A tribute to Marc Faber, part one: US dollar, Nasdaq, gold and oil (page 1 of 3)

So what did Dr Doom get wrong in the 2000s? Not a great deal really, but actually his biggest error was a repeat of the error of pessimism he committed in the 1990s about the length and durability of the US stock market upturn.

What he missed entirely was that the start of the Second Gulf War in spring 2003 would be a 'Bottom War', marking the bottom of the US stock downturn that began in early 2000. He thought US stocks were down and would fall still further.

His record on the US dollar was much better, and in February 2003 he was perfectly correct in saying: 'In the course of 2002, we have repeatedly warned that US dollar weakness was only a matter of time.

'Since the summer of 2002, the dollar has weakened considerably and we feel that the 1995-2002 bull market has definitely come to an end and that, after a brief technical rally, more dollar weakness should be expected in 2003, as the US economy continues to disappoint.'

What actually happened was that the nominal US stock market rally was then supported by the declining value of the US dollar, and the value of US equity investments if denominated in non-US dollar currencies drifted sideways.

So in that sense Faber's pessimism about the performance of US equities throughout the 2000s was proven correct as US stocks went nowhere in foreign currency terms.

Nasdaq spot-on

He was also right as regards the Nasdaq. In October 2000 his AME Info column noted: 'This Nasdaq 5000 level may very well turn out to be as much of a 'milestone' in financial history as the Nikkei 39,000 level reached in December 1989.

'When the Nasdaq reached in March the 5000 level, this Index consisted of about 4,800 stocks with a market capitalisation in excess of US $6 trillion. Based on combined Nasdaq earnings estimates for the year 2000 of US$25bn, these stocks had, in March 2000, collectively a P/E of about 240!

'Now, let us assumes that the Nasdaq with its $6 trillion valuation can grow its earnings at a compound rate of 20% per annum for the next 10 years 'without interruption.' At the end of the period, in 2010, let us also assumes that the P/E of the Nasdaq will be twice its earnings growth rate (of 20% per annum). In other words the Nasdaq will sell for 40 times earnings.

'Since the S&P 500 sells for about 28 times earnings, the assumption of a P/E of 40 for the Nasdaq is quite realistic. Under this scenario, the Nasdaq's current $25bn in earnings will grow to $155bn in 10 years time and with a P/E of 40, these $155bn would have a value of $6.2 trillion. In short, even under this extremely and, in my opinion, totally unrealistic scenario, the Nasdaq would at best be in 10 years time where it was in March of this year.'

With the benefit of hindsight this is a superb application of sober investment analysis to the dot-com boom folly that still held some investors fixed like rabbits in a car headlights in late 2000. And as we now know even seven years later the Nasdaq was still only worth half of its 2000 peak.

Gold tipped in 2001

But his most brilliant call was undoutedly to buy gold in early 2001, way ahead of most other market commentators and following a 20 year bear market that had left the gold market in a mood of deep depression and dispondency. It was an incredibly radical call, and first appeared in an article in February 2001 with a groundbreaking fundamental analysis of the gold market.