Speaking to Bloomberg last week, Marc Faber gave viewers a rundown of his thoughts on the markets as an announcement from the Fed regarding QE2 nears.
On equities, Faber is not optimistic in the short term. He expects a selloff after the Fed announcement on Wednesday, noting that many investors could be disappointed with the language released out of the Sept.2-3 FOMC meeting.
In addition to his expectations regarding investor reactions to the FOMC meeting, the American Association of Individual Investors (AAII) released results of a survey which show overly optimistic sentiment of further gains in the S&P. Faber doesn’t like any asset that is too heavily weighted with investors optimism.
Faber does say, however, he doesn’t anticipate a full-blown selloff to below 1040 on the S&P. If that was to happen, he said, the Fed will print more money to support stocks.
Faber warns of an over-bearish outlook on the S&P in the intermediate term, saying the Fed may be engineering a “crack-up boom” in the U.S. economy with policy initiatives, which include negative real interest rates in sovereign credit markets. In this scenario, money printing could make its way into stocks and other risk assets for between six months and a year, he says.
Faber’s point is: Any selloff in the S&P could be rather mild, providing investors an opportunity to buy cheaper stocks before a temporary, but extended, rally begins—fueled by a money-printing Fed.
Ditto for commodities, says Faber. Faber believes the recent strong rally in commodities is overbought in the short term, but a pullback from present levels could provide an excellent opportunity to position for a continuation of a stronger rally during the crack-up boom period next year.
Faber likes agricultural commodities and fertilizer in this space.
Precious metals remain on Faber’s favorites list. In a crack-up boom scenario, silver could outperform gold by a substantial amount given the metal’s dual purposes, one monetary, the other industrial. Faber believes silver could reach $30 per ounce as long as real interest rates remain negative—which could be the intentions of the Fed for approximately three years, according to the bond king, Bill Gross, of PIMCO, in an interview on Bloomberg on Friday.
As far as bonds, Faber says to stay far away from U.S. Treasuries. His reasoning is simple: Interest rates are nearing all-time lows, and any reflation in asset prices under a crack-up boom reflation effort will destroy wealth on the coupon of the bond and the price.
On the dollar, Faber says the dollar could rally in the short term because the anti-dollar trade is too crowded, taking the dollar too low, too fast, especially against the Swiss and Japanese currencies. Any rally in the dollar, however, could be short-lived, he says, as the Fed appears to have committed to a debt monetizing policy in Treasuries and mortgage-back securities.
Finally, Faber says to keep an eye on any indication out of the Fed of anything less than $1 trillion in QE2. And definitive language suggesting a “test-the-waters” could trigger the selloff Faber predicted in September.
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