A tribute to Marc Faber, part two: Calling the US housing top

In June 2005 he waded into the debate, pointing to the uneven distribution of property price gains in the US and the fact that market bulls were taking comfort from the fact that since 1952, the value of household real estate holdings had never declined.

While that may be true, he said, ‘We must take into account that every year the stock of homes is increasing. Consequently it is only natural that the value of household real estate has a rising tendency. Still, whereas the value of household real estate has never declined in nominal terms, it has declined in real terms and for selected markets on numerous occasions.’

When real price gains were strong in 1971/72, 1979/80, 1986/87, inflation adjusted prices declined in 1971, 1974, 1981/82 and in 1990/91. ‘Therefore, following the extended period of real price gains we had since 1997, it is more than likely that prices will decline at least in real terms at some point in the future,’ he said.

Global impact

Our Swiss investment adviser also firmly grasped what a US housing downturn meant for the global economy. As far back as June 2004, when the US housing market was booming he wrote: ‘US consumption since 2000 was not driven by capital spending and employment gains, but purely by asset inflation in the housing market, which allowed people to take out larger and larger mortgages and spend the additional funds on consumer durables such as cars and consumer non-durables.

‘Now, however, there is a problem with the housing market. If the US economy continues to strengthen, interest rates, which are negative in real terms, will have to rise considerably and this could lead - if not to a housing crash - at least to a less buoyant market.’

Dr Doom made this prediction two years before the US housing crash that enveloped the nation from the middle of 2006. Another seminal forecast greeted the appointment of Ben Bernanke in place of Alan Greenspan at the Federal Reserve.

In November 2005, Faber thought: ‘So, at latest by the middle of next year, I would expect the Bernanke money printing press to shift into high gear. This should lead to more consumer price inflation, a weakening US dollar and tumbling bond prices.’

Bernanke disaster

He described Bernanke as the ‘greatest disaster that has ever hit the US bond market’ and believed that ‘the worst long term investment will be to own a 30-year US treasury bond with the view to hold it for 30 years’.

He added: ‘Granted, long term treasuries could rally somewhat from here for the next few months, but new interest rates lows are most unlikely. With Bernanke at the Fed, disaster will strike sooner or later and long term bonds will plunge precipitously….’

In June 2007 the US bond market reversed a 17 year trend and Faber’s call on the market seemed remarkably astute, if a little ahead of its time. Gold and precious metals continued to be his favorite asset class for the long term, if only because monetary inflation made a higher gold price certain in his view.

Middle East investors loved to read about gold and Faber’s opinions are always eagerly sought about the yellow metal. But it was not often that he had much to say about the region and its markets.

That changed in June 2006 when the recent sell-off in the Middle Eastern bourses attracted his attention as seeming to be remarkable, because it had occurred at a time of increasing liquidity and near-record oil prices.

Liquidity trap

His view was that the problem was not liquidity, but that the rate of growth of liquidity had been slowing down. 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