Navigating the Global Financial Markets With Jan van Eck

Through this mid-April time period, remember there's going to be uncertainty in the markets. Maybe tomorrow suddenly some therapy comes out for the coronavirus and the party starts all over again, but I just don't think that the implementation, even if that were to occur, would be that simple.

I guess the Van Eck perspective on the world, every money manager has to have like a growth bias or a value bias or whatever it is. And over our 60-year history, our bias has been basically look at what's happening in the world and then that will impact the financial markets. Don't think that the financial markets have all the clues, and this is a perfect instance where you had a health crisis that came out of nowhere. No one predicted it, obviously, and it's massively impacted the financial markets. And people can look at the history of the financial markets and try to find clues, but we've really never experienced anything like this. And so, that's really what I meant by exciting. It's just different. And I think we have to bring the perspective of the world in thinking about how this will impact our investments and when things might turn around.

Sure. I mean, first I should say, you know, my overviews tend to be quarterly and I speak as the CEO of an asset management company. I'm not a portfolio manager and I'm not a market strategist. And all I try to do is bring together all the knowledge that I kind of see around me and share that with our clients because I think they might be missing something sometimes. And maybe it's good news, maybe it's bad news, but there's a lot of commentary out there and I kind of just want to add my two cents. So, having said that, I don't know exactly what's going to happen in the future, obviously. But, the reason we became concerned is because obviously the impact of the virus was hitting the developed markets, Europe and the United States. And the one thing I know is markets hate uncertainty. And we just knew that there was going to be a situation of uncertainty here for a period of time. So, what I was saying to investors is realize that this is not going to be a fun ride. And then I said, 'The other thing you got to think about is when is this ride going to end because it's not going to last forever.' I kind of said, 'Listen, based on the Chinese experience where after their complete lockdown, new cases started to come down after 2 weeks, if we're implementing that in a sloppier way, I'll call it, give us 2 to 4 weeks. By mid-April, we should know.' Now, the question is what happens to economic recovery after that, but markets are very forward-looking. So, I'm basically saying, 'Hey, listen, now is the time to start thinking about taking advantage of the situation.'

Well, you never know what's going to happen, but what's interesting that does remind me of that time period is not just that stocks have sold off sharper than ever in US history, which is kind of an amazing thing to say since I saw you in January. That's what's happened, but also the credit markets basically completely collapsed. And in that sense, it's sort of like 2008-2009. Now, what's weird is that half of the lending goes through the banking system, right? And half of the lending in America goes through the informal banking system. And the formal banking system is fine right now. Banks are fully capitalized, but what really shut down was the functioning of the bonds markets, which is less visible to individual investors. And you saw that manifested in discounts for fixed-income ETFs, and just a lot of lack of a lot of selling of mutual funds and ETFs, and almost no one taking the other side. And so, over the last week, the Federal Reserve has come in. It's funny. In '08-'09, they kind of had to be the lender of last resort to help the formal banking system, the banks. This time, they kind of bailed out. The banks are fine, but they bailed out the kind of bond markets and the non-bank part of the lending markets. High-yield spreads have blown out basically higher than the financial crisis, almost as high, and all the other indicators just suggest how stressed the markets were. Now, that's already come back because of Fed intervention, so they've normalized a little bit.

Sure, sorry. There's basically investment grade bonds which are highly rated, whether they be municipal bonds or corporate bonds, and they almost never default. I'm oversimplifying. Then, over the course of early in my career, some creative people in New York said, 'Hey, and in California, actually, I should say, milk is out there. Said, 'Hey, listen, we can issue bonds for riskier companies and we know that some of them will default, but on average you're going to make more money because they're going to pay you a higher interest rate as an investor. So, if you buy a basket of them, it's actually a good proposition for you.' So, I'm really talking about that riskier part, the high yield part of the bonds markets. And there's always a default rate that's associated with high yield. It's not like investment grade. So, how you measure the riskiness of a bond is effectively the interest rate that they have to pay higher than government debt. There's indices that measure all that and the spread or that higher interest rate premium that high yield borrowers had to pay was pretty low about 6 months ago, 3 months ago. It goes up a lot. It goes up to basically 8 or 9% over government debt on the annualized basis, of course. And that's what happened. And whenever you have spikes like that, it's sort of like a chart, if you just it spikes, let's say, every 5 or 10 years, it almost always comes back down pretty fast. So, it's just a moment, it's a way of describing a moment of panic in the debt markets and it's sort of like the volatility. It's just a little bit harder for people to see and understand.

