Dr. Marc Faber, the Thailand-based editor and publisher of The Gloom Boom & Doom Report, favors stocks only as the least of all evils.
Q: How high can the market go before, if I read your work correctly, America falls apart and takes everything down with it?
A: I'm not sure that the risk/reward now is particularly favorable. The inflationary school of thought says the Federal Reserve has no other option but to print money, and that will lift asset prices. The Standard & Poors 500 could get to 1,000 or 1,100 or depending on how much money they print, possibly even higher than that.
Between March and today, the S&P is up 40%, and in an environment of zero interest rates, that's a huge gain. Many of the resource stocks we were recommending in November and December have tripled. So, maybe we have for two or three months now a reversal in expectations, where people suddenly realize that maybe the economy doesn't recover a lot and that deflationary pressures are still there. But if the S&P was to come down to 800 or 750, the Fed would probably increase its money printing activity. So, I kind of doubt that we'll see new lows.
Q: You've warned that US risks Zimbabwe-style hyperinflation and then more recently said US inflation could reach 10% to 20% in five to ten years. Isn't there a big gap between those outcomes?
A: We have the worst recession since the Second World War and actually the prices of necessities are still rising, including food and energy. So, one day within the next ten years, when the economy slowly recovers and when further dollar weakness occurs, inflationary pressures will increase. And once you have inflation increasing, it's not easy to stop it unless you implement tight monetary conditions, which would imply very high real interest rates. And I don't think that Mr. Bernanke or the US government have any intention whatsoever of having positive real interest rates. Combine easy monetary policies with large fiscal deficits, and the likelihood of much higher inflation is there. Once we go to 10% inflation, 20% becomes quite likely and once we go to 20%, we can easily go into hyperinflation.
Q: If the largest economy in the world is at risk of hyperinflation, shouldn't people be selling everything and hoarding gold and silver?
A: For sure, gold is better than cash. But the devious thing about inflation, if we define it as money and credit growth, is that it touches different asset prices at different times with different intensity. And so, you can have for one year a huge increase in the price of gold and then the next year you could have a huge increase in the price of real estate and the next you could have an increase in silver or agricultural commodities, and the next year in wages or stock prices. You just don't know exactly which one will do the best. It's a very tricky environment, and it favors large speculators and the people who are close to the government. It shifts wealth from the middle class and workers to rich people, as has happened over the last 25 years.
June 26, 2009
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