Marc Faber, Swiss money manager and editor of the Gloom Boom Doom report, said on Bloomberg television a “correction is overdue.” After yesterday’s dismal performance in stocks, the awaited Faber correction, with all major averages off more than 1.5%, may be upon us.
He stated his expectation for a pullback on the October 26 edition of Bloomberg’s “InBusiness” segment when the S&P 500 stood at 1185. After climbing as high as 1227.08 on Nov. 5, the broader measure of the U.S. stock market has since retreated to 1178.34 at Tuesday’s close.
“We are in the inflation trade again,” he said to Bloomberg’s “InBusiness” hostess, Margret Brennan, noting “a weak dollar, strong precious metal prices, strong equity prices especially in emerging markets and now in frontier markets, plus strong industrial commodities.”
“So, I think a correction is overdue,” he asserted.
With more than 95% of all stocks on the S&P trading down for the day, the sell off was a wholesale one. Broad-based selling of this magnitude, though not in price percentage terms, suggests the “inflation trade” that Faber spoke of, is unwinding.
Invariably comes the question: At what level is it safe again to buy? Faber weighs in with suspicions of a Federal Reserve intervention, at an important technical level, if stocks decline too far.
In his latest edition of the Gloom Boom Doom report in late October, Faber suggests a move down to the 1040 level on the S&P could spook the Fed into action of supporting stocks.
He also asserts, in the longer term, the bears could have it all wrong while a “money printer” is at the helm of the Fed. Faber’s knowledge of financial history is broad, recollecting numerous instances of central bankers fighting credit contraction in the real economy with excessive money supply, which inevitably spills over into equities among other assets. Zimbabwe’s stock market serves as the most recent example of this phenomenon.
Moreover, Faber’s assessment that the Fed has embarked on a Von Mises “Crackup Boom” cycle has begun to show early signs of materializing since Nov.4, the day after the FOMC announcement.
Though premature to conclude whether Faber is, again, accurate about an imminent Crackup Boom, the dollar’s relative strength against other major reserve currencies, including gold, lately, was noticeably meager against the backdrop of plunging Treasury bond prices—the real focus of worry at the Fed, according to many economists.
The yield on the Treasury 10-year note has backed up 35 basis points since the Fed’s QE2 announcement, troubling some market participants (presumably some Fed officials, as well) who believe rejection of the Fed’s QE2 plan could most likely begin in the bond market, then, spilling over into equities—for now, according to Faber. Then, he predicts, a reinvigorated “risk on” boom, the Von Mises Crackup Boom, lasting approximately six months, he said.
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