ETF.com: Developed ex-U.S. ETFs have been hugely popular this year. Has that run its course?
Faber: In the deep value, we like Portugal, Italy, Austria, Norway, Spain, Greece—depending on which index provider and their category for developed or emerging—but we own a lot of Europe. We also own Poland-Turkey- kind-of-Europe periphery, but no Japan.
ETF.com: You did a poll recently on Twitter asking whether people owned U.S. equities, how much, and whether they’d continue to own it if valuations hit a 10-year CAPE of 100. A lot of the answers were yes to all of these things. What’s your takeaway?
Faber: The responses were a surprise to me. I think it's crazy bones. If you reframed the question and applied it to your house or the lemonade stand down the corner and said, ‘This lemonade stand makes $1,000 a year in earnings, what would you pay for it?’ I don't think anyone in their right mind would pay $100,000 for that.
People just have a different mindset when it comes to public market equities. And part of that is a very U.S.-centric focus. If you were to ask somebody in Greece or Brazil or Russia or even Japan the same question, they'd say, “You're bananas, no way.” People seem to forget the lessons of history.
ETF.com: U.S. valuations may be high, but the stock market keeps going higher. We're eight years into this, and it keeps going. I could see an investor agreeing that it’s crazy, but why bail out? Is there a clear sign of when it's time to bail?
Faber: Valuation is the yellow warning light, and historically we've been a trend-following shop. When the trend rolls over, it's historically been a really wonderful timing signal. You could call it the 200-day moving average, you could call it the 10-month moving average, all sorts of different stuff.
But if you were to put equity returns into four buckets historically across uptrend/downtrend, cheap/expensive, the best-returning bucket is cheap/uptrend. But the second-best is expensive/uptrend, which is where we are now. (The worst is obviously expensive/downtrend.)
The real danger comes when the trend starts to peter out and roll over. To me, that's really like the full signal to really put on some defensive positions or hedging. But again, look, at a valuation of 30, it's not as bad as it was in the '90s bubble when we were around 45. It's not as bad as China was in the 2000s.
We’re not in a bubble. There are a lot worse examples. Still, you don't have to play. You can wait for a better entry.
ETF.com: If someone today wants to trim some of their U.S. exposure, or protect themselves, what do you suggest?
Faber: There are a lot of things you can do. Selling would be one. But if you're not going to do that, then certainly adding hedges or asymmetric exposures would probably be the best way to hedge a traditional portfolio. If you're going to do U.S., you may want to think about a risk-managed approach.
Contact Cinthia Murphy at [email protected]