Gwen Robinson of the website FT Alphaville (UK) talked about the latest client newsletter from legendary investment adviser Marc Faber this past Monday. Robinson wrote:

Investment guru Marc Faber is living up to his “Dr Doom” moniker with a client newsletter this week that seems to be as cheery as the English weather.

“The global economy is decelerating rapidly, corporate profits are declining and the weakness in financial stocks is now spreading through all asset markets,” he notes. Oh happy days.

There’s a small spot of relief though - if Faber is correct in his prognosis that stocks and commodities are near-term oversold while the US dollar is short-term overbought. A temporary reversal is possible but then, he warns, as the credit crisis spreads into the real economy, be prepared for a slump in all asset classes.

Ultimately, just like in the 1970s, we are currently in “a stock and asset picker’s market”. Volatility will stay relatively high and there will be large moves in individual stocks, sectors and asset classes (up and down).

Robinson also spoke of Dr. Faber’s near-term investment outlook. She wrote:

In conclusion, then, what could happen in the next few weeks in Faber’s view is a rebound in the euro, “which is oversold near-term”, and a rebound in equities and selected commodities. However, he cautions, from a longer term viewpoint, stocks remain high and given the decline in corporate profits they are also far from inexpensive.

Furthermore, judging by the course of asset markets and individual stocks, the downside risks remain rather significant.

On commodities, “we have reached a top in the CRB Index”, says Faber, although it is unclear whether this top turns out to be an intermediate top or a longer-term top.

At some point, he says, money-printing by all the world’s governments will lead to higher inflation and commodity prices (this assumption would also be consistent with the Kondratieff Cycle).

However, we should not forget that the current financial crisis and credit growth slowdown is unprecedented in the last 30 years or so and that the through of the Kondratieff down-wave, which lasted in real terms from 1974 to 2001, was incomplete because it was not accompanied by a massive debt-liquidation.

As a result, a deflationary bust originating from debt liquidation should not be ruled out entirely before highly inflationary monetary and fiscal policies around the world bring about very high inflation rates. But that may only happen after 2012 and in the meantime, “all asset markets could continue to suffer badly as credit contracts and liquidity evaporates”.

In this scenario, gold is likely to shine again at some point. As indicated above, asset markets and non-US currencies have become near term oversold and could rebound shortly.

So, he concludes: use rebounds to lighten positions and to increase US dollar positions.

In particular, use any rebound in stocks like IBM, Apple, Amazon.com and Research in Motion as a shorting opportunity (with tight stops). For individuals the purchase of put options may be a less risky alternative.

Source:

“Dr Doom: More gloom, the Kondratieff wave and what comes next”
Gwen Robinson
FT Alphaville (UK), September 8, 2008

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