about 3 years ago • 9 mins
Mark Mobius managed emerging markets funds at Franklin Templeton for nearly 30 years, before leaving to start his own firm a couple of years ago. He’s in his 80s, so we hope he won’t mind us describing him as a veteran of money management – and he certainly has a longer-term perspective than many of us.
The big theme we wanted to talk about with Mark is what he calls the “inflation myth” – and what this means for your investments. Because he’s got some very unorthodox ideas when it comes to inflation, along with some firm advice on where you should be placing your money.
Economists working for government agencies tend to look at baskets of typical goods to see how quickly prices are rising. So they might calculate how much you have to pay to buy a games console, a packet of coffee, and a pair of jeans compared with this time last year. And while you can find plenty of people who criticize this approach as undercounting inflation – Mark actually thinks the opposite is true – that this overcounts inflation. According to Mark we’re very much stuck in an era of deflation – or falling prices – driven by technological improvements rather than an era of inflation. And he has plenty of thoughts about what that means for your money.
Here’s a transcript of the interview. Hit 🎧 in the app to listen.
Andrew Rummer: So, Mark, you have a new book out called “The Inflation Myth and the Wonderful World of Deflation”. What is the inflation myth?
Mark Mobius: The myth is that people think things are getting more expensive. And the reality is that – in terms of their income, and in terms of what they were able to get 5, 10, 15, 20 years ago – things are much cheaper, and are getting cheaper by the day.
What they should focus on is currency devaluation. Because the so-called inflation numbers really reflect the devaluation of the currencies. And as I point out in the book, in the history of mankind, no currency has maintained its value. All currencies eventually go by the board. And the other thing I try to point out in the book is that – because of technological changes – services and goods are getting cheaper and cheaper in constant currency terms. People forget that the so-called inflation index is really a changing phenomenon: because the basket of goods and services that they use is changing on a constant basis. So what was happening in 1950 is not happening today. And finally, I point out as well, and give some numbers, that wages generally have been in excess in growth than the inflation numbers. So, at the end of the day, it really doesn't make much difference because it's not having an impact on people's lives in real terms.
Just think about what you could do with the old Nokia phones? I forgot what they cost, but they certainly didn't cost any less than what you can buy a cheap smartphone for. I mean, just think of what the Chinese are turning out: cheap smart smartphones that are incredible, for less than 50 bucks. And the power of these smartphones today is just incredible. Someone was saying that the power of one of these smartphones is greater than what the first mission to the moon had in their computers. So it's an amazing development that we're seeing. And we're getting things to be cheaper and cheaper because of this technological move that we've seen.
Andrew: So if inflation is indeed a “myth” and we’re experiencing ongoing deflation, how does that feed into the world of investing – into the prices of bonds, and stocks and so on?
Mark: Since the so-called inflation numbers really reflect a devaluation of currency, then you should be investing in products or services or companies that will beat the devaluation of currencies. And the best way to do that, in my view, is to invest in equities, because companies adjust their prices in line with the devaluation of currencies. So this is a way to keep up and hold the value. And, more importantly, by investing in good companies that are creative, and doing research and development, you're keeping in line – and maybe even ahead of – the technological changes that are taking place. So you're benefiting from this technological revolution that we're going through.
Andrew: Is this trend of hidden deflation going to continue in coming years? Or do you see it breaking?
Mark: I think it's going to continue. I'm not saying that the inflation numbers will not look like they're going up. But actually what will be happening is that the currencies will be devaluing more and more, but the cost and availability of goods and services will be going down. And we will be having available to us many, many other goods and services that we never even dreamed of before. Just like now: who ever dreamed that I could pick up a phone and call an Uber and get a car that would take me somewhere without having to dish out any money directly. And these technological changes are really having a big impact on the lives of people around the world.
Andrew: You keep saying that inflation will look like it's going up but in reality it won't be. Does that mean there's some kind of issue at the heart of how statisticians in government agencies are measuring inflation? Do they need to change their approach?
