In his latest interview with Moneyshow.com, Marc Faber states that the current risk/reward in the stock market is not particularly favorable. He is quoted as saying:
Q: How high can the market go before, if I read your work correctly, America falls apart and takes everything down with it?
A: I’m not sure that the risk/reward now is particularly favorable. The inflationary school of thought says the Federal Reserve has no other option but to print money, and that will lift asset prices. The Standard & Poor’s 500 could get to 1,000 or 1,100 or depending on how much money they print, possibly even higher than that.
Q. You’ve warned that US risks Zimbabwe-style hyperinflation and then more recently said US inflation could reach 10% to 20% in five to ten years. Isn’t there a big gap between those outcomes?
A. We have the worst recession since the Second World War and actually the prices of necessities are still rising, including food and energy. So, one day within the next ten years, when the economy slowly recovers and when further dollar weakness occurs, inflationary pressures will increase. And once you have inflation increasing, it’s not easy to stop it unless you implement tight monetary conditions, which would imply very high real interest rates. And I don’t think that Mr. Bernanke or the US government have any intention whatsoever of having positive real interest rates. Combine easy monetary policies with large fiscal deficits, and the likelihood of much higher inflation is there. Once we go to 10% inflation, 20% becomes quite likely and once we go to 20%, we can easily go into hyperinflation.
Click here for the complete Marc Faber Moneyshow.com interview
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“So, one day within the next ten years, when the economy slowly recovers and when further dollar weakness occurs, inflationary pressures will increase.”
I think this statement gives us a much clearer picture of where Faber sits on the Deflation/Inflation debate. It is important to note that he is not necessarily making a short-term forecast for inflation, but points out that a key inflationary trigger will be real economic recovery (not the so called green shoots we have today). However, i have never actually heard Dr. Faber refer to the current economic climate as ‘deflationary’. He oftens cites the price of food, energy and insurance as evidence of our current inflationary environment. I suppose that there are some inflationary pressures out there now, because I can say honestly that I pay more for gas, food and insurance now than i did, say, 3 years ago.. But Mike Shedlock had a good article on the deflationary side of our economy that is worth reading to get a different perspective: http://globaleconomicanalysis.blogspot.com/2009/06/embrace-deflation-its-cure-not-problem.html
Mac