Sure. I mean, the history of the firm, it was founded by my father and he basically became he did two things. He started investing in international stocks in 1955. Americans weren't that interested in that so it didn't go anywhere. But then in 1968, actually he's getting a PhD at night and he studied under an economist and said inflation is going to be a big problem in the US. And so what he actually did is took that mutual fund, sold 80% of it and bought gold mining shares and de facto became the first gold fund in the US. It took a couple of years but then inflation became a big thing in the 1970s and gold which had been pegged to the US dollar for the entirety of our almost 200 years of history at $35 an ounce at that point basically delinked and went up to over $800 an ounce. So that's kind of the history of the firm and that's why I like to say we kind of look at what's happening in the world because the financial markets weren't pricing that in then. Look at what's happening in the world and then make sure your portfolio is roughly positioned to take advantage of it. Today, we are about assets under management at a $44 billion manager that's 80% in issue ETFs and not actively managed mutual funds. So I would say our mission is to provide interesting exposures that are different from what you would get from a basic benchmark. That's what we call smart beta.

Yeah, sure. So, it's basically an extension of what we were just talking about. So, when spreads go up, when riskier companies have to pay more for their debt, then the prices of their bonds go down. That's just the math. And so, that's the reason corporate debt has fallen so much. I think it's fallen even further, Taylor, because there's this panic in the markets. So, I guess my general view is that we're going to go through a global recession, which would probably have never happened in our life, but it's definitely going to be a sharp recession. The whole world is kind of shutting down at the same time, and then we'll recover, and the question is, have the prices fallen too much? And I kind of feel like they have. Now, what's interesting, as you pointed out, is that municipal bonds have also been really affected by that. And that's a mystery to me sitting here right now. We have a large part of our offering as municipal bonds, both investment grade and high yield through ETFs. And it is to be expected that the federal government will help municipalities that are faced with short-term funding problems. This is not like a Puerto Rico that we're just going to let go bankrupt. So, it's just really hard for me to imagine why muni bonds would be so stressed other than everyone and their mother is trying to sell them. And I still I'm trying to figure out who's selling them, but if the overall message of this time to me is don't sell, keep your portfolio strategy intact, there are sometimes opportunities when you have panicked markets like that. And I think when you saw ETFs trading at these discounts to net asset value, that was a signal, 'Wow, that's a nice time to be buying that type.' Now, a lot of that has closed over the last week since the Fed intervened, but that was one of the things on sale that I would say.

Yeah, I think there's two ways to look at this. So, first of all, I say through this mid-April time period, remember there's going to be uncertainty in the markets. Maybe tomorrow suddenly some therapy comes out for the coronavirus and the party starts all over again, but I just don't think that the implementation, even if that were to occur, would be that simple or clean. So, just realize that time period has not ended for us. But having said that, I think there are things that are longer-term opportunities. And number one, I would just be buying more equities right now. If you think this is a recession and not a depression, the market just often does not sell off 50% and it's sold off 30%. So, you're getting an opportunity to buy a lot of high-quality companies at prices that were unimaginable 3 months ago. So, I would start again, understanding it's going to be a period of time, I would start buying equities generally. And then the question is, and this is sort of a much smaller part of my answer, are there things that are just so cheap now that you just know at some point they'll be worth more? And I think there are. I think when those muni bonds were selling at discounts, it was one thing that I was pointing to. Number two, bank stocks at tangible book value. Bank of America below $20 a share. It's just... Sure you had that in the financial crisis and sure you can say, 'Okay, Bank of America's going to have to be doing the lending and maybe not all the loans will be repaid or whatever.' But, wow, that time was sort of like when Citibank was a dollar a share during the financial crisis. Just kind of like, you know, yeah, they'll survive. So, that's another thing I like to point to: oil prices at 25 or 30 dollars a barrel. That's just not sustainable and I know that we're moving towards using less fossil fuels, but even the most aggressive forecast thinks that fossil fuel or oil demand will be going up for the next 10 years globally. So, that's again, if you want to do more of a tactical trade.

