Marc Faber turns bearish on stocks

Posted on 27 September 2009 with no comments from readers

Just a week after appearing bullish on the outlook for stocks in a period of hyperinflation, Dr. Marc Faber told Bloomberg on Friday that ‘ a correction for the market has been overdue for quite sometime’.

Responding to the immediate poor data on US housing he said: ‘The economy, through fiscal stimulus and money printing, has stabilized but hasn’t improved, and considering the stimulus it’s actually a very disappointing performance.’

Correct calls

If Dr. Faber has reversed his previous position or substantially amended it, then should we now expect the same from the stock market? He did correctly call the bottom in March. Has he now correctly called the top of the rally?

We may need to wait for the US jobs data next Friday to see if the celebrated contrarian has got it right again. Then again markets may fall in anticipation of this important statistical news.

But the S&P has suffered three straight days of losses and last week recorded its worst weekly fall since early July. In July that was a false indicator as was the astrologers call of August 14th, except for Chinese markets.

Yet in markets the higher you climb the harder you fall. And the S&P has vaulted a stunning 54 per cent higher since early March. What goes up has to come down, and in the worst recession since the 30s the plunge ought to be a big one.

Bear market lows

Will this be a normal 10-15 per cent correction or something worse, a plunge to new bear market lows, for example?

What we have not yet seen in stock markets is a true loss of confidence, a selling climax that drives stocks to undervaluation. This is the typical swing of market confidence from manic optimism to total pessimism.

You have to turn to the psychologists couch to answer this, not US statistical data. The nub of the problem is this: was the crash last autumn and the rally that followed a reaction to over-optimism that was followed again by over-optimism?

Or is there a genuine global economic recovery going on that the stock market is trying to value? If there were a genuine recovery coming through then just a modest correction would be justified. If the market is completely misreading reality then a far more comprehensive sell-off would seem on the cards to reflect a new status quo, or more likely big uncertainty about what it might be.

So will it be business-as-usual in 2010 with a return to three per cent global growth as forecast by the IMF or do other nasties lie ahead?

China crisis

Perhaps the bubble inflated by a 50 per cent of GDP stimulus in China might burst? Or the worse than 1930s slump in global trade reappear back on the radar? Or the economic catastrophe in Japan cause further waves?

Certainly there is a myopic fascination with data from the US and China, and the rest of the world is being ignored. The Russian economy is in a mess, so too frankly are the Oil States where the credit crunch has popped the real estate bubble.

Or maybe Dr. Marc Faber’s theory about money-printing at the Fed will somehow support nominal stock prices while devaluing them in real terms with inflation. And to be fair he has always put a time horizon of several years on this process when pushed for clarification.

Personally I am very bearish on the outlook for stocks again, as I was last autumn readers might recall, and think we are about to fall off the edge of a cliff. How far down we have to fall is not an appropriate question when jumping off.

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