A tribute to Marc Faber, part two: Calling the US housing top (page 2 of 2)

In other words, yes oil money had been pumping into the stock markets of the region. But as Faber noted, the expansion of this cash flow was slowing down, and from the end of 2005 oil production had been declining slightly and prices had stabilised.

Thus, while liquidity was still strong, it was not strong enough to support an exponential growth in stock market prices. And once stock markets lost their upward momentum then the same multiplier effect that had pushed them upwards moved into reverse, and they had fallen back sharply. Ergo, Middle Eastern economies had experienced a tightening of monetary conditions in 2006 almost without realising it.

Yet even our Dr Doom reckoned that the regional stock market crashes might have gone too far, and in his AME Info column he forecast a 'rebound in Arab bourses by 20-30% over the next few months, although new all-time highs are out of the question.'

For the Saudi bourse his prediction was spot on, the UAE took another year and only after Faber had repeated his forecast at a seminar in Dubai, which appeared to spark a local rally.

He continued be be a major gold bug, arguing in October 2006: 'Despite its correction from $730 to the current level, gold is still up 12% year-to-date compared with a gain of 7% for the S&P 500. I continue to believe that over the next few years gold and silver will significantly outperform US financial assets. In fact, I am leaning increasingly towards the view that both buyers of bonds and equities could get it badly wrong.'

Bond crisis

Bond buyers would get it wrong, he predicted, because inflation would continue to increase despite a weaker economy and the stock buyers would get it wrong because corporate profits would disappoint.

The result would be 'a more meaningful downside correction starting soon, or even a nice little crash', he said.

'In addition, the US dollar has begun to weaken significantly against the Chinese RMB, which could add to inflationary pressures. So I am far less optimistic after the recent strong US stock and bond market performance than the complacent buyers of bonds and stocks. There are many factors affecting US financial assets that could in future have a negative impact on their pricing.'

See also:
A tribute to Marc Faber, part one: US dollar, Nasdaq, gold and oil