Wall Street Is Living It Up, Everyone Else Is Suffering

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Gold Won’t Fall Below $1000/oz Level Ever Again: Marc Faber

Recently by Marc Faber: The Frame of Mind of American Economic Policymakers

It has been a tumultuous phase for the markets globally in the recent past with major contractions in the private sector and huge stimulus packages. The question remains whether the markets are going to rally from here or is it bracing itself for a correction. Commenting on the same, Investment Guru Marc Faber says that the US economy did not respond well to stimulus packages. However, he adds, “The asset markets responded well to stimulus. The US Fed is keen to push the asset markets.”

On the much talked about issue of the dollar carry trade, Faber says, he is not sure if there is a huge dollar carry trade and believes that it may not short positions in the dollar.

Though he sees a dollar overhang, but doesn’t consider it to be a huge risk. “I would short dollar currently, but hold gold.” The metal has scaled USD 1,000 per ounce level with heavy volumes. However, Faber believes that it will not fall below USD 1,000 per ounce level ever again. He advises investors to diversify into precious metals and equities.

Faber doesn’t see a huge downside risk in crude and is not sure if it will go up to USD 100 per barrel. “Crude consumption of India and China will rise but the supply will remain weak which will take crude higher.”

On S&P 500, he says, it is unlikely to break below low of 666. It may however go up to 1200 next year after revisiting 900 levels, he adds.

He expects to see weakness in corporate profits in 2010 and believes that it is unlikely for the developed markets to outperform emerging markets.

Faber believes that equities can gain 10—15% from the present levels. He also feels that the Sensex is fully priced but can gain 10—20%.

Q: It has been marked by volatility, the last three weeks of November, what have you read into the kind of flip-flops that we have seen in emerging markets and US markets?

A: Basically, we have the private sector contracting around the world and then we have these huge stimulus packages that boost economic activity and we have quantitative easing, in other words money printing around the world in concert by all central banks, whereby the Reserve Bank of India (RBI) has been doing a relatively good job at that.

So I think that whereas the economy collapsed between September 2008 and March 2009, we have stabilized but basically considering the size of the stimulus packages and the monetary printing, the economy hasn’t responded well. What have responded well are asset markets. The Federal Reserve in the US is basically keen to lift asset markets again — to push them up. Unfortunately, it backfired on them, to the extent that actually oil prices have risen very sharply and other commodity prices also.

So the benefit of quantitative easing has essentially flowed into Wall Street, into investment banks, into the banking sector but it hasn’t flowed into the typical household in the US. Unemployment is still horrible at the present time with a lot of people being either unemployed or employed in jobs that they don’t really want — in other words under employed.

So we have a very strange economy. We have booming financial markets. The stock market in India is up more than 100% from the lows in March and in the US we are up 60%. But at the same time the average household — the man on the street is basically suffering.

Q: All our trades nowadays are linked to the dollar — whether the dollar is bouncing back or slipping once again. Do you think there is a big dollar carry trade, which is going on and do you see risk of it unwinding — presenting any threats to emerging markets as such?

A: I am not so sure there’s a huge dollar carry trade. What happens is that worldwide because interest rates are at zero percent — institutions as well as individuals borrow money and they go and speculate. The dollar carry trade is frequently misunderstood in the sense that there are big short positions in the dollars. But one shouldn’t over estimate the short positions in dollars because the world is basically awash in the dollars.

There are too many dollars floating around from the American current account deficit that reached USD 800 billion annually and total international reserves in the hands of central banks now are USD 7.7 trillion. That is the dollar overhang and to some extent some people want to hedge their dollar exposure and then they sell dollars and buy foreign currencies and of course also precious metals including gold, silver, platinum, palladium.

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Dr. Marc Faber [send him mail] lives in Chiangmai, Thailand and is the author of Tomorrow’s Gold.

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