A fixer upper for rent in West Africa.
Joel Bowman: Good morning, Doug. Thanks for picking up the phone.
Doug Casey: As you know, I’m not crazy about the phone. Face-to-face conversations are far superior. But since I’m in Argentina and you’re in Australia, we’ll make do.
JB: Let’s get straight to it. Although Emerging Markets (EM) stocks were the darlings of 2017, they have been hammered so far this year. Many indexes are deep underwater and the currencies they’re priced in are submerging as well.
A contrarian investor has to ask: Is it time to go, as Donald Trump might phrase it, “sh*thole shopping”?
Doug Casey: Well, I've always been attracted to third-world countries, both personally and professionally. Westerners are unfamiliar with them, so an investor has less competition. And that’s a good thing. But because technology and knowledge flow across borders easily today, it’s possible to have many of the advantages of a first world country. Since they’re coming from a low base, backward countries can also have more upside.
In fact, the Third World is ideal for the contrarian investor because it’s an un-level playing field. A westerner typically has a big edge in knowledge, experience, capital and connections over the locals. In the US or Europe you’re just one more guy like 100 million others; in a backward country you may be unique. I like a playing field that’s tilted in my direction.
Of course things are changing rapidly. From the end of World War II up to at least the early 60’s, the United States was really all that mattered. It had all the world's skyscrapers, it made 75% or so of the world's aircraft, 75% of the world's automobiles, and had most of the world's technology. It hadn’t been damaged much by the war. It produced most of the world’s food for export. It had over 75% of the world's stock market value, the US government owned half the gold in the world, and the dollar was said to be “good as gold”. The US actually was the land of the free. It was a unique place.
Now it’s a different story. The U.S. is probably still the biggest economy, but it's sinking by many measures. If present trends continue, China’s economy will be triple ours in a generation. By many measures, the US is no longer even in the top ten when it comes to standard of living, freedom, or growth. Instead, we lead in things like the rate of incarceration, and per capita debt.
We also lead in overpriced stocks, shaky bonds, and leveraged real estate. For all its problems, however, the US doesn’t offer many financial bargains.
JB: Hope, then, for some of these sinking markets?
DC: Well, the question is: where in the world is now the best place for my money? Despite their progress over the last 50 years, I don’t believe they’ll continue progressing.
I'm reasonably familiar with Africa, for instance, having traveled to about half of the 54 countries on the continent. I wonder if some places there aren't beyond hope.
Why do I say that?
Because the only civilization in the world that’s worth anything – in fact it's worth everything – is Western civilization. Most of the rest of the world brings basically nothing to the party. Except some arts and crafts and exotic food. This completely debunks the idea of multiculturalism, by the way, which is a ridiculous and utterly destructive concept.
Broadly speaking, I see most of the world outside of Europe and North America – and let's say Japan and perhaps China – not as investments but as speculations. Hot potatoes that you should buy only when they're really, really cheap and there's some legitimate reason to believe they're going to go up.
Of course, they're not long-term holdings because the basics of civilization aren’t essential parts of their culture. Concepts like free thought, free speech, property rights, free markets, individualism, liberty, privacy, rule of law, rationality, and limited government aren’t in their cultural DNA. That makes it impossible to invest in for the long term. Only speculate on possible anomalies.
Unfortunately, the US and the West are slipping rapidly in these regards too. But that’s another subject.
JB: Fair enough. So, if not exactly “sh*thole shopping,” is it time to go “sh*thole speculating?”
DC: Well, that’s the right way to look at it. But my answer, at this stage of the game, would still probably be a “no.” It’s too early. The reason I say that is because all of the world markets – the stock markets, the bond markets, the real estate markets and so on – aren't just overpriced. They're in a bubble. We could easily get a collapse. And soon.
Why are they in a bubble? Because not just the U.S., but every government in the world – the Japanese, the Chinese, the Europeans and all these little sh*thole countries in addition – have printed up currency units by the tens of trillions over the last decade. All that money has basically flowed into the financial markets making them very overpriced. It's also the reason why the rich have gotten richer, because the rich have financial assets. The poor people generally don't. They're more or less hand to mouth, even in the U.S.
Meanwhile the level of debt all over the world has soared since 2007. The bubble broke then because debt was so overwhelming, but it has gone up another probably 50% since. That was possible because governments simultaneously reduced interest rates to near zero. But now rates are headed up—I expect towards very high levels. That will make today’s levels of debt completely unsustainable, even for governments.
