By 11:00 a.m. ET Wednesday, it was apparent to most market participants that what had begun as a 1.2% drop on the S&P just after the opening bell was turning into something quite a bit uglier. By 11:30 a.m., the S&P had fallen nearly 3% to 1388. It was around that time that the pundits seemed to stop blaming Germany's council of economic advisers for the sell-off and began instead to attribute the steep decline to the market's disappointment that the Republican candidate didn't take the White House on Tuesday night.
In such desperate times a little comic relief goes a long way, and Marc Faber is usually up to the task. The incorrigible author of the "Gloom, Boom, and Doom Report" appeared on Bloomberg Television Tuesday morning and the first words out of his mouth were:
Well, first of all, I'm surprised that with the reelection of Mr. Obama the S&P is down only 30 points. I would have thought the market on his reelection should be down at least 50%. (emphasis mine)
Faber goes on to say, essentially, that Bernanke's policies in terms of money printing will serve to offset Obama's negative effect on businesses, and thus corporate profits will remain artificially high and the market in general may remain inflated. That seems to be his outlook for the next several years and it is consistent with what he has said before about how difficult it is to call a top (or a "maximum bubble inflation point," if you will) when central banks continue to print money with the explicit aim of keeping the charade going as long as possible.
That said, Faber still expects the S&P to fall 20% from its Sept. 14 high of 1474 in the near term. More specifically, he expects the S&P to hit 1360 in fairly short order before rallying into the end of the year and, presumably, taking the 20% dive sometime in 2013. Consistent with this, Faber says the U.S. economy will likely head into recession in 2013 and
...probably would already be in recession if ... the nominal GDP was adjusted by a proper price deflator.
But the truly insightful part comes next. After suggesting that investors "buy a machine gun ... or a tank" to protect their assets, Faber gets serious and notes that excessive money printing has unintended consequences. And one of those unintended consequences was an Obama reelection:
...money printing favored the so-called, I wouldn't even call them 1%, the so-called quarter of a percent ... [and] made it easy for the democrats to attack the wealthy fat cats of Wall Street ... and portray them as profiteers of the system, which, to some extent, they are.
This is an interesting point and when you combine it with the idea that the Fed also boosted the president's reelection chances by artificially driving up stock prices, one wonders whether the Fed chairman deserves a thank you card from the White House.
...if the U.S. economy dips into recession next year, operating earnings...could easily plunge by a fifth [and] risk premiums would almost certainly climb, particularly because the U.S. and the world would have run out of policies that could lift their economies out of recession. (emphasis mine)
In other words, if Congress fails to resolve the fiscal cliff or if, as Faber predicts, the economy simply falls into recession on its own, the market (and the economy) may be out of luck as all monetary policy levers have already been pulled.
While the above-cited UBS note focuses on how the U.S. might achieve long-term fiscal sustainability, it is what is said about the short-term problem (i.e., the "cliff" itself) that is particularly illuminating:
...the S&P500 remains within a few percentage points of its cyclical highs. Accordingly, we can only conclude that investors assign a very low probability to the 'cliff' and a 2013 U.S. recession. That's darn surprising against the backdrop of divisive U.S. politics in recent years, including the political brinksmanship during the debt-ceiling negotiations in the summer of 2011 that nearly resulted in a U.S. default.
UBS concludes that should Washington prove as ineffective at compromising to solve critical issues as it has in recent years, global equities will fall "at least 30%" next year. Of course, this is UBS assuming that a cliff dive is the only way the U.S. heads back into recession. If, like Faber, you believe the U.S. could slip into recession with or without a cliff resolution, it would seem as if a 20%-plus decline in stocks is a foregone conclusion.
Ultimately, I concur and recommend a short position in the SPY. There are still undoubtedly those who call this type of thinking "fear mongering" -- they see a U.S. recession, a fiscal cliff failure, or a Greek euro exit as virtual impossibilities. In my view, these investors would be wise to consider the best passage from the UBS note mentioned above:
Basing investment decisions on the idea that the unthinkable is impossible is a curious trait after the unthinkable things that have occurred in recent years.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.