Speaking with hosts Matt Miller and Carol Massar on Bloomberg Television’s afternoon program “Street Smart,” Marc Faber, publisher of the Gloom, Boom & Doom Report, offered his latest thoughts on a variety of financial subjects—including his guess for the direction of equities in April.
On the prospects for QE3, Faber reiterated his views of what he thinks is coming from a Bernanke Fed and an accommodating Congress.
“For sure, there will be QE3, but not right away,” Faber said. “So I think they will do QE3; and my view is they will do QE3, QE4, QE5, until QE26, until the whole system breaks down.”
As far as the timing of a Fed announcement of an extension of its so-called quantitative easing program, Faber suggested that the Fed won’t go forward with its plan for further easing while pundits of the Fed’s policy actions remain too large in numbers. Therefore, a crisis in confidence on Wall Street must precede any announcement regarding further expansion of the Fed’s balance sheet, he speculated.
“I think QE2 is fully discounted,” Faber said. “I believe the Fed would like to see stocks correcting somewhat and then have an excuse if stock are down 20%, then yeah, we need QE3.”
On the subject of relative stock market values between U.S. markets and other markets, the Swiss-born investment manager disagrees with the notion that U.S. stocks are cheap relative to foreign markets, citing Mexico’s much improved economic fundamentals, as an example, along with the country’s low-wage base and proximity to the world’s largest economy to the north.
China, Faber said, is pricing itself out as a low-wage producer of choice among developed nations, while Mexico’s wage growth, on the other hand, continues to stagnate. Faber also cited Thailand as another example of his viewpoint. The availability of sound growth stocks in the Thai market, which in some cases pay 7% dividends, and other stocks, which can be purchased at price-to-earnings valuations in the nine and 10 range, offer better value, according to Faber.
When asked by Carol Massar what he thinks of the fiscal climate in Washington to deal with the ballooning federal budget deficits, the unabashedly outspoken Faber colored the interview with his views on the issue as well as his opinion on U.S. foreign policy and American culture.
“The U.S. is already out of control. It’s going to be very difficult,” he said of the political will to institute fiscal austerity measures to slow explosive trillion-dollar budget deficits.
“A society has to be patriotic. Patriotism doesn’t mean to go to invade Iraq and Afghanistan and bomb Libya with mercenaries,” Faber explained.
He continued, “And every interest group in the U.S. must make scarifies—but the U.S. and other countries as well—I have to point this out—have evolved into a society where the corporate sector wants as much they can in terms of corporate profits, the financial sector wants as much as they can through their relationship—partly with the government—and the unions want as much as they can because they see how the banks and the large multinationals rip off the system by not paying their due taxes, as GE is doing. So what kind of society is it?”
On the outlook for the markets absent QE3, Faber expects Wall Street to sell off.
“I suppose the market will go down,” if the Fed discontinues its easy monetary policies, he said. Faber goes on to explain that QE3 must be must larger in scope and in amounts due to the lower marginal impact monetary stimulus has on an economy as more and more “mal-investment” distorts capital formation decisions.
So what to do? Faber’s recommendation to investors hasn’t changed over the past several years. He still suggests investors seek to preserve wealth by exchanging interest-bearing instruments for real estate, art, stamps and precious metals during this period of deliberate currency debasing actions by the Fed.
“In my opinion the Fed funds rate should be at 5% . . . That will provide real interest rates,” Faber explained. “I don’t think the Fed will increase interest rates to a positive real rate. So, I’d say to an investor, he should have at least 20 to 30 percent of his money in precious metals.”
When asked about his opinion about renewed fears of a bubble forming in the gold market, the student of the Austrian School of economics theory scoffed at the pundits who say the gold trade has become crowded.
Faber said he routinely sees less than 5% of attendees at his speaking engagements raise their hands during his casual sentiment polls regarding the precious metals. Sometimes he sees no hands raised, he said.
“And my daughter, she lives in Germany. She walks by a shop when she goes home from work. She said people are lining up to sell gold—the jewelry. So, I don’t think that it’s a gold bubble,” Faber added.
And finally, on the outlook for the U.S. stock market for April, Faber has been watching the price of copper for clues for forecasting global economic growth. Copper prices have been used as a leading economic indicator, of sorts, as its correlation with economic growth has been quite high, historically.
After trading between the $4.50 to $4.65 range in mid-March, the price of copper has slipped to the $4.20 to $4.30 range, lagging the precious metals on a relative basis in the month of March.
“Well, I’m very cautious now about all asset markets,” Faber warned. “As I explained the price of copper has been weakening and technically the markets don’t look very convincing. I think maybe we will make a new high in April; and if we make a new high, we’ll have a more significant correction in May [or] June.”
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