Back to the inflation/deflation/hyperinflation debate.
Marc Faber raised a lot of fuss last week with his bold warning on Bloomberg TV that US hyperinflation will approach Zimbabwe’s levels. His warning – as Credit Writedown’s Edward Harrison noted – raised the question: Is this headline-seeking exaggeration or serious punditry?
We suspect a bit of both. Faber struck a chord with his evocation of the “Z word”, setting off frenzied debate.
This week, things look different, as unexpectedly strong US output data and other economic figures elsewhere drove equity prices higher as risk appetite improved and the dollar plunged against both the euro and the pound.
And lo and behold, Faber’s latest monthly client newsletter takes a far more – er, sanguine – view of things, relatively speaking. In fact, we’re wondering if it’s the same Marc Faber doom-meister of last week.
It’s not that the uber-bear has become a mega-bull. Indeed, citing a variety of factors including the overbought condition of stocks, “heavy insider selling” and an increase in the supply of equities due to debt to equity conversions, Faber warns that the buying of equities right now “does not seem to be particularly timely”.
It’s rather that Faber is more tempered than he has been in a while. No mention of Zimbabwe at all. Equities could go either way but more likely bottom out. US inflation will be irksome, of course, as a result of the disastrous economic policies of Tim Geithner and Ben Bernanke. But US government bonds have tumbled and the US dollar has been weak. Both are near-term oversold and should shortly rebound, he says.
As for equities, a correction should “unfold” in the short term, he says, but market lows reached either towards the end of last year (in most emerging markets) or in March of this year (in most developed markets) also should hold.
Any such correction, he adds, could take the shape of a sideward movement in the major averages, “or even not occur at all”.
Many big institutions completely missed the powerful rally since March 6 and are now nervously waiting for the market to come down; but should markets not correct on the downside, these investors “could lose their patience and their sudden rush into long positions could lead to another stock market upside explosion,” he says.
As some FT Alphaville readers have noted, you either love him or hate him. Either way, we’ve undertaken not to quote too much from Faber’s newsletter, so we’re limiting ourselves to a few paragraphs for what it’s worth:In a recent discussion a large institutional investor exclaimed, “I just can’t believe it, here we have the super-bear Marc Faber being so optimistic about stocks!” I responded, “it is precisely because I am so super negative about the world that I prefer to invest in equities and in commodities rather than in cash and in US government bonds.”… the skepticism of many investors about the sustainability of this rally is reflected in the still relatively low bullish sentiment readings. I expect that before the current upside move comes to an end, the “Bulls/Bear Difference” will reach close to 40! At the same time, I would expect at the next market top to see at least 70% of stocks above their 200 day moving average.
Just as an aside - inflation is a dynamic process and it is not possible to fix it at 6%. If inflation increases from the current level of, say, 2% per annum to 6%, it will likely thereafter accelerate to far higher levels, largely thanks to Mr Geithner’s and Mr. Bernanke’s Bernanke’s economic policies of combining huge fiscal deficits, which are unlikely to come down in the next few years, with easy money!
In conclusion, then, Faber advises to shift more funds into Canadian dollars and into Asian currencies on a US dollar rebound. Such a rebound in the dollar and US government bond market is likely to coincide with a stock market correction. Overall, he says, keep accumulating precious metals. Longer-term investors meanwhile should move out of US government bonds in favour of commodities, commodity-related companies, and hard assets.
Related links:
Inflationistas, deflationistas and Goldilockeans – FT Alphaville
JPM says mild inflation good for stocks too – FT Alphaville
The new art of inflation mongering – FT Alphaville
Marc Faber: Hyperinflation coming to the USA – FT Alphaville
Guest post, Edward Harrison: Dollar weakness continues – NakedCapitalism