Luskin: Cheap Oil To Spur Another US Housing Boom

February 10, 2015 Some folks are expecting this housing rebound to falter in the near future. Based on what you are saying, do you expect another housing boom in the coming years?
Luskin: That is exactly what I'm saying. I'm trying to look at the secondary and tertiary consequences of treating the oil price as a kind of an externality, as a given, where it's just the random number generator. When that number is $100, there are thing you can do and things you can't do. One of the things you can do, when it's $45, is have a really long commute. I definitely want to get your thoughts on Europe, because you've been bullish on the continent from early 2014. Draghi just announced a 1 trillion euro quantitative easing package. Is that going to do the trick? Are you more bullish, or less bullish on Europe than you were several months ago?
Luskin: I'm more bullish, but it's qualified. I guess you could really say I'm as bullish as I've ever been. My reasons have always been very fundamentally driven. They've not really been about some rabbit that Mario Draghi is going to pull out of his hat.

The crisis of 2011 and 2012 forced big, sclerotic economies like Italy and Spain to do things they wouldn't have done otherwise—modernize and liberalize themselves and to become more efficient, less unionized, less government regulated. Those things lead to growth. Those are the things they've done. The growth is starting to show up. For example, Spain outperformed Germany last year on every economic metric.

So my first reaction to QE is, why? Why did you need this? The excuse is because inflation is too low. Well, we know why that is. That is because the oil price has collapsed. Was this a bad thing all of a sudden? I'm in the strange position of thinking that the market needs something to catalyze its awareness that Europe will be just fine.

This tantrum that the market threw to make Mario Draghi feel like if he didn't do that he would lose all this credibility—he did it on a dare, basically. All of a sudden, all of these things that were true before he did it are now appreciated. They used to be underappreciated. Is that because he did it? No. That changed the perceptions. It didn't change the reality; the realities are fine. So, I'm still very bullish on Europe. Earlier in the year, you weren't a fan of currency hedging. But assets are pouring into currency-hedged eurozone ETFs. In the aftermath of this QE announcement, have you changed your view on currency hedging?
Luskin: I think you might be slightly overstating my zeal on the subject the last time we talked. With the exception of the Bank of Japan's very conscious effort to devalue the yen, which was incredibly overvalued, I see currency as a random walk that is extremely hard to predict.

I'm not against hedging them. I'm not for hedging them, either. There are plenty of people out there that have very strong views of it and make fortunes on it and lose fortunes on it. I just feel like it's not something I understand all that much.

In this last six months while the euro has become fairly weak, isn't it strange that in this economic zone, the big narrative is that they are lapsing in deflation? Deflation, by definition, means that the currency becomes more valuable than the goods that you can buy with that currency. So you would expect to see a deflationary currency appreciating, not depreciating.

I look at that and I say, this is why I don't recommend hedging. I don't recommend not hedging. This just doesn't make any sense. Why do we have this deflationary currency where the currency is weakening? That is not supposed to happen. So that just tells me that maybe there is a genius who can figure that out, but it is not me. So I'm not making any recommendations on it. You've been talking about cheap money continuing in the U.S. The developed world is mired in deflationary pressures and central banks are either engaging in QE or cutting interest rates. Does all this bode well for emerging markets in 2015? If so, how do you play emerging markets?
Luskin: Great question. I believe the central bank story for emerging markets is secondary at best at this point. These policy postures you are talking about—there is nothing new about them. Everything you said is true, but it is all old news. The true regime change is the collapse in the oil price. Oil matters more to emerging market countries than it does to developed countries. Certain emerging markets like Russia are dependent on oil because that's how they make their living.

On the other hand, if you're India, where you don't produce any oil, you're a hostage. Well, you've just been set free. This is just an absolute lottery win for India, for most of Asia, China. These are all big oil importers who have just won the lottery. India alone is going to have to build a city the size of Chicago every two years for the next 25 years. That takes oil. This is huge for countries like India. I would be a buyer of India on this news. Thanks for your time.

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