Mark: Oh definitely. How can you compare the products and services that we used in 1950 with what we're using today? And, of course, the statisticians and the gatherers of inflation try their very best to keep up and they think that they're keeping up – but in fact they’re not. Because they're comparing apples and oranges, so to speak. I mean, to be fair, what they should be doing is saying, OK, in 1950, the cost of an automobile that went a certain speed and had certain characteristics, what would that automobile cost today? And that's really a way you could measure. And if you did that, you'd find that prices are going down dramatically. But they're not doing that, unfortunately.
Andrew: If we can get away from the somewhat academic debate around inflation and deflation for a moment and look at markets more directly, how do you see the current stock market? Are we in a bubble at the moment as increasing numbers of commentators seem to be saying?
Mark: I think it's fair, you know, when people say it's a bubble, you can say, if you look at the price of bitcoin, we are living in somewhat of a bubble. But it's all related to interest rates. What is the cost of money? If the cost of money is 1%, the reciprocal of one is 100. So you can have a price-to-earnings ratio of 100 or more. So the traditional valuation methods, which are still prevalent and are used, should not be relied on as much because of this change.
Andrew: So these traditional discounted cash flow models or other common ways of looking at the valuation of stocks don't make sense anymore?
Mark: I don't think so. I don't think price-to-earnings or price-to-book make much sense. I'm not saying that they should be thrown out completely, but I think you should rely more on return on capital employed. And growth, earnings growth. And when I say earnings, I would say in the wider sense, turnover growth, cash flow growth, that sort of thing. That's what you should be focusing on. And by the way, there's a whole new generation of people – young people – who do look at that. That's the reason why they buy Tesla, who weren't earning money for quite some time. Now they’re earning money, but their valuations are sky high compared to the traditional automobile manufacturers – because people are looking at the future, they're looking at what Tesla will be in 5, 10, 15, 20 years from now.
Andrew: Would you buy Tesla at the current price?
Mark: No . Because I think the other car manufacturers will catch up. Let's put it that way. I mean, there's no reason why General Motors or Ford can't catch up and get on this. Well, they already are. But do it in a much more forceful way: to get on this electric car bandwagon.
Andrew: You mentioned bitcoin a few minutes ago. Considering your position on inflation, what do you think about bitcoin?
Mark: It's a religion . I mean, you might say that, if any currency, let's face it. Since Nixon took the dollar off the gold standard, all currencies are based on belief and faith. Faith that you can take that currency and go out and buy something with it. And that's the reason why the dollar is so prevalent around the world, because you can use it almost anywhere. And it's wanted almost anywhere. In the case of bitcoin, I'm sure there's a demand, but I think it's more of an illicit demand, people escaping taxes or money laundering or whatever. So there is a role for that. But my feeling is that if you sit down with anybody who tries to explain it to you, they lose me, frankly, I have no concept of what the heck they're talking about.
Andrew: But yet it’s clear from your writing that you’re a fan of gold. What's the appeal of gold in a deflationary world?
Mark: I love gold, because at the end of the day, it is a currency and it is credible anywhere you go. So if things really fall apart, a gold will really, I believe, hold some value.
Andrew: You’ve built your reputation over the past few decades as an expert in emerging markets. Why should I put money into emerging market stocks rather than US or European stocks?
Mark: I tell everybody: you must have exposure to emerging markets. Regardless of how you do it, you've got to do that because these countries are growing at double the rate of the developed countries. And they're taking off like nobody's business because of the technology – the leapfrogging over the old technology into the new. So you're getting some very exciting things happening in these markets.
So I always say, look, put at least 10, 15, 20% in dedicated emerging market funds, hopefully active, actively managed funds.
For a young person, I would put everything in emerging markets, because that's where the growth is gonna be. And they can take a long view, you know, they don't have to worry about, you know, the short term.
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