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Faber Dismisses Pretcher's View

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Marc Faber says if the Dow falls below 1,000, buy a self-sustainable farm surrounded by high voltage fences

Source: BI-ME , Author: BI-ME staff

Posted: Sat July 31, 2010 1:12 am

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INTERNATIONAL. Marc Faber the Swiss fund manager and Gloom Boom & Doom editor dismissed the possibility that the the Dow Jones Industrial Average could drop to 1,000 points as suggested by some analysts because of debt deleveraging.

In the August edition of the ‘The Gloom, Boom & Doom Report’ Marc Faber says if the DJIA where to fall by more than 20% from the present level there would be further massive fiscal and monetary stimulus packages, not just in the US but worldwide.

"These economic policy measures would likely fail to boost economic activity in the US but could support asset markets," Faber said.

He was responding to Robert Prechter, who based on his interpretation of Elliot Waves, Fibonacci numbers and socioeconomic trends believes that the stock market is historically overvalued in terms of dividends and earnings, because of a "great rise in positive social mood'.

"The amount of outstanding credit today is so large that system-wide defaults could lead to as much as an 80%- 90% decline in the volume of dollar-denominated credits worldwide," according to Precther.

"In such an environment, surviving dollars and dollar credits, representing the denominator of the DJIA, will rise in value, and the Dow, along with everything else not used as money, will fall in dollar price," Faber said.

"The question here is really, with the Dow below 1,000, what kind of dollars, and especially what kind of dollar credits, will survive," Faber added.

"It is safe to assume that almost all banks in the world, and almost all governments, will be bust."

"I want my readers to think very carefully about the implications of a Dow below 1,000 (or even just below 5,000). Does anyone really think that the money printing presses won't run 24 hours a day? For sure I don't," he wrote in his August report.

In a speech last Friday on the final day of the 11th annual Agora Financial Investment Symposium in Vancouver, Faber said he was a believer that the stock market lows of March 2009 will not be revisited.

"You have people like Robert Prechter who think the Dow will collapse to 700 because of debt deleveraging."

Debt deleveraging could happen, but the Dow will not fall because of monetary policy. The Fed will keep everything inflated in nominal terms, the legendary investor expained.

"And if the Dow does go to 700, you'll have more to worry about than your investments".

"All the banks will be bust. The government will be bust. You don't want cash if massive deflation happens".

It will be worthless. You have to think very carefully about hardcore deflation, Faber added.

In his Agora Financial Investment speech Faber also reiterated his often stated views about the US Federal Reserve.

The Fed doesn't seem to have learned anything at all from its mistakes, he said. Their current policy of cutting rates to zero is designed to create sustainable growth, but they've created larger and larger volatility in markets and there are many unintended consequences of their actions.

The Fed doesn't pay any attention to asset bubbles when they grow. That's their official policy. But they flood the system with cash when bubbles burst. They only care about bubbles when they crash. It's a very asymmetric response and it has many unintended consequences.

Letting bubbles inflate and then fighting them when they burst actually worked for a while. That's what makes it dangerous.

It worked in the '90s. But you shouldn't read too much into this: This period was assisted by unusually favorable conditions. From 1981 until early last decade, commodities were in a bear market after a bubble in the '70s and early '80s. And interest rates were falling throughout the '80s and '90s, too. They almost never stopped falling. That made Fed policy look like it was working.

Today, the Fed has created a bubble in everything, in every single asset class. This is an achievement even for a central bank. Stocks, commodities, bonds, real estate, gold. Everything goes up when the Fed prints. The only asset that goes down is the US dollar.

Speaking at the the CFA Institute's summer seminar in Chicago on Thursday, Faber warned investors against government bonds.

"When the turn comes and inflation and rates rise, all the money in bonds will move into equities," he said.

"Money printing is extremely dangerous," Faber said, adding that if he was the Federal Reserve chairman, he would "push rates up and push down the deficits".

"It would be painful," but in the long run would relieve the threat to the global economy that comes from massive levels of debt, he added.

So what should investors do if ever the Dow falls to 1000?

Buy a self-sustainable farm in the middle of nowhere 'surrounded by high voltage fences and barbed wire and equipped with booby traps and an arsenal of machine guns, hand grenades and armed vehicles guarded by vicious Dobermans".

Edited by ringledman

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The whole point is in this line:

In the August edition of the ‘The Gloom, Boom & Doom Report’ Marc Faber says if the DJIA where to fall by more than 20% from the present level there would be further massive fiscal and monetary stimulus packages, not just in the US but worldwide.

By how much more than 20%? And when will the packages be delivered? All about timing.

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