Barron's Online: Marc Faber's views
MARC FABERWhat's next for the U.S. economy?
Faber: The Fed's policy options are limited. Since Bernanke was appointed Fed chairman in October, he has lost a lot of credibility. In November the price of gold was $480. It subsequently topped $720, and is now $620. [Gold fell to $580 after our conversation.] Commodity prices went up sharply, the dollar went down and bond prices sold off, reflecting concern in the investment community that he is a money printer. The economy probably already is significantly weaker than the statistics would show, particularly housing.
Bernanke could either keep increasing rates, which would support the dollar and lead to a bond-market rally and further stock weakness. Or he could recognize the economy is weakening, and pause or begin to cut interest rates. In that case, the stock market might have a modest recovery, but the dollar would get hit hard.
Which option will he choose?
The first, to regain credibility. From now until October or November, we will have unattractive asset markets. Commodity prices will continue to fall. Emerging markets, which have significantly outperformed the U.S. stock market since 2003, are especially vulnerable. It's payback time. As for the U.S., the S&P 500 now has huge resistance, between 1290 and 1320. The highs we've seen may well be the highs for the year. But U.S. assets have grossly underperformed assets in emerging economies and Europe since 2002, so for the next few months they could modestly outperform foreign assets.
What happens after November?
Mine is a short-term call, but you never know, when markets begin to go down, how serious the downturn will be. Two-year U.S. Treasuries are not a bad alternative in this market. You're not going to become rich, but you're not going to lose money, either. Lots of stocks are modestly valued, but even these can go lower still as money flows out of emerging economies. If you must be in equities, you want very defensive stocks with relatively low valuations.
In January I mentioned several Singapore real-estate investment trusts, Suntec REIT and Macquarie MEAG Prime REIT. The Singapore dollar is strong, and the financial condition of Singapore is rock solid. You don't have large downside risk. I also recommended two Thai real-estate companies, Rojana Industrial Park and Ticon Industrial Connection. They've had big moves and now have sold off. The Thai market has been weak because the political situation looks bad, so stocks could be under further pressure. But these two companies are attractive at current levels.
What about gold?
If gold sells down to $540-$580, start accumulating it again.
And other commodities?
Industrial commodities have had huge moves. As the economy weakens, they are not attractive. The price of copper more than doubled since Mr. Bernanke became Fed chairman. From their recent peaks, prices easily could drop 40%. I would short copper, using the futures contracts.
On a relative basis, gold will do better than the Dow Jones industrials. On the one hand, if the Dow falls to 5,000 and home prices in America sink 30% and there are massive problems in the credit system, the price of gold will stay around $500-$600 an ounce. On the other, if Bernanke prints money in earnest and the Dow triples to, say, 33,000, we'll see gold prices between $5,000 and $6,000.
You have an active imagination.
Paper money has lost a lot of its purchasing power. It buys fewer goods than it did 20 years ago, and there are more losses to come. In the long run, with its exploding debts, the U.S. has no other option but to print money.
Going back to stocks, Thai Reinsurance shares recently eased by about 15%, and are in buying range. The Vietnamese market at one stage was up 100%. It's still up 77%. If it declines another 30%, I would consider increasing exposure.
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posted by gsg @ 9:11 PM
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