Faber: Hong Kong Real Estate Shares Attractive, Hold US Treasurys

August 19, 2014

ETF.com: Do you still see an eventual sharp sell-off in the markets later this year?
Faber:There has been significant technical damage in several stocks and several groups. Whereas the consensus is for a strengthening economy in the second half, and further strength next year, looking at the performance of the bonds market, one would conclude that the bond market is suggesting renewed economic weakness.

What investors may overlook is, maybe the U.S. is strengthening somewhat, but at the same time, Europe is basically weakening. All emerging economies are not strengthening, but rather weakening. So I would be very careful in making a statement that the global economy's healing—I don't see that at all.

ETF.com: If the stock market does take a plunge, where do you see this global pool of liquidity rushing to? Will it flow back into Treasurys, as it has historically on sharp market pullbacks?
Faber: That is a very good question. I think I mentioned before, in our last interview, I still own 10-year Treasurys, which I bought last November when the yield went to 3 percent. Now the yield is at 2.42 percent. So it's been a well-performing asset class. In particular, long-term bonds, 30-year bonds have performed superbly in the U.S. They are up this year something like 14 percent, year-to-date, compared with 12 percent for the S&P and the loss of 2 percent for the Russell 2000 and the Dow that is flat.

I think that if the market went down substantially, then Treasurys could easily—on the 10-year—fall below 2 percent.

ETF.com: So do you think that Treasurys remain a good hedge against a sharp market sell-off?
Faber: My asset allocation is essentially real estate, equities, bonds, cash and gold. I think that it would be a mistake at this stage to sell all the bonds and all Treasurys and put everything in the stock market.

It's not that I think that Treasurys are good value from a long-term perspective; that I doubt. Because the maximum you will earn on your 10-year Treasury will be 2.42 percent each year for the next 10 years. That's not a very high return. But it could be—in a period of six months or one year—a better return than to lose money on other asset classes.

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