By Edward Harrison of Credit Writedowns
Marc Faber is in a bullish mindset, particularly on gold. In a wide-ranging interview with CNBC TV-18 in India, Faber talked about where he sees markets headed and why he thinks gold will never drop below $1,000 an ounce.
Private sector contracting while public sector expanding
This is the frame that Marc Faber puts on recent events post 2008 panic, namely that we are likely to see an era of increased government intervention. This is an echo of comments Bill Gross has been making for some time. We are seeing this stimulus on both the fiscal and monetary sides through fiscal stimulus programmes and quantitative easing worldwide.
The economy has not responded robustly given the size of stimulus, Faber says. Asset markets, on the other hand have. This sets up a clear dichotomy between ordinary citizens and those who benefit most from asset price appreciation on Wall Street and elsewhere in the financial sector. Moreover, the spill-over of asset price appreciation into commodity prices further constrains purchasing power for ordinary citizens.
Less certain about carry trade
Faber is less certain about the U.S. dollar carry trade. He sees a dollar overhang due to the enormous U.S. current account deficit and $7.7 trillion in U.S. dollar reserves as more the issue. Many are looking to sell these dollars and hedge their exposure in precious metals and other currencies.
The one area where Faber is bearish is U.S. treasuries. He says:
There is a risk that at some stage in 2010, the government bond markets (would) weaken considerably because I don’t understand why anyone who would now buy a 10-year US treasury at a yield of less than 3.5%. It’s a losing proposition. I also don’t understand why anyone could buy a 30-year US treasury at a yield of 4.4%. So I think that eventually yields will go up and this could disturb the stock market.
Not as bullish on equities
Given the huge uptick in share prices globally, Faber believes there is now limited upside going forward. He says the risk/reward in equity markets at present is not favourable. Moreover, profit margins are cyclically high due to cost-cutting. Faber anticipates weakness in profits in 2010, causing earnings to disappoint and precipitating a correction.
Bullish on commodities and precious metals
His logic is as follows: cash is now trash with zero interest rates. So holding cash means underperforming. Bonds present an unfavourable risk/reward. Therefore, commodities and precious metals look attractive. One must also have equities exposure.
Interestingly, he makes a fairly explicit statement in favour of peak oil from about 1:40 in the second video below. The world is adding less in oil reserves than it consumes. That necessarily means a tighter supply/demand dynamic, especially given the demand in emerging economies for oil.
He uses a technical argument to make his money quote (in bold):
I believe that whereas in the past the USD 1000 per ounce level was kind of a resistance level, now it becomes a support level. I don’t think that you’ll see gold below a USD 1000 per ounce probably ever again.
So I’m actually quite positive. Maybe gold at this level is a better buy than it was at USD 300 per ounce in 2001.
If videos don’t appear they are also embedded on original post.
Marc Faber Interview: Part 1 (6:19)
Marc Faber Interview: Part 2 (5:42)
Gold won’t fall below $1000/oz level ever again: Marc Faber – Money Control