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Marc Faber: Fed's QE2 Could Trigger Market Correction

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By Dian L. Chu, Economic Forecasts & Opinions

Marc Faber, publisher of the Gloom, Boom & Doom report, discusses the potential impact of further quantitative easing (QE2) by the U.S. Federal Reserve in a Bloomberg interview on Oct. 36 (clip below).

Correction Triggered by QE2?

Faber sees Democrats--"sadly enough"--would get a shot at still retaining the majority, which would mean the monetary and fiscal policy will most likely stay on its current course.

Equity has done well in Sep. and Oct months; however, Faber thinks the markets are stretched in the inflation trade, and weak dollar, high commodity and precious metal prices, along with high equity valuations, all suggest a correction is overdue. 

Now, with QE2 being largely priced in, anything less than $1 trillion from the Fed would disappoint the markets and may trigger a correction in U.S. stocks, which could result in more quantitative easing.

But the correction should provide a buying opportunity for investors leading to an up cycle, instead of another bear market.   

Equity Better for the Next Decade

Looking at investing for the next ten years, equities, emerging economies in particular, would be a relatively better place to invest than U.S. government bonds, and cash.  However, Faber advises against financial, auto, and aircraft.  He's been in the high tech sector and likes Microsoft (MSFT).

Precious Metals Due for Pullback

Faber is currently recommending agriculture commodities, and the accumulation of precious metals.  On precious metals, he thinks they are overdue for "some kind of correction" by year end, and expect the next leg up in 2011.    

Dollar Near An Inflection Point

Faber says dollar is oversold, while in contrast, some of the foreign currencies such as Yen and Franc are overbought.  So, an inflection point could be near for a short-term dollar rally which could temporarily push down asset prices. 

He warns investors to be very careful about shorting dollar and long assets as the trade has become quite crowded.

Expect a Strong Pullback of Chinese Economy 

Although not quite gloom and doom, Faber does expect a "strong pullback" on the Chinese economy due to its many imbalances. 

According to Faber, the 0.25% interest rate hike effective Oct. 20 by the PBoC is "meaningless," because of skyrocketing property prices, and the cost of living inflation has gone up much more than the official figure.

He notes food prices have seen high inflation, and because of low GDP per capita where food would account for a high percentage of total expenditure, Faber estimates that the typical consumer inflation rate in countries like China, India, and Vietnam should be around 8 to 18 percent per year.

My Take on China Inflation

The inflation rate in China was last reported at 3.60 percent in September of 2010, climbing at the fastest pace in two years.  However, there are some hidden rampant inflation such as 50% on apparel, 20% on food, as reported by BusinessWeek.

Many analysts as well as academics also question how China could have such relatively moderate inflation rate given its double-digit growth and upward pressure on wages. Michael Pettis, a finance professor at Peking University, for example, estimates that "Inflation could well be 6 percent now for most people in China."

There's also another indicator--growth of money supply--which has a proven strong correlation with inflation. China's money supply, M1 and M2, has expanded by 56 percent and 53 percent respectively over the past two years. Currently, with the various tightening measures, both money supply figures are still growing at an annual rate of about 20 percent, based on Bloomberg data.

Furthermore, the continuing massive rural-to-urban migration will likely keep pushing up rents and food prices, just to name two of the many categories, and wages are expected to rise around 8 percent this year.     

As consumer inflation is typically a lagging indicator, China may experience continuing higher CPI.  That means Beijing is facing an increasingly difficult task of containing inflation, while maintaining sufficient growth to prevent a mass civil unrest.  As such, there will likely be more tightening, which would put the markets on a few roller coaster rides in the next two years or so. 

Nevertheless, since Chinese policymakers are keeping a close inflation watch, and are already taking actions (which is the key), I believe China is heading towards more sustainable growth.  And if China is "on a treadmill to hell" as Jim Chanos says, you can bet that the United States will be dragged along for the ride as well. 

