- There’s a big difference between an exuberant view and a risk-reward view.
- This also often leads to relative underperformance but long term outperformance, which is something difficult for 99% of investors to grasp.
- This is my view on the markets now.
I’ll start with a story of Croatia, the land I was born and raised in because while it might be a small country, it has seen so much history there is a lot to learn.
On a funny note, my great grandmother was born in the Austro Hungarian Monarchy, lived in Italy, in the Free Territory of Trieste, in the Socialist Republic of Yugoslavia, and she died in the Republic of Croatia. You would think she travelled a lot, but the fact is that she never changed her address. Aside from what she went through, even in my short life, I’ve seen hyperinflation, bubbles, debt bubbles, countries going bust, stock markets exploding and imploding and staying down, economies grow, and economies stall.
The Croatian index, with its extremely high survivalship bias that totally distorts it to the positive, was around 1,200 points when I first invested in 2002. It went to 5,000 in 2007, fell back to 1,200 in 2009, and now it’s at 1,839 points.
I don’t think the Croatian economy in a nominal way is at a higher level than it was in 1989. Croatia gave me a lot of hands-on economic experiences that I wouldn’t have experienced if I had been born in, say, Australia where they haven’t had a recession in 25 years.
Further, as a small country, Croatia can’t use monetary policy or fiscal policy to protect itself. You immediately see the consequences of reckless decisions and activity. But I think the same is bound to happen to bigger economies, even though they may be able to kick the can down the road with certain maneuvers. However, they can’t avoid the reckoning that will come one day.
Now, all these things that I’ve seen go on in Croatia, I see them happening on a larger scale in the world. The key components of my view are that:
- Debt is being used recklessly.
- Valuations don’t matter as growth is the key and profitability will come.
- Book values are so old fashioned.
- Stocks can only go up and corrections and bear markets don’t last long.
- Real estate can only go up.
- If you invest in index funds, you will do well.
Now before going into what I think, let me emphasize that what I think today might change tomorrow because I’m always trying to learn. Secondly, there is a big difference in how I see the world and how I invest. When investing, it’s about the risk reward and the timing, so it might be costly to position yourself to what might happen as you don’t know when it will happen. A high level of sophistication and research is necessary for that.
I think that the key component of the economic growth we’ve been enjoying in the last 8 years is debt. Even if debt in Europe and the U.S. in relation to GDP has gone down lately, the total debt has just gone up.
The U.S. has an even higher household debt to GDP ratio than Europe.
The point is that the debt just goes up and up which is something I don’t really like.
I’ve seen the pattern evolve twice in my life. In Yugoslavia which imploded, and in Croatia which is still in a terrible state and is coming out of a 7-year recession thanks only to tourism. So I see the debt as a huge burden that few think about because of extremely low interest rates.
Just as an example, I was recently watching home prices in Italy and there is an offer for a mortgage. The rates were 1.2% for the variable and 2.7% for the 30-year fixed rate. I don’t even have to mention that the required down payment is zero.
This is something I find impossible to be sustainable. I saw the same situation crack in the 1980s in Yugoslavia, and I have a feeling that the same thing will happen in Europe in the longer term. It may not crack, but a lot of things will change and my expectation for the next 10 years is change, and a lot of it.
Now, the FED thinks, and also I see that the general feeling is, that the synchronized global economic growth can go on and can be managed and balanced between contraction and overheating. History tells us this has never happened and will probably go wrong again. When interest rates go up, especially in the late part of the economic cycle, a recession is near.
The key is that no one knows when it will all go wrong, so it isn’t really an investable scenario because you can feel stupid for a lot of years before you end up right. So there’s no point now in talking about how to invest in it because I think the majority of my audience would miss the timing of it which is the key component. Either that or they wouldn’t understand the cost of maintaining such bets. However, those who follow what I do will know when I will act and how to act on the matter themselves.
Conclusion On Debt
My key view on debt is that as long as things go well, debt is good and not a concern. When the trend shifts, it becomes an issue. The trend will shift at some point, but I don’t know yet when. What I do know is that it’s going to be ugly for some sectors.
So I’m a bit concerned for long term investors, pension funds, and all those things that buy into this debt fueled economy expecting it to remain stable for the next decade. My message from this is that you have to be prepared for whatever can happen in the next decade.
Perhaps I’m biased by my history, but I like to be prepared, that’s it. How to be prepared? That’s something for another time.
I’m going to finish here today. I hope I gave you some food for thought and a better insight into what I’m looking into now. On Monday, we’ll continue to go on through the key components of how I see things which should lead you to have a pretty good sense of my long term perspective on the economy.