Dr. Marc Faber discusses he thoughts on equities, government debt, commodities and precious metals January 12, 2010. (Video interview follows excerpts and commentary)
Faber on Stock Markets:
“I think that this complacency and unanimous belief that we’ll still go higher now may lead, actually, right now to a more meaningful correction. And then later on in the year maybe a rally, but maybe not to new highs. And that overall we could close the year lower than we are today.”
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“So I have some signs that show some weakness is emerging in the market. Number two, years ending in “0” are not favorable for stocks, for whatever reason, years ending in “0”. Number three, years where you have mid-term elections are not particularly good for equities and after the huge gains we had last year you can’t expect another huge gain this year. Now, can the market go up 15%? Possible. But, can it go down 20%, 30%, also possible. So, the risk reward is no longer particularly good.”
It seems that everywhere I look and listen, be it mainstream news or my neighbor next door, the economy has recovered and the stock market is the proof. Yet no one talks about the disaster looming in residential real estate, commercial real estate, consumer credit, international sovereign defaults, the Chinese bubble, or the US Dollar. One event, even a minor one like bad retail sales numbers for example, is all it will take and everything can turn on a dime.
Faber on government debt:
I’m concerned about the US government deficit bubble, in other words, I’m concerned about the government debt rising very dramatically over the next five years and also unfunded liabilities going up very substantially and that eventually in five to ten years time the interest payments on the government debt will go up very substantially as interest rates then go up, so that is my main concern.
This should be a concern for every American. As our government continues to borrow more money from foreign governments, commits more money to spending on programs like universal health care, medicaid, medicare and social security, the interest payments on the loans being taken out will eventually destroy any ability we have to pay back the loan.
If the government was an individual borrowing money from credit card companies, they would have been cut off from additional credit long ago or already defaulted on their payments.But unlike an individual, the government can print money to cover the payments on that debt.
We currently have over $100 Trillion in debt, including unfunded liabilities. Does anyone in the US government, maybe Mr. Geithner, or President Obama, or Mr. Bernanke, find this at all excessive? How are we to generate the revenue to pay this money back when tax revenues in the US are dropping?
In the 2007-2008 GAO audit report, the government had tax revenues of $2.5 Trillion. Of that $2.5 Trillion, 18% or $454 Billion (if you include Social Security) was paid just to service the interest payments on the debt!
Look at it this way: The US basically owes $100+ Trillion in debt over the next 40 or so years. The US government brings in about $2.5 Trillion a year. Even if they increase the peoples’ taxes, the government will still be hard pressed to pay all this money back. It’s kind of like an individual making $50,000 a year taking out a loan for $2,000,000 or so. How easy would that be to pay back and how long would it take, even with salary increases? Exactly.
Marc Faber’s concerns are well founded, because in order for the government to pay all of this off, they will have to print even more money. This is the only way, save a full-out default, to pay off our debt. And this is why foreign creditors like China, Japan, Russia, et. al. will eventually stop buying our debt — they know that regardless of the interest rates they have on their bonds, the value of the dollar will continue to decline and they will be paid back in toilet paper. They will, in essence, cut us off like a credit card would do to you if you had too much debt.
Doc Faber on Gold:
I think we can test around $1050, maybe even $950. But longer term, as long as I look at Mr. Obama, Mr. Bernanke, Tim Geithner and Larry Summers, I will keep my gold, that I guarantee you.
No commentary necessary.
Watch the full interview below.
Hat tip Nathan’s Economic Edge
Marc Faber on Bloomberg January 12, 2010
Marc Faber on Bloomberg January 12, 2010 (Part 2 of 2)
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What Mr. Faber says about years ending in 00 and mid-term election years not being favorable for equities is straight out of Harry Dent’s theory on economic cycles. Past data shows that there is indeed some correlation here, but (and this is a big but) this is not ALWAYS the case.
I now believe we are in the exception, much to my chagrin. I had believed, up until a month ago or so, that we would have a huge pullback sometime this February, or April at the latest. I now am reversing that position.
I believe the markets will continue to rally for some time. There will be minor pullbacks, but nothing to derail it from going higher. I think 12,000 will be in the cards by late summer/early fall, if not sooner. The reasons for this are numerous. I wish I could say otherwise but I just don’t see it. I think everyone who predicted a major crash will be proven right eventually, but for the time being the could be proven very very wrong.
Which makes it all the more difficult to convince those with their heads in the sand that there is indeed a problem. Do I think this is by design? You bet.