Related Reading - Chanos Could Lose Big On China Bubble Bets

Video Source: Bloomberg via YouTube

Dian L. Chu, Oct. 29, 2010

 

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Sun, 10/31/2010 - 12:14 | 688920 JimboJammer
JimboJammer's picture

Mr.  Faber  ...  Gold  and  Silver  will  not  pull  back...  It  will  shoot  up..

Lots  of  data  says  so...

Sun, 10/31/2010 - 10:17 | 688839 Quinvarius
Quinvarius's picture

The sell QE trade already happened.  The skittish have been already suckered.  Thus, the bull has been trimmed for another rally.

Sun, 10/31/2010 - 11:05 | 688865 DR
Sat, 10/30/2010 - 22:18 | 688561 Judge Smales
Judge Smales's picture

"Bloomberg interview on Oct. 36." ??

See, we're already getting hyperinflation. The calendar is growing out of control.

Sun, 10/31/2010 - 10:52 | 688855 grunk
grunk's picture

The ruling elites are merely borrowing time from next month. Our kids will be born 45 years old. Live within your means? Let's start with the calendar. No more leap years.

Sun, 10/31/2010 - 00:32 | 688664 dark pools of soros
dark pools of soros's picture

you still using the sheeple's calendar? those who run the matrix have many extra days each month

Sat, 10/30/2010 - 22:05 | 688540 RockyRacoon
RockyRacoon's picture

The guy apparently makes a lot of money, and all people who make a lot of money are suspect, regardless of whether they are singing our tune or not.

e.g.: Bill Gross, George Soros, Buffet and friends.

Sun, 10/31/2010 - 10:00 | 688829 DR
DR's picture

Courtesy of the FED, QE* has lifted all asset prices and because of the gains now all investment managers think they are a genius.

Sat, 10/30/2010 - 20:26 | 688437 Silverhog
Silverhog's picture

Faber sees Democrats--"sadly enough"--would get a shot at still retaining the majority. Did Marc have a stroke? He's talking rag time.

Sat, 10/30/2010 - 20:08 | 688416 eigenvalue
eigenvalue's picture

Nevertheless, since Chinese policymakers are keeping a close inflation watch, and are already taking actions (which is the key), I believe China is heading towards more sustainable growth.  

 

The writer should do more homework. The Chinese policymakers simply pretend to keep a close inflation watch. Just look at their track record. For years, interest hikes in China have never kept up with inflation. 

There is already suggestion in China to raise the inflation target. Since interest hikes mean huge amount of dud loans, the incumbent Chinese leaders can never have the guts to do that.

Sun, 10/31/2010 - 10:58 | 688861 DR
DR's picture

 

 

State-Owned Bidders Fuel China’s Land Boom

"All around the nation, giant state-owned oil, chemical, military, telecom and highway groups are bidding up prices on sprawling plots of land for big real estate projects unrelated to their core businesses.

“These are the ones that have the money to buy the land,” says Prof. Deng Yongheng at the National University in Singapore. “Because in China, it’s the government that controls the money supply and the spending.”

http://www.nytimes.com/2010/08/02/business/global/02chinareal.html?ref=w...

 

Sat, 10/30/2010 - 20:27 | 688438 Mitchman
Mitchman's picture

China is the Mother of All Bubbles.

Sat, 10/30/2010 - 20:33 | 688442 eigenvalue
eigenvalue's picture

Exactly. Jim Chanos has done an indeed thorough research in China. China is Dubai x10000 and US subprime x 100.

Sat, 10/30/2010 - 22:22 | 688564 asiablues
asiablues's picture

I've written many posts (on zh and other sites) refuting Chanos, et. al. and will not repeat myself here. 

Mr. Chanos got lucky when Enron came to pass without the usual "bailouts" we now has grown so accustomed to see.  Enron is a company, and China is a country, and a huge one for that nmatter.  He will have to wait at least a decade for that to happen in China (he admitted this much himself as quoted by Reuters ), if it ever takes place, and if his portfolio can meet margin calls along the way.    

China, U.S. and Dubai are like apple, orange and pear from demographics, resources, to market structure.  Two crisis formations do not equal a thirld one in China.       

