Jody Clarke talks to Barton Biggs about why big stocks are the best investment in the markets right now.
What is today's most compelling investment?
High-quality, big capitalisation stocks, across the board: in America, Britain, Europe and emerging markets. All our relative valuation stuff shows that that class of stocks, the S&P 100 for example, is where the real values are.
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Exactly. But not just in any particular class of stocks or any industry group. It's more the general class of stock that's cheap. Big pharma firms Merck (NYSE: MRK), Pfizer (NYSE: PFE), Johnson & Johnson (NYSE: JNJ). The big technology companies. Cisco (NSQ: CSCO), Intel (NSQ: INTC), Microsoft (NSQ: MSFT). Are you going to get rich owning any of these stocks? No. But are you going to get richer and are they really good, solid, long-term investments? I believe they are.
I think it's very unusual that these stocks are the most attractive on a relative valuation basis. In a world where currencies are increasingly being called into question, and the dollar is losing its status as a meaningful reserve currency, I think it's possible that the shares of high-quality companies are going to become almost a substitute for currencies. These are highly liquid multinationals they are a claim on earnings and real assets. And they also have a dividend yield, so they have an income. So I think they're a much more attractive place for money than gold or Treasury bills, which have no return at all.
You don't like gold?
I think gold is ridiculous. You tell me what the price/earnings ratio of gold is. You tell me what the dividend yield of gold is. As Warren Buffett said, what sense does it make that we send people 5,000 feet under the ground in Africa to dig up this metal and ship it under heavy guard all across the ocean to London and Tokyo, Mumbai and New York? And then we bury it with great security another 100 ft under ground. Gold as an investment, to paraphrase Churchill, has all the virtues I dislike and none of the vices I admire.
In your 2008 book, Wealth, War and Wisdom, you said families should get ready for a breakdown of civilised society. Do you still believe that, and how should they prepare?
I believe we're going to have a happy outcome. But there is always a chance that I'm wrong and that there will be some very disruptive terrorist strike or that we could slip back into another recession. We could go and double dip here. And that could result in a period of crisis.
Modern civilisation is so fragile. With its dependence on electricity, society could break down very quickly. So as a prudent person, just as you have insurance on your house or car when you're driving, it makes sense to take some measures to keep yourself going if we had 30 days of social breakdown.
So do you own a shotgun?
No. But I do have my Marine Corps 45 automatic pistol.
You've described yourself as 'an American optimist'. Do you believe the US will come out of this crisis stronger than before?
Yes. I don't think the US model is broken. There is nothing wrong with the current state of capitalism. Human beings are always subject to greed and fear. That makes capitalism volatile and unstable. But nevertheless, capitalism is the best religion for creating economic growth that the world has ever known.
And I don't believe that (Pimco bond fund manager) Bill Gross's 'new normal' of 1.5%-2% real growth for the US is the way things are going to work out. America's genius is still its entrepreneurial nature and its ability to adapt. On top of that, American business has cut back very dramatically on hiring and capital spending. That's why profits have held up so much better than people expected they would, considering how severe the decline in output has been.
And I think those are positive changes that have occurred that the system has adapted to. Do I think the US is a 4.5% trend-line real-growth economy? No. But is it a 3.5% trend-line real-growth economy? Yes, I think it is. And as I said, I think these high-quality, large-cap stocks are in a unique situation.
Who is Barton Biggs?
In 1961, "bored with playing soccer and getting rejection slips for my stories", he went to his father, chief investment officer at Bank of New York, saying he wanted to be an investor. He joined EF Hutton, a US brokerage firm, starting on $7,200 a year. In 1965, he created Fairfield Partners, one of the first established hedge funds. He went on to spend 30 years at Morgan Stanley before leaving in 2003 to form Traxis Partners, now a multi-billion-dollar hedge fund.
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Jody studied at the University of Limerick and was a senior writer for MoneyWeek. Jody is experienced in interviewing, for example digging into the lives of an ex-M15 agent and quirky business owners who have made millions. Jody’s other areas of expertise include advice on funds, stocks and house prices.
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