Tuesday, August 25, 2009

Marc Faber - extending the liquidity thesis

Click here to listen to an interview with Marc Faber on KingWorldNews. It's long but worth the time if you have it.

A quick synopsis for those that don't...
1) Faber's world view is based on a belief that the Fed and the Oval Office will keep printing money to stave off what they see as disaster. Bernanke's reappointment confirms this.
2) The 3 to 6 month outlook is for a 10% to 20% correction in equities coupled with strength in the USD and bonds as liquidity tightens.
3) He expects that the US will defend the S&P around 850, pumping in more cash in Liquidity Mania Part Two. For this reason he doesn't expect the S&P to make a new nominal low.
4) But the flipside to this is that the Fed will lag the effects of all its monetary stimulus keeping interest rates low to avoid the negative effects of higher interest rates on consumption and the financing of the deficit.
5) For these reasons, he suggests the balance of probabilities is in favour of higher nominal stock prices over time - the market will go up not because of fundamentals but because of money printing. Inflation will follow the deflation we are currently experiencing.
6) In real terms expect the stockmarket to plumb new depths - as the effects of inflation and a weakening USD take their toll
7) As a postscript he observes that the risks of war increase in this environment as governments are inclined to paper over fundamental difficulties with land-grab campaigns.

So, an equities correction in the near term, but with interest rates at zero (effectively forcing people to speculate) and more money from the presses, a higher market over the next 1 to 2 years.


  1. I wrote a fairly lenghty reply to this yesterday but managed to lose it by dicking around trying to post using the correct username etc, but anyway I digress...my only issue with Faber's comments are that this is broadly the same theme which he has been talking about for at least a decade (which is when I first became aware of him, so perhaps it's even longer).

    I agree with some of his observations, but not neccesarily his conclusions. Faber has essentially been short equities, long commodities and long Asia for as long as I remember.

    I'm not a huge fan of one-track pundits who repeat the same mantra for all time and invariably one day get it right. A bit like that Steve Keen guy who is over all he press talking up a property crash - eventually he will be right but he can be wrong for a very very long time.

    Faber also likes to talk his book, though not yet in the same league as the clear leader in that field, Soros.

  2. Fair point. Faber, Soros etc have enough in the kitty to take a medium term view...so what if Jim Rogers sells his Manhattan apartment? Is it really a call on NY property prices or simply the fact he now lives in the Far East?... So yes, take these guys with a grain of salt.

    The bits that make sense to me are particularly - zero interest rates push investors up the risk curve (at least until they get burned again by asset price deflation), and the US govt will be standing ready with the money bucket if the markets do peel off again.

  3. "zero interest rates push investors up the risk curve (at least until they get burned again by asset price deflation), and the US govt will be standing ready with the money bucket if the markets do peel off again"

    I completely agree with the above statement. I guess the question we need to answer is what does this mean, how do we prepare for it?

    Longer term, a hopelessly debt-swamped USA is going to have some significant ramifications, but how you play that is not easy to figure out.

  4. Contrarian-historian-fund manager Hugh Hendry makes an interesting note:

    weakness in global economic demand can force the most painful adjustments not on the “sinful” low savings trade deficit countries but rather on the “virtuous” high savings trade surplus economies

    Maybe its China we should be looking at?

  5. I guess China will certainly suffer, the corresponding viewpoint being that this is the China century, most likely at the expense of the US. Again, multiple equally compelling points of view...