The house of cards is much more unstable than it was the last time the economy collapsed. This time it's going to be much more serious. You can plan on a lot of political, sociological, and possibly military consequences as well.
So the answer to the question is, sure, I've always been predisposed toward backward countries… but not now. Because when things get bad, they’ll get much worse for backward countries. The West will have its own problems; it will stop sending them capital and aid.
The West is busy turning itself inside out and upside down, dismissing the very ideas that made it great in the first place. It’s adopting many of the stupidest, basest ideologies on the planet – ideologies that have proved disastrous in the past. Given the technologies we now have, things could get out of hand.
It used to be that Western capitals were like beacons of opportunity for free-thinking individuals trying to get ahead. Now they’re decaying into vast swamplands of collectivist idiocy.
JB: The currencies of emerging nations have collapsed along with their equities. When you're looking at making a contrarian speculation in a depressed market, to what extent does the currency factor in to your analysis?
DC: It's absolutely critical. If a country doesn't have a reasonably stable currency, it’s very hard for the average guy to get ahead. Why? Because the average guy doesn't buy stocks or property.
Even if he can produce more than he consumes, and saves the difference, he's got to save in the local currency. But the local currency in most of these countries is toilet paper. The governments in almost all of these third world countries inflate the currency as a major source of income. It makes it extremely hard for the average guy to get ahead. That’s a major reason why these countries are stuck on the bottom of the barrel.
JB: On that point, you spend some of your time in Argentina. My friends there tell me it’s very tough if your income is in pesos. It’s been among the very worst performing currencies this year, losing half its value. But if you have dollars, things on the Rio de la Plata are quite a bargain these days. At least as far as cost of living is concerned.
DC: I've been visiting Argentina for almost 40 years now. It regularly goes from being one of the cheapest countries in the world to the most expensive. It does that because of the idiocy of their government and their central bank. Right now it's very cheap, an excellent time for people to visit.
JB: Doug, you’ve often joked that you could be dropped penniless and naked into the dark heart of Africa, and quickly emerge a wealthy man. So as not to excite our Dear Readers' sensibilities, let's imagine you have a few bucks in your pocket and a change of clothes. Into which “sh*thole” countries would you be airlifted today, given your assessment of opportunity globally?
DC: [Laughs] That's a good question. I still think that Africa would be the best place. I’ll repeat what I said earlier. I want to be on an unlevel playing field where I have big marginal advantages. Someplace where I'm unusual and different and have things that the locals don't. That means Africa.
If I was airdropped into, say, Belgium today, I’d likely have to start at the bottom ... But in Africa, I could be sitting down with the president of most countries on the continent, or certainly with some of the richest people in the country, within a couple of weeks of arriving. I know that because I’ve done it. You want to go some place where you have a big marginal advantage.
JB: Okay, I know you've traveled extensively in Africa. But narrow the focus a bit among its 54 countries. Is there some country that you have as an outlier on your international speculator radar?
DC: Perhaps the next African country I'm going to visit is Togo, in West Africa, a place that few people even know exists. Why Togo? Well, partially because it's small and obscure. But the president of the country is a graduate of Georgetown University where I misallocated four years of time and a bunch of my parents' money. That alone, I think, will make it easy for me to sit down with him. We’ll have something in common, and I know he speaks perfect English. I won’t have to practice my rusty French.
In addition, I’ll set up appointments with lawyers and real estate agents. They’re always well-connected local power centers. They'll talk to anybody because you might be a client. I’ll get along personally with X percentage of them. I always get invited home to dinner, to parties.
I also go to art galleries because I'm interested in art and dealers will also talk to anybody. These are the right circles of a society. The people with money, sophistication and connections.
You do it by just reaching out and, before you know it, you're one of the “in crowd”.
JB: Thanks, Doug. I trust you'll keep the International Man readers abreast of your latest adventures.
DC: Yes. We'll see what happens next.
Editor's note: Clearly, there are many strange things afoot in the world. Distortions of markets, distortions of culture. It’s wise to wonder what’s going to happen, and to take advantage of growth while also being prepared for crisis. How will you protect yourself in the next crisis? See our PDF guide that will show you exactly how. Click here to download it now.