The US Federal Reserve will throw more money into the system as the economy deteriorates and so it would not be very favourable to be long on the US dollar, Faber added.
On commodities, Faber said that prices would continue to go up in the next couple of years, regardless of the global scenario as the supply of commodities could not be increased.Commodity prices will find support due to excessive quantitative easing by the US and the global commodity prices will rise if economies improve.
Q: What is your own belief because as you said the camps have been split between what this looks like where the market might go? What do you believe for the Indian story?
A: It is not a question of what I believe. I was fortunate to essentially accumulate equities in December and then again in March and also play the rise in commodity prices as well as the rise in bond prices. At the moment I have to say when I look at the risk reward when the market was very oversold in March of this year, when the S&P was at 666 and the India at less than 8,000 then I compare it to today’s level. I am kind of neutral at the present time. I am leaning towards the view that we will get a correction now but most likely not new lows and then another move into July but the gravy is out of the markets at the present time. I don’t see a lot of opportunities right now where I would say the risk is very small and the opportunity is huge.
Q: So you are saying the next time there is a dip for whatever reason in global equity markets, it is a dip that should be bought into because whenever that dip happens, people will once again start talking about the fact that the bear market rally is over and we are now going back to retest the old lows of October or March? Would that be the right view or would it be the right view to buy into that dip whenever it comes?
A: I am not sure that it is the correct view but my sense is that the markets will correct now and they will correct for a variety of reasons partly because it will become obvious that the global economic recovery is not very strong or not taking place at all. Added to that, we have rising bond yields and renewed dollar weakness, we still have plenty of problems economically and financially. The markets should go down now and in this correction and as the economies kind of deteriorate once again, I am convinced that the US Fed will once again throw money at the system and there will be even larger deficits, more money printing and so the global economy may not recover much but asset markets due to the excess liquidity created by the Fed may hold.
Q: There has been a lot of talk even since crude bounced back close USD 60 per bbl that maybe crude is going back above USD 75-80 per bbl once again and it put a durable bottom in place around USD 35 per bbl. Do you agree with that?
A: There are some commodity bulls and they think that the oil price will continue to go up and there are some bears who believes that the commodity’s bull market that we had essentially since March when the CRB (Commodity Research Bureau) touched around 200 is just a bear market rally and that commodity price will collapse once again.
I am leaning towards the view that regardless of the global economy. If the global economy strengthens or is very strong the demand for commodities will go up and lift commodity prices and the weaker the global economy is, the more money Mr. Bernanke will print and this will lift commodity prices because the supply of commodities cannot be increased at the same rate as Mr. Bernanke’s money printing presses issue new bank notes. So, in general I would lean towards the view that oil prices and other commodity prices will move high over the next couple of years.
Q: There is a view here in conjunction with yours that markets may not go back to test the lows they saw earlier and perhaps they set a higher base for themselves. Would you agree with that when you say you are looking for a dip, how meaningful do you think that dip might be from current levels?
A: A lot of equities have gone up by more than 100% and so we could easily see in individual equities corrections of 25-30% or even more. But in general in the case of India we went from less than 8,000 to 14,000. I wouldn’t be surprised to see something like 10,000-12,000 in a correction but maybe it won’t happen. All I am saying is the risk reward today of buying equities is obviously not as favourable as it was in March when the markets were very depressed, very oversold and when sentiment was incredibly negative. Now sentiment has surprisingly turned very optimistic and most people think ‘the worst is behind us, let us pile into equities’.