Yeah, I think the world is a really different place than it was 20 years ago and that has affected people's portfolios as well. So, China is 20% of the world economy. And if you look at the global growth over the last 10 years, it's really been driven by two pistons. It's the US and China. So, I like to oversimplify. I really love to oversimplify because if you ignore the rest of the world, you have to understand what's going on in China and the US. And I think one of the things is it's really hard to understand what's going on in China. It's a different system. We hear a lot of the political noise. So, we publish a blog where we just focus on what we think are the core essential things. It's kind of China in two charts, which I update monthly. And one is looking at PMI, which is just purchasing managers index. And it basically says, 'Look, how is the services part of China's economy doing? This is the new China.' And how's the manufacturing part of their economy going because if you look at the manufacturing it actually does go into contraction mode from time to time. It did so in 2015, it did so in 2018. So just understand if you're trying to see how the world economy is doing, we know how we're doing, how's China doing? So that's kind of my overall perspective and I think to this crisis they're pulling out of it. I mean almost all of their new coronavirus cases are coming from people from outside visiting China who they're quarantining. If you look at their back to work statistics, they're getting towards 90% of electricity consumption with a real trajectory towards going to the way things were before the crisis. And so during this period of uncertainty, we are getting some certainty out of China. And what my colleagues tell me is that even if you say that 90% of let's call it like Nike stores are open in China, sales are still down. We're still looking at revenue off of 15 to 20%. So when people say, oh we're going to have this rapid recovery in the US, I'm like, well, you know, China went to zero cases and they're still a month and a half after their kind of peak crisis ended, they're still at not 100% of capacity. So that's the trajectory.

Let me state an extreme. You don't need to own China at all. But what you do need to understand is what's going on in their economy because they're 20% of the world economy. And if China ever were to have a massive recession and you know what happened just over this time period, it would affect all asset classes. So, I look at 2015 for example when old China, if you really will, was contracting. They were saying, 'Listen, we want to shift to a services economy. We're going to shut down a lot of capacity in our infrastructure, concrete, building, aluminum, all that kind of demand went down.' What happened? Commodities crashed. Oil went down to $25 a barrel during that time period. Copper went down. Okay, you may say, 'Well, that didn't really affect me.' Well, it certainly did if you're in Texas because that oil price, lower oil price, rippled through not just commodity prices but also through other asset classes. So, high yield, we were talking about riskier companies, a lot of energy companies were high yield issuers. So, high yield investments got hurt. It sort of rippled through other asset classes. So, I guess that's my weakest case for paying attention to what's going on in China because if they slow down, it really matters. Now, whether and to how much you invest there, that's probably to a certain extent it's becoming a value-based decision like we were talking about. I kind of feel like you want to diversify globally and not worry too much about politics and deal with political issues separately, but there are really no solutions in our industry right now for avoiding sort of selected China exposure. And the last thing I do want to point out is that China and Asia are becoming 80% of an emerging markets benchmark. So, if you own emerging markets, realize how weighted towards Asia that is right now.

Again, a little bit of the VanEck theme is weird things happen in the world, right? So, realize how they're affecting your portfolio. And the precedent for very odd country weightings in global portfolios was when Japan's stock market went basically through a bubble. And international equity indices at the time very heavily weighted towards Japan, and Japan still hasn't reached its highs of that bubble. So, China's certainly not in bubble land right now. So, what I mean by that is I don't see a huge credit explosion. They really have gotten ahead of that problem. So, that's not today's issue, but I just want to point out that the country weighting issue has existed in portfolios before. I think when emerging markets started as a concept of investing about 15 or 20 years ago, it was a global phenomenon because you had free markets coming into South America, into Russia, Brazil, India, and China all at the same time, and it was a global story. But now, because these indices tend to be weighted by the value of their stock markets, China directly, and now that China stocks listed in China have been included in these indices, especially, you have those stocks, you have Hong Kong stocks, and then you have countries that do a lot of trading with China, like Korea, Singapore, etc. So, collectively, if you add up that regional weighting in an emerging markets index, what 15 years ago used to be globally diversified is now very much a China play. If you want to reduce your China weight, yes, you can just reduce your emerging markets fund. There are not, unfortunately, a lot of solutions for being kind of selective about China. I think it's easier to add China exposure by buying a China fund than it is to kind of selectively reduce it right now.

Maybe I can first answer why would you ever own gold?

