Marc Faber predicts a 20% fall in markets

Stocks have moved up substantially and are likely to correct. Faber prefers emerging markets.

Stocks may have already peaked for this year and might drop 20 percent amid renewed deflation fears, said Marc Faber, the publisher of the Gloom, Boom & Doom report.

The dollar is likely to rebound from an “oversold” position, which will be negative for equities, Faber said in an interview with Bloomberg Television on the sidelines of CLSA’s annual investor conference in Hong Kong.

“I wouldn’t be surprised if we had seen the peak of the market for this year because the economic news isn’t going to improve very much,” Faber, 63, said. “The correction in the market has been overdue for quite some time.”

The investor predicted on March 9 in a Bloomberg interview that equities would rally because of government stimulus measures. The Standard & Poor’s 500 Index dropped to a 12-year low that day and has since climbed 55 percent. The MSCI World Index rallied 63 percent in that time.

The S&P reached a high for 2009 of 1,071.66 on September 22, and has since slipped 2 percent amid concerns the rally had outpaced prospects for a recovery in earnings and economic growth. France, Germany and Japan are among economies that have emerged from recession.

The Bank of Japan upgraded its assessment of the economy on September 17 though it remained concerned about the strength of the recovery.

Federal Reserve Chairman Ben S Bernanke said on September 15 that the US recession is “very likely” over, while warning that growth may not be strong enough to quickly reduce unemployment.

Credit crisis
In a presentation to investors at the CLSA forum after the interview, Faber reiterated his bearish outlook for Western economies because fiscal and monetary stimulus efforts have only delayed a coming crisis instead of averting it.

The global credit crunch, worsened by the collapse of Lehman Brothers Holdings Inc. a year ago, has caused more than $1.6 trillion of write-downs and losses at the world’s biggest financial institutions. The MSCI World Index slumped by a record 43 percent in 2008.

“You cannot postpone the hour of truth forever,” said the Swiss national, who now lives in Thailand. “The next stage is for total breakdown of the financial system and for an economic and financial crisis that will bankrupt governments.” The investor predicted in the interview with Bloomberg that gold “should correct” in tandem with equities. Gold futures rose above $1,000 an ounce for the first time in seven months on September 11.

‘False breakout’
“We probably had a false breakout on the upside,” he said. “I wouldn’t be surprised to see a little bit more of a correction down to maybe $920 per ounce.”

Faber had recommended investors buy gold since the start of an eight-year rally and maintained that he isn’t going to sell his holdings of the metal despite his prediction for prices to fall.

Faber expects the dollar to rally as concerns about deflation prompt risk-averse investors to repatriate funds back to the US. The Dollar Index has slumped 8.4 percent in the past six months amid speculation investors are using borrowed dollars to fund asset purchases in other countries.

The dollar is ultimately a “doomed currency,” as is the British pound, he said, because high debt levels in both countries will lead to inflation as central banks monetise debt. Asian countries, which have low levels of leverage, should continue to grow in spite of any economic decline in the US and the UK, he said.

UK consumer debt as a proportion of the country’s gross domestic product exceeded 100 percent at the end of the second quarter, while the US was more than 90 percent, according to CLSA data. China, India, Indonesia and the Philippines had less than 20 percent.

“On any setback in Asian shares, you should gradually accumulate,” he said.

The authors are Bloomberg News columnists. The opinions expressed are their own