Marc Faber explains in this interview the consequences of tapering and the potential motives of the US Fed.
First, however, he expresses his concerns about the stock market. He compares the situation in Asia with the one in the US. The Asian markets were up some 20% between the beginning of the year and May but came down sharply since. On the other hand, the S&P500 reached its peak on August 2nd. Meantime many emerging markets are down 50% since their 2009 highs.
Where would asset allocators put their money in: the S&P (which is in the sky) or the emerging markets (which are in the dumps)? If a decision is made to put money in equities, it would be in depressed markets.
Marc Faber owns shares in countries like Malaysia, Singapore, Hong Kong, but he admits not being in the mood to increase those positions. In Thailand, among other countries, there is no growth at present time. There is a meaningful slowdown in many countries.
Mr. Faber points to the fact that this stock bull market is 4 years old meantime. It started in March 2009. The global economy started slightly to recover in the summer of 2009 as well. Stocks are not the greatest bargain anymore.
The treasury market is greatly oversold right now, so a bounce is possible. In case the US Fed would announce to taper off, let’s say from 85 to 65 billion USD per month, then the bond market would react strongest on this by rebounding. In such a case, rates would come down. Longer term, the bond market has to be concerned about the continuous asset purchases, which are basically monetization and, hence, symptoms of inflation would appear somewhere.
All leaders have only interventions in their mind while the market has been proven to be a much better allocator of assets. When QE3 and QE4 had been implemented, the aim was to lower interest rates. The rates have been bottomed in July 2011 on 1.34% and are now standing at 3%. So the aim of the Fed has been totally missed. That’s why the bond market would like a high level of tapering.
Although Mr. Faber has not been talking about gold in this particular interview, we know what a tapering decision would imply for the precious metals. We remind readers that next Wednesday and Thursday, an FOMC meeting with official press conference will take place. Expect a signficant volatility going forward, in all markets probably.