And I think I had a discussion about a year ago with an extreme skeptic. And there are a lot of skeptics like Warren Buffett and they'll say the same thing about Bitcoin because they don't produce income, right? Gold same thing. Gold doesn't produce income. Why would you ever own it? And I think here's my strong counter. Paper money has never survived throughout history. So, governments always overspend and the value of currencies always trends towards zero. Now, you might say, 'Jan, that's not going to be in my lifetime for the US dollar.' And I'll say, 'Or the US is very special and it will never happen.' Well, all I'm saying is we would be the one exception that's proven throughout history. And we did go through a big period of dollar devaluation in the 1970s. So, it can certainly happen again. The case for gold today is a kind of version of that, which is that central banks are using all kinds of tools to keep the economic growth going, and at some point investors may lose confidence in central banks. Now, you may say, 'Yawn, I'm never going to lose faith in the Fed. I love the Fed.' Okay, then don't buy gold. But, if you think there is a risk that we've been spending too much money as a country, and central banks can't stimulate forever, and they're stimulating like crazy now, then you want to own gold. So, that's the why gold. To answer your question about do I want to own gold bullion or gold shares, gold bullion is less volatile. They tend to perform the same. Historically, gold shares have done better in bull markets. And if you think about it, the reason is that if their costs of producing an ounce of gold is $800 an ounce, if gold keeps going up, every dollar of increase is an extra dollar of profit to the mining company. So, that's the theory. Now, the theory has both worked and not worked in my career. In the 1970s, it worked for gold and other commodities because the cost of production did not go up, just the price. You could get a lot of oil at $3 a barrel, it's just that the price of oil went way up. Same for gold. In this last decade of the aughts, I like to say, the prior decade from 2000 to 2010, that did not happen for commodities companies because their cost of production went up a lot. So, GDX I'll call it disappointed investors who were expecting much higher performance than the appreciation of GLD would have suggested. The question today is all right, a lot of those gold companies cut their costs and have become more disciplined financially. Will they start performing better? And that's an unknowable question. So, I like to say buy a mix of both. So, that's the long-winded answer to your question.

It's not directly a hedge against the stock market collapse. It's more of a hedge against what central bank and financial instability I would call it and lack of faith in central banks. But, I certainly say over this time period in a way their performance has been disappointing to investors because it didn't go up every day the stock market went down. But, if you go back to when we started becoming more bullish last summer when gold broke out, both GLD and GDX are up over that time period. And the analogy that our strategist Joe Foster likes to talk about is look at '08-'09. Both gold and gold mining shares fell during the crisis, but they rebounded and they rebounded faster than the overall market afterwards. So, it's a little bit when you're getting a margin call, an investor needs to raise cash, they sell everything and they do sell gold as well. So, I understand why that's disappointing to people, but if they just broaden their lens from the last month to the last year, they won't be as disappointed and you know, there's been a little bit of a strong rally over the last week, so we'll see if that lasts or not through the crisis.

I would just remind people to keep an eye on what's happening in China as well as what's in our news, which is our experience with the virus in Europe and in the United States. China is different than it was 10 years ago. Only 20% of its less than 20% of its GDP comes from exports. So, if you think, 'Oh, China can't do well if the US economy's in a recession.' That's a lot less true than it used to be. And so, I think as long as they keep recovering, that's something that seems to be out of the headlines. So, we'd just encourage people to kind of find their own sorts of China information because like it or not, as I said before, it's a large part of the economy. Otherwise, no, I think that's really the point I like to stress. Maybe I have too much of a China focus. I just think it's what's left out of the conversations a lot. And as I said, I do think that when this period of uncertainty ends, we'll have viewed this as a pretty good buying opportunity.

I can't guess. I would say the chances are it's higher in 12 months than it is now. How much it recovers, it depends on facts, obviously. I don't know.

Sure. Well, what I said investors should look at to see whether the world is coming out of this economic crisis is you can look at the price of oil and you can look at the price of copper, Dr. Copper, because we all consume that in the world and they will indicate as they bottom whether economic growth is starting to pick up. So, those are available on Yahoo Finance. The indicators of China PMI are available on our website vaneck.com and you can subscribe to our news and views. We update those at the end of every month. If you sign up for the subscription, you'll get a note when we've updated those statistics. You'll see them in the press, but I just don't feel that they're really well explained. And if you go to that blog, it's only like a page and a half blog, it'll explain why we think those indicators are important.

Well, Taylor, you know I'm a big fan. I've listened to I think a majority of your podcasts, so it's really nice to talk live.

Bye-bye.