Dirk Müller, the popular investment guru known as Mr. Dax for his insights into the German stock market, is not surprised by the massive plunge in global equities. The stock market expert, author and funds manager tells Handelsblatt that market movements are like earthquakes. The only question is how often and how violent are the tremors on the trading floor.
Handelsblatt: Mr. Müller, we sought this interview because you're seen as someone who prophesied the crash.
Mr. Müller: Well, first of all, I take exception to being termed a prophet of the crash. I assess the current situation in the markets and cite opportunities and risks, although, naturally, no one wants to hear about the risks. If I were a crash prophet, I certainly wouldn’t have any equity funds relying on long-term increases in price.
Did the sharp drop in prices around the globe surprise you?
What’s happening here was foreseeable. I have said over and over that Greece won’t be the country to cause major upheavals. It will be China.
How great is the danger that China will pull the global economy down with it?
The danger was always there. China has had a boom that was certainly good, but eventually, every boom phase is inevitably followed by recession. Growth and cooling belong together. I need the counter movement so negative developments can be corrected. For almost 25 years, there has been no recession in China. There was an unbelievable amount of fresh capital flowing into the market year after year. As long as capital flows, you can finance complete rubbish like ghost towns in the middle of nowhere or freeways that don't go anywhere. We have observed these undesirable developments and it was clear they had to be corrected at some point. The only unknown is just when this would happen.
Small investors also wanted a piece of the pie.
Developments in the Chinese stock market have become extremely unhealthy, especially in the last two years. Small investors, in particular, were buying on credit anything with a securities identification number. A bubble like that was bound to burst and it was obvious that when it happened, it would be really severe. That's exactly what we're experiencing now.
Is this the Big Crash?
I like to compare market falls to an earthquake, or the pressure that builds up prior to an earthquake. Scientists can measure and describe it, but they can’t say when the quake will happen. Is an even worse quake coming -- the danger exists — or did it already occur? We only know when it’s all over.
How can governments and central banks calm the situation?
Naturally, governments, the central committee and the central banks do all they can to stabilize and save the situation. In past years, we have seen the central bank is capable of buying time again and again with crazy measures. Yet the fact they are solving no problems is clear.
There is still a lot of nervousness in the markets. Are the measures falling flat?
At the moment, the Chinese state reminds me of a clown balancing ten plates on a pole and flailing. Everything is wobbling terribly and he's trying desperately to buy time with all kinds of tricks. If you look at the Chinese measures, it’s madness. Half of stocks are simply taken out of trading, so their prices won’t fall anymore. Major shareholders are not permitted to sell securities. Billions in government money is being pumped into stock markets. That’s the hysterical wobbling of the clown to keep the plates on the pole. It may work for a while, but the situation can also worsen. Through globalization, it naturally spreads out right across the world.
Is the devaluation of the yuan helping?
That’s an interesting aspect. A massive amount of capital is being pulled out of China. For decades, loans were taken at close to zero percent with money invested in China. With a growth rate of over 10 percent, it was a free lunch for investors. Naturally, euros, American dollars and yen were taken to China, exchanged into yuan and invested. It’s like a casino.
China as a casino? Doesn't that analogy go a bit too far?
Imagine walking into a casino with a million and trading it at the cashier’s booth for plastic chips. First, things are looking terrific in the cashier’s booth. Then, you play and win a lot. At some point, your winning streak ends. You stop and take your remaining tokens to the cashier’s booth to trade them back – hopefully at a profit -- into euros and take them home with you. That’s exactly what is happening in China now. The investors, who have been walking into the casino for years, are taking their money off the tables and cashing it in for euros, dollars or yen. What does the casino do? It allows a devaluation, so they aren’t required to pay back so much for those chips.
Central banks haven’t shot off their powder yet?
Central banks don’t run out of possibilities that fast. They can pump more money into the markets and, at some point, the central banks may buy shares themselves. We have been seeing in recent years what kinds of crazy ideas central bankers can come up. The central bankers are sure to have some ideas left.
Are there any safe havens left for investors?
No, neither gold and certainly not bonds work are safe havens. We saw that on last black Monday. Everything was sold across the board. Investors treated quality shares and junk the same. What trended particularly well was sold first. It didn’t matter if it was great quality or not. The motto was cash is king.
What will prevail? Bulls or the bears?
There isn’t yet a sellout mood on the market, but there is great uncertainty. Low prices still are used by investors as an opportunity to buy. Prices stabilize and the next alarming report follows and things head downward. It is far from clear whether we are a bear market or whether bulls again will take the lead. I’m not sure myself.
How has your own fund fared in recent days?
The fund has withstood the turbulence very well. It is trending somewhat better than its settlement fund and 9 percent better than our benchmark index, the MSCI World Value on a euro basis.
Is the fund losing money?
Whoever makes a profit with equity funds in this tumbling stock market also can walk on water. I really can’t do that. It’s all about not losing too much. Since it began, the DAX has lost more than 20 percent. The funds are just under nine percent in the red. It would be much nicer to take in more profit instead of less loss or than the benchmark. There are no bad markets, only bad strategies. I look forward to opportunities to buy.
The interview was conducted by Jessica Schwarz. To contact the author: [email protected]