re looking at today is a situation where the bubble in America still exists, the bubble in emerging markets has collapsed, and we’re sitting in a suspended animation between the two situations. I fully expect Wall Street to face a crash within six months.
"If the long bond goes to 6.4% or 6.5% that’s when you’ll have your crash."
He adds: "The funny thing about our business is that when markets fall you have to explain it, but when markets rise, that’s considered to be the norm. We have a client who is 88 years old and he said that in America today a million people wake up, log onto the internet, and buy and sell shares – in many cases without any knowledge whatsoever of the assets they are buying. Now any way you look at it, that is pure speculation, gambling. When that stops, you’re going to have a tremendous drying up of liquidity within the system.
"Our client looked me straight in the eye and said ‘You’re probably too young to remember the 1929 crash, but I remember it very well. In my opinion the speculative excesses in the United States today are worse than they were in 1929."
Everington’s bearishness is also a function of his view of US demographics. "If you compare the ratio of workers to non-workers, it will be halve what it was in 1985 in 2015. What that means is, assuming everything else stays the same, you can work out the US will be running a cash flow deficit on its social security account of $1500 billion a year, which is clearly unsustainable. And that represents massive dis-saving because the baby boomers will start to spend instead of save once they go into retirement. So you can postulate that sometime in the future there is going to be a massive decline in the savings rate from the current position of zero."
He also adds that this change will have one other profound impact. In previous eras, the non-workers have been children. This time they are adults. Children can’t vote. Adults can. This will lead to a fight between the two groups – workers and the retired – because their interest are diametrically opposed.
He concludes: "The next superpower is clearly going to be an Asian power. That will automatically mean the ending of 500 years of Western dominance."
Mark Mobius of Templeton is next up, although his views are well known thanks to his recent book (see Bookend, October). The same is true of Marc Faber who appeared in our Investor Lunch Club in December. But Gough’s interview with Faber throws up some very interesting points such as the Swiss guru’s observation that in 1945 Egypt had the third largest stock market in the world.
His views – as Dr Doom – are naturally always bearish. But like many others in this book he is incredibly bearish on what he sees going on in the US.
"Dell is an assembler of PCs – I don’t see any difference between assembling PCs and assembling washing machines. Why would one sell at a market cap of $100 billion and the not the other?"
He is very keen on gold. "As we speak with the Dow at over 11,000 you can buy more than forty three ounces of gold. May I remind you that in 1980, you could buy just one ounce of gold with one Dow Jones industrial Average point."
He says Hong Kong property is still overvalued. "If someone had the choice of buying a small, empty flat in Hong Kong or a large luxury flat in Shanghai which would include a nice concubine and still cost less than the pigeonhole in Hong Kong, I would advise them to buy the one in Shanghai. It will have a much better price appreciation in the long run than the one in Hong Kong."
In fact maybe this book should be titled, Bears on the US market. The final interview of the eight is with Robert Prechter, a technical analyst who is famous for calling the great bull market of the 1980s using the Wave Principle. He believes that a grand supercycle bull market has now ended and that we face a long process of contraction.
He says the explosion of mutual funds in the US is a function of the "most bullish sociology since 1720" and says that day-trading is a misnomer. Traders can make money shorting stock. These people simply go long and sell on a rising market. By his definition, they are thus not traders.
He thinks the only safe option going forward is cash because everything is going to fall. He suspects capital controls will be reintroduced in the developed world. "Governments always have to appear to be doing something about a crisis, and I have little doubt that governments will try various insane policies to try to stop a human emotional tidal wave that can’t be stopped. The best way to protect your assets in such conditions is to have them in a safe place well before governments become concerned enough to take drastic measures to curtail financial freedom."
Such advice will not be news to rich Asians, who saw just such an emotional tidal wave during the crisis. As Prechter concludes: "A handful of bears in the world are the ones offering sanity and safety at the peak of what my records show to be the greatest stock mania of all time."
Right or wrong, Gough’s interviews provide food for thought. They certainly provide an excellent counterpoint to much of the superbullishness you read today.
Reviewed by Steven Irvine
Rating: 5 stars
