Marc Faber: No S&P below 1,010 – Agriculture Attractive

Posted by Marc Faber

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Speaking on the road ahead for US markets, Investment Guru Marc Faber said he does not see the S&P going to 1,000 levels. He feels the July 1 low of 1,010 will hold. “If the S&P 500 goes to 1,000, then you may be better off being in shares than in government bonds, and bank deposits. I don’t believe we will go to 1,000. Massive quantitative easing will come between 870 and 950 on the S&P and my inclination is to believe that the July 1 low at 1,010 will hold. The worse the economy becomes, the more they will print money, and the more equities can go up.”

He sees more quantitative easing forthcoming. “The Fed will continue to monetise. They will never let up. They will print and print and print, until the final crisis wipes up the entire system.”

Below is a verbatim transcript of the interview.

Q: We have got a report that the Fed might consider rolling over their purchases. How should investors read that?

A: Investors should have listened to me already six months ago , when I wrote that the Fed would continue to monetize—and this is my view—they will never let up. They will print and print and print, until the final crisis wipes out the entire system.

Q: Is that because they are more concerned about deflation than anything else?

A: They are very bad forecasters of economic events in particular—that was the case for Mr Greenspan but Mr Bernanke is in the same boat. He has no clue what the economy is doing and so they misread in 2007 the severity of the forthcoming crises and then they misread the last few months the strength of the economy, which shows no signs of strengthening but signs of weakening everywhere in the world and therefore I would argue that the Federal Reserve with its policy, and with the writings and papers Mr Bernanke has published about the great depression, that more quantitative easing will be forthcoming and significantly more.

Let’s say they push money into the system that is true it may not go into stimulating capital investments, it may not go into consumption but it will go somewhere. Now this somewhere in the last few years has been mainly emerging economies that have accumulated huge foreign exchange reserves as a result of the US trade and current account deficit that led to the surpluses in these emerging economies.

There isn’t outlet for excessive money creation. It can be in agricultural commodities or it can be in emerging economies or one day it could in wages in the United States—I do not think it will happen. But we have inflationary pressures in emerging economies and eventually I suppose that this labour arbitrage in the world and the imbalances—overconsumption in the US and capital spending and essentially savings in emerging economies—that this will lead to a readjustments of currencies and also to a readjustments of cost in other word that labour cost in emerging economies will go up substantially whereas in the Western world they will be flat to down in other words that real wages in the Western world will decline. But in this environment, you can’t be overly dogmatic. There will be a lot of bouts of inflation—sudden explosions in prices like last year.

Everybody in the world has some concerns about the ultimate value of the US dollar and also obviously about the value of US government bonds, because if the fiscal deficits stay at this level and in my opinion, they are likely to actually increase over time, then you will have a credit problem in US, sooner or later. It will not happen in next three years, but thereafter. So I think that the diversification out of US dollar treasuries is desirable and that’s why I am not all that negative about equities.

If you look at the different investment alternatives—equities, bonds, real estate, commodities and precious metals—I think that equities should be represented in a portfolio, in particular, if you are very bearish about the world long-term, you probably be better-off in equities than in bonds.

Q: Just looking at where the wheat prices have gone at the moment. You like the soft commodities?

A: Somebody said before that markets are now highly correlated and that’s true to some extent but not true from other perspective. Say 2008 everything went down and the US dollar rallied and the US government bonds rallied and more recently it’s been when you have a strong day in the stock market bonds go down and so forth. So not everything is correlated and the same applies to agricultural commodities.

I wrote already six months ago that unlike any other commodity the agricultural commodities had gone down in 2009 certainly unlike the industrial commodities and that wheat was, at the beginning of the year, at 200 years low in real terms and when food prices move they move a lot and they have a huge impact on the world because there are studies that have been made by the Federal Reserve Bank of St Louis that show that actually food prices are a leading indicator of inflation. So I think that at the agricultural sector is actually quite attractive.

Q: How much of this attractiveness in the agricultural sector is tied to the growth we are seeing over in China, in India where there is so much high demand for agriculture?

A: There are two factors in agriculture—obviously demand, expanding when you have people moving from poverty to the middle class and than to more affluent class they eat more specially protein rich types of food and then you have the other impact that is more meaningful and this is supply interruptions by droughts and floods and so forth. This year we have a lot of unusual weather. We have floods in Pakistan and we have heat waves in Russia and so forth that may disrupt crops.