INTERNATIONAL. Dr. Marc Faber the Swiss fund manager and Gloom Boom & Doom publisher believes markets will punish central banks, at some stage, for their extensive monetary easing. This could materialize as a bonds market collapse or a stock market bubble.
He reckons investors should enjoy the rally while it lasts, and says he is already unwinding his long positions because when 'euphoria' builds up and everybody is investing, markets turn down. He also thinks investors who don't own gold are in "great danger".
Speaking on the phone to CNBC's "Closing Bell" on Wednesday, Faber told Maria Bartiromo: "I think it [a correction] can start any day. We are very overbought but it's also possible that we have a mild correction in February and then a further increase in stock prices."
He sees a possibility of a lot of volatility this year in equity prices. "I'm selling shares at the present time. I'm reducing positions because there is euphoria building up."
Faber concedes it is difficult to pinpoint the timing of the correction as investors have no immediate alternative to owning stocks because of plenty of corporate and institutional money on the side lines. "That is why, maybe the market goes up first strongly but that would be a major embarrassment for central banks to have a real stock market bubble while unemployment isn't going down and the global economy isn't growing."
But the bigger embarrassment he says, would be when finally the stock markets crashes because they [central banks] can't cut interest rates any further or bond prices really sell off, in other words, "for the market to push up interest rates".
"The central banks aren't going to boost up interest rates, but the market may boost it up," he reckons.
From a global market perspective, Faber at the present time thinks "Ukrainian stocks are very low, Vietnam is inexpensive, and Chinese stocks are relatively speaking inexpensive.
In terms of US stocks he sees mining companies and resource companies as relatively cheap. On the other end of the spectrum, builders and technology are vulnerable and may lead the sell-off
Be careful about stocks when you can't see why they can go down
In a live interview on CNBC Asia's "The Call" with Bernie Lo on Thursday, Faber further elaborated on his prediction of an upcoming market correction: " When you print money, the money doesn't flow evenly in an economy. It flows to some people or to some sectors first, and in this case, it flowed into equities, and until about five months ago, bonds… I believe that markets will punish central banks at some stage through an accident."
"For the first time in four years, since the lows in March 2009, I love this market because the higher it goes the more likely we will have a nice crash, a big time crash," he added.
Answering the "why should stocks go down, everything looks perfect" calls, Faber explains:
"A year ago, the mood in Europe was horrible and nobody could see how stocks could go up. Now since May 2012, less than a year ago, Portugal, Spain, Italy, France, are up 30%-40% and Greece has doubled."
Reminiscent of the famous Warren Buffet quote, “Be fearful when others are greedy and greedy when others are fearful," Dr Doom told Bernie Lo: "You need to buy stocks when there's no reason to buy them...and I will be careful about stocks when you can't see why they can go down."
The S&P 500 has seen its best start to a year since 1997, rising 5.2% last month and the Dow topped 14,000 today for the first time since October 2007.
"With the US fiscal cliff behind us, but automatic spending cuts due on 1 March, there is a risk that the US equity market will give back some of its recent gains ahead of the deadline for implementation of cuts" Mark McFarland Chief Investment Strategist, Private Banking, Emirates NBD, the United Arab Emirates biggest lender by assets, said in a note.
"It is quite clear that President Obama does not fully appreciate the extent to which US welfare and retirement budgets are unfunded on a long-term basis. This fact alone makes the likelihood of a near-term resolution, as opposed to a quick fix, much less likely. Thus our US equity weightings for conservative clients have been paired back to under-weights"
Federal stimulus and deficit spending can't create sustainable economic growth
Faber said that although data this week show the US economy contracted 0.1% in the fourth quarter of 2012, he doesn't pay much attention to GDP figures because they are "difficult to calculate." But, unemployment is weak and overall economic activity- except the economy of wealthy people is not very good, he says.
The median forecast of 83 economists surveyed by Bloomberg called for a 1.1% gain in GDP. Projections ranged from 0.3% to 2.1%. The GDP estimate is the first of three for the quarter, with the other releases scheduled for February and March when more information becomes available.
For all of 2012, the economy expanded 2.2% after a 1.8% increase in the prior year.
"After more than four years of nearly never ending monetary stimulus and more than US$5 trillion worth of new federal debt, the economy remains stuck in a serious recession, writes Peter Schiff, CEO of Euro Pacific Capital, in a statement in reaction to the GDP data.
The report shows that federal stimulus and deficit spending can't create sustainable economic growth," says Schiff adding that GDP report shows just how out of touch most professional economists remain with respect to the fundamental weakness of the US economy.
Why aren't more people buying gold?
Faber says he is surprised that only a minority of people own gold and precious metals, but on the other hand that explains why gold is not in a bubble.
Stocks may outperform gold for a while but in general , I don't think that gold, silver and platinum will all collapse unless if you have a deflationary collapse
Asked by Maria Bartiromo to explain the rationale behind his assertion that he will never stop buying gold and whether this amounted to a strategy since gold, like any other commodity, can go up and down, Dr doom said: "I want to tell you something about gold, Maria. I buy gold because I’m fearful that we will still have a systemic crisis that we will have wars and so on and so forth, so I’m buying gold because I am fearful."
Urging the CNBC anchor to buy the precious metal, Faber said: "But I am sorry to say Maria, you don't own any gold and you are in great danger [precisely] because you don't own any gold.
"I am fearful and I own gold and you are in danger because you don't own any gold," Faber reckons.
Credit Suisse published a note today entitled 'Gold: The Beginning of the End of an Era', arguing that the 2011 gold price peak could prove to have been the high "in this cycle" as the financial crisis grows less acute.
In the "where's gold heading next" debate, one is reminded that gold prices have risen because of excessive monetary policies which ultimately lead to the debasement of fiat currencies, inflation, and the loss of confidence in our financial system. In turn every period of inflation eventually (timing is key) ends up with deflation. When Marc Faber (67 this year) says "I will never sell my gold in my life, are we to conclude that the inflationary period will last another 15-20 years?
The jury is out.
About Dr. Marc Faber
Dr. Marc Faber was born in Zurich, Switzerland. He went to school in Geneva and Zurich and finished high school with the Matura. He studied Economics at the University of Zurich and, at the age of 24, obtained a PhD in Economics. Between 1970 and 1978, Dr Faber worked for White Weld & Co in New York, Zurich and Hong Kong.
Since 1973, he has lived in Asia. From 1978 to February 1990, he was the Managing Director of Drexel Burnham Lambert (HK). In June 1990, he set up his own business which acts as an investment advisor and fund manager.
In 2000 Faber decided to spend more time writing his newsletters as well as growing his advisory business. He moved back to his home in Chiang Mai, Thailand, maintaining only a small administrative office in Hong Kong.
Dr. Faber publishes a widely read monthly investment newsletter 'The Gloom Boom & Doom Report' which highlights unusual investment opportunities, and is the author of several books.