Biser Varchev: Worthwhile Investment Targets in 2016? Commodities and Gold

Biser Varchev, founder and CEO of Varchev Financials Ltd.,to Bulgaria ON AIR

Mr Varchev, let’s start with the recent divergence between the European Central Bank and the Federal Reserve regarding interest rates. The Fed has been expected to hike rates since the summer...

The big players like Bill Gross and George Soros expect a rise as early as in December. The problem is that this sparks unending speculation. It was supposed to happen in November. Now the talk is about December, but I personally don’t think that’s certain either. It even seems more likely to be postponed until 2016. And it won’t change the long-term policy of very low interest levels. Indeed, central banks are now managing financial markets by statements and talk rather than by tangible moves. They try to keep the markets stable while doing nothing about it. The manoeuvring is thus limited to words.

The credit crunch of 2007-2008 should have heightened our sensitivity to over indebtedness. But the very measures taken to deal with its consequences have led to readily accessible credit and a growth of the global debt – according to some estimates, by $57 trillion between 2007 and 2015. Do you see this as a cause for concern?

Indebtedness has always been the main target of banks. But, frankly, bank loans are outside our focus, which is on trading in financial instruments.

"Central banks are now managing the markets by statements and talk rather than by tangible moves"

Still, isn’t it worrying that what caused the crisis is now in turn caused by the measures taken to manage it?

I don’t think so. Crises are cyclical phenomena, caused by the fact that people forget their past mistakes. That they no longer remember what happened seven or eight years ago. Otherwise they would be more sensible, a little more conservative, they would not invest so boldly and send stocks and indices skyrocketing yet again. Ultimately, these are the same people – twenty years have not passed for a generation change. But despite this, now too, stocks go through the ceiling. This is a psychological problem, and the Fed is perfectly well aware of it. That’s why they don’t do anything. Except talk. In our business, there are specially developed software applications that already buy or sell just prompted by the particular language used in each Fed statement. This software does not follow the numbers as before but reacts to words like “maybe” or “probably” appearing in the statement.

There has also been much speculation about a possible euro-dollar parity. What do you expect?

It seems very likely. Right now, nobody is interested in changing the status quo, except perhaps for the regulatory authorities trying to prevent a new market blowout. But we see that they’re failing. We can see the dollar strengthening steadily, yet nobody reacts. On the contrary. Clearly, this suits everybody. So, technically, parity is quite possible, even as early as in the first half of 2016.

But the strong dollar is evidently pushing down the prices of oil and commodities, won’t this trigger pressure in the opposite direction?

With currencies, fundamentals used to be crucial. In a pair like the British pound and the Swiss franc, for example, the movement depended mainly on the interest rate levels of the countries concerned. And, in the long term at least, it was pivoted on the stronger number, so the currency pair moved in that direction. But this time has passed. The textbooks we studied twenty years ago are now ridiculous. Nothing in them is valid any more. Another example: the appropriate correlation, as we were taught, is that when a currency strengthens, stock prices fall. But today we see simultaneously an appreciating dollar and rising US stocks and indices. So logic does not work any longer. It’s just the trend. And psychology.

In this situation that obviously defies forecasts, what would you say are the worthwhile investments in 2016?

Commodities. Everything that is currently very cheap.

You don’t think prices will stay at their present levels?

Precisely. Gold is another good option. There’s no way low prices can last long. Especially in the case of oil. To me, political machinations are the only reason for its current levels. No other logic explains them. Only political pressure, mainly targeting Russia.

Which are the interesting regional markets at the moment? We are seeing a slowdown in China, problems in Russia and Brazil...

The Chinese artificially cooled down their economy because it was overheating. Their only mistake was that they freed the yuan from its peg in one go, causing their markets to collapse. But they will get over this, and are even already getting over it. Speaking of individual markets, the US and UK markets should be watched as something bad is bound to happen there. I can’t rule out an up to 50% stock dive. It’s not a matter of whether, but when. Probably not in December, because banks and hedge funds have to show a profit, so they will push stock prices further up. But once the financial year is over, a crash is very likely. And once there is a crash and investors dump their stocks, their money will have to go somewhere else. And then all these currently cheap commodities (including cocoa, cotton, maize) will appreciate.

Bulgaria’s financial stability is a mantra we have been repeating for nearly a decade now. But now ever more analysts are warning that the country is about to enter into a Greek-style debt spiral. Do you think this is a tangible risk?

No, I don’t. That’s an exaggeration. The latest debt increases reckon with GDP growth. But then, nobody fears indebtedness today, except probably the Greeks. Bulgaria’s key economic parameters do not look bad. We are definitely not overindebted. The GDP in recent years is not at all bad, and even develops better than that of many other European countries. But Bulgaria’s economy itself does not look all that good. The main reason is that foreign investments have been withdrawn. Mostly driven away by political insecurity. The failure of Corporate Commercial Bank has rekindled many people’s fears of keeping their money in banks. Consumption has contracted. Lending has decelerated. It’s a chain reaction. To put it in a nutshell, without external credibility things can’t possibly work out.