Sun, 10/31/2010 - 00:05 | 688637 eigenvalue
eigenvalue's picture

Guess you can read Chinese. So please check the following sites. You will have a better idea about the Real China and stop sitting in front of a pile of "statistics" and having pipe dreams.

http://user.qzone.qq.com/622000525

http://www.tianya.cn/publicforum/content/news/1/187369.shtml

http://www.tianya.cn/publicforum/content/develop/1/502255.shtml

http://www.tianya.cn/publicforum/content/free/1/2009624.shtml

Sat, 10/30/2010 - 23:40 | 688621 eigenvalue
eigenvalue's picture

I read your "analysis" but I think it is totally trash. Guess you have never lived in China for more than 2 years because your analysis was mainly based on "statistics" provided by the National Bureau of Statistics.

One of my high school classmates currently works at the National Bureau of Statistics. He tells me that these "statistics" are dictated by the "leaders" not collected through surveys. Actually that is already an open secret for the Chinese. One example is that the house prices increased by 1.5% in 2009 according to the National Bureau of Statistics. Anybody in China except those who "made" the number would puke over this number. 

Another argument of your "analysis" is that Chinese officials will do the right thing and avoid the crash. Well, since you are from Taiwan, guess you recognise simplified Chinese. Please google "Ying Di" (Movie Emperor") plus "Wen Jiabao". Wen Jiabao vowed to control house prices every year. But you see the results. 

In terms of demographics, do you know the "one-child policy". The demographic picture in China is far worse than anybody could imagine. Overseas investors now are still bewitched by the story of so-called urbanisation. Young farmers in those poor rural areas "will" continue moving to big cities and working in sweatshops. The cheap labour in China is thought to be endless. That's bullshit. Just go and visit any village in central provinces like Henan or Shaanxi for yourself. What's left in those villages are toddlers and the elderly. That's why food prices keep increasing in China because farming is not profitable! Most of the labour has ALREADY moved into cities.

It is true that Enron is a company and China is a country. However, Citigroup is a company like Enron and Japan is a country like China. Citigroup got bailed out but its stock prices are still below $5, far less from its peak. 

Anyway, we need some gullible people to buy the "China Story" for the clever to make money. Financial markets are a zero-sum game, are they?;)

Sun, 10/31/2010 - 05:30 | 688759 jeff montanye
jeff montanye's picture

to me, another suggestive item for your perspective is that two other times in modern financial history have so large a portion of foreign currency reserves been in one country as are now in china: u.s. 1929, japan 1989.  

Sun, 10/31/2010 - 08:39 | 688802 eigenvalue
eigenvalue's picture

Nowdays, lots of so-called experts on China have little idea how this filthy country works. For them, China simply means those five-star hotels on the Bund and the "statistics" provided by the National Bureau of Statistics. They haven't the faintest idea how precarious China is right now. 

Sun, 10/31/2010 - 10:30 | 688846 steve from virginia
steve from virginia's picture

The key to China's future is the amount the Chinese political elite are leveraged to the real estate bubble.

A the municipal level the leverage is huge with massive 'investments' on both sides of the books. Not only are the figures gigantic but the resulting high- rise piles are effective ads for the scams.  The Chinese property bubble is a currency trap. Letting the bubble deflate would crash the apparatchiks' portfolios, the same folks who hold the levers of power.

Since the Chinese elite won't bankrupt themselves the solution will be for the Chinese banks to continue to lend as they have for the past five years, putting more and more funds into circulation.

I've been calling for Chinese hyper- inflation since last June and with QE looking like a 'go' what is questionable is the rate. 5%? 7%? 11%?

That's the Chinese rate of inflation per day, of course.

http://economic-undertow.blogspot.com/2009/06/hyperinflatoin-in-china.html

 

Sat, 10/30/2010 - 18:58 | 688341 mynhair
mynhair's picture

My next fart could cause a market correction.

Stay tuned.

Sat, 10/30/2010 - 19:19 | 688370 A_MacLaren
A_MacLaren's picture

Beans, beans the magical fruit...  What's for dinner?

Sat, 10/30/2010 - 22:05 | 688543 LeBalance
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