I consider Dr. Marc Faber as one of the best and well read economists in the world. It is rather unfortunate to have someone like Mr. Bernanke at the Fed instead of someone like Dr. Faber. I understand that different people have different views and many would disagree with what I am saying. However, if one does a historical analysis of Dr. Faber's views, it will be clear that he has been spot on most of the time. Not exactly always on the timing, but surely on the trend of asset classes and the economy. An article by Dr. Faber titled "Irreparable cracks in the financial system," written way back in 2007, is just one example of the point I am trying to make about Dr. Faber and his deep insights.
Coming to the main topic of discussion in this article, Dr. Faber is currently bearish on almost all asset classes (including gold).
According to Dr. Faber,
It has a huge rally from around - the low was at $1,522 last December and we are now over $1,700 and I think we need a correction here. In fact, I am now bearish about practically all assets near term I think we're entering a correction time where there will be some disappointments, where stock markets, from the recent times can easily drop 20%.
Is there are reason to be so bearish?
I would say yes when looking at asset classes from a 3-6 month perspective. I would try and discuss few asset classes and the reasons to be bearish in the near-term.
U.S. Equities - In one of my very recent articles, I discussed four reasons to be bearish on equities over the next 3-6 months. The primary reasons discussed included the recent rally in the markets to overbought levels, concerns related to fiscal cliff, concerns related to the debt ceiling, and the realization that QE3 is not doing anything great for the real economy. All these factors combined have the potential to induce bearish sentiments, which can easily result in a 10-15% correction for equities in the near-term.
Emerging Market equities - Growth in emerging markets has also slumped with the global manufacturing PMI below 50 (indicating a manufacturing recession). Even if emerging market GDP growth is relatively decoupled from developed markets, the financial markets are still very much coupled. Weakness in developed market equities will invariably lead to weakness in emerging market equities. In this case, China might be an exception as the Chinese stocks have already discounted a sharp slowdown and Chinese equities did not participate in the recent global rally.
Gold - There is a strong positive correlation between gold prices and the amount of liquidity present in the financial system. The current easing measures by the Fed have lead to a rally in gold and the rally might sustain for a bit longer. However, if market participants do realize that QE3 is doing practically nothing for the economy, investors will move from a "risk on" trade to a "risk off" trade. The fear of weak economic growth, the global recession, and sustained high levels of unemployment will result in money flowing to relatively risk free assets such as Treasury bonds. The flow of money to bonds will indicate relative liquidity tightening and the dollar should strengthen. A stronger dollar would be negative for gold prices. Therefore, it will not be surprising if gold does correct meaningfully over the next three months.
Industrial Commodities - With China slowing down sharply, there is absolutely no reason to be bullish on industrial commodities in the near-term. Further, a possible liquidity tightening (as explained above) can result in a further correction in industrial commodities. I remain bullish on commodities for the long term. However, I would exercise caution on exposure to commodities and commodity stocks in the next few months.
Crude Oil - Crude was trading below $80 at the peak of global economic activity in 2007. Currently, Brent crude is still trading at over $100. This is at a time when we are staring at a global recession. Clearly, the liquidity and speculation factor has resulted in higher crude prices. It would not be surprising to see crude correct by 10-15% or more over the next few months. I had discussed crude oil correction in detail in one of my earlier articles.
Treasuries - After the announcement of QE3, the 10-year Treasury bond yields had surged from 1.4% to over 1.8% in a matter of few trading sessions. Post that, yields have started to decline again and is currently at 1.63%. This might indicate that market participants are skeptical about the impact of QE3 on the real economy. Further, as economic activity in the US and the world weakens, there will be more money flowing into Treasuries. One can be relatively bullish on Treasuries over the next few months.
Dollar - As mentioned earlier, the dollar will do well if all other asset classes underperform. A bear market for risky asset classes is a bull market for the dollar. With the expected tightening of global liquidity (relatively), one can hold some cash positions at this point of time.
However, the above expectation does not necessarily mean that investors need to be 100% in cash. As Dr. Faber points out,
I'm not 100% in cash, for the simple reason that I could be wrong, but in general I think that people that have a heavy exposure to assets being that equities, or gold, or other commodities. I think they will face some profit taking here.
Very rightly, even the best analyst can be wrong. At the same time, the current indicators and the upcoming issues point to a higher probability of a correction.
Investors therefore need to tread with caution and not let greed overcome rational thinking. Of course, I am bullish on markets in the long-term and I have discussed the same in several of my earlier articles. Therefore, a correction would be a good time to buy equities and some precious metals.
I generally favor index investing (especially for retail investors) and investors can consider exposure to the SPDR S&P 500 (SPY) ETF, which provides investment results that, before expenses, generally correspond to the price and yield performance of the S&P 500 Index.
For investing in precious metals, the SPDR Gold Shares (GLD) ETF is a good option. However, a better idea is always to consider exposure to physical gold. Also, silver can be considered for the long-term portfolio on corrections and the iShares Silver Trust (SLV) ETF can be considered for exposure to silver.