by John Galt
August 9, 2016 18:40 ET
Marc Faber, often referred to as “Dr. Doom” among many other nicknames from the bulls who hate it when he turns super bearish (and some when he turns bullish for that matter), was on CNBC earlier today and dropped this bomb on the pump-and-dump stock infomercial network:
For the mathematically challenged and government employees who might have heard what he said but failed to comprehend, that would put the S&P 500 around 1100 and the Dow Jones Industrial Average somewhere between 9,000 and 10,000ish.
While there are many people who dismiss the author of the “Gloom, Boom, and Doom Report” as just another naysayer, his record predicting the crashes in 1987 and 2007 was pretty remarkable. His ability to recognize patterns indicating the potential for a crash or long duration market declines has been nothing short of uncanny. For the perma-bulls who doubt what he has said in the past, here is a snippet from a warning in he gave in September 2007:
The stock market peaked out in July 1998, after having been in an uptrend since the 1991 lows. It then sold off on the Russian default and on the LTCM crisis by 22% to its intraday low on October 9, 1998. When it became obvious that the Fed would bail out LTCM, and it flooded the system with liquidity, the stock market took off. Between the October 9 intraday low and the year end, it rallied by 33%, to achieve a new all-time high, and then continued to rise — interrupted by a correction in 1999 — into the final March 2000 top.
Pundits who are likening today’s market rout to that of 1998, and who expect the market to rally strongly towards the end of this year and to close at a new all-time high, are failing to consider the very different economic and financial circumstances of today, compared to those of 1998. In the years leading up to the 1998 crisis the US dollar was in a bull market, and interest rates – which had peaked in September 1981 – were in the middle of a secular decline. At the same time, gold and other commodities were still deflating. Also, in the 1990s, the US stock market had significantly outperformed the emerging markets, most of which had peaked out between 1990 and 1994 and had crashed during the Asian crisis of 1997-98.
Therefore, in 1998, the emerging markets and commodity prices were very depressed (unlike today). Moreover, in 1998, house prices weren’t elevated, the subprime lending industry was in its infancy, Japan and Europe were largely stagnant, and Asia and Russia were in depression (i.e. there was no synchronised global growth). The process of securitisation existed, but was very modest when compared to the present.
Today, the key difference is that the dollar looks extremely wobbly. In 1998, the US current account deficit was 2% of GDP; today, it’s hovering around 8%. This massive deficit puts continuous pressure on the dollar. Moreover, gold and other commodities are in an uptrend. There is another reason why conditions today are very different from those in 1998: in 1998, total credit market debt to GDP was 250%; today, it’s 330%. In addition, whereas debt growth averaged 4% per anum in the 1990s, it has averaged almost 10% per annum since 2002. In particular, household debt has surged from 65% of GDP in 1998 to almost 100% in 2007. Since debt growth has been so strong in the last few years, and because the system is now far more leveraged than in 1998 (not to mention the derivatives market), a tidal wave of liquidity would be needed to bail out the system, which would have to lead to even stronger debt growth; but, obviously, it would
only lead to even larger dislocations and problems later.
Another difference: in 1998, the Fed had to deal with the bailout of just one institution — LTCM; today, who should it bail out: the subprime lending institutions (it’s too late), leveraged home owners, the US$2 trillion-plus collateralised debt obligation (CDO) market, or the financial institutions, which are now stuck with over US$200 billion of leveraged buyout (LBO) loan commitments which they cannot sell to investors? So, whereas it was relatively easy to bail out just one institution in 1998, today the task would be extremely complex and daunting. Of course, the Fed could try to bail out everybody by cutting the interest rate aggressively and taking “extraordinary measures”, such as buying up the entire CDO market. [Editor’s note: Faber wrote the words above in late August, well before the Fed’s aggressive rate cut yesterday.]
Just think; he warned back then about a disaster that would indeed overwhelm the Fed and in the video from CNBC he warns once again of a crash which will initially overwhelm the Federal Reserve.
The pathetic Janet Yellen Fed is neither ready nor has the ability to stop such a decline without drastic action; and in the case of the U.S. central bank, the option of negative yields on Treasuries, is irrelevant. The only course of action the Fed could take would be to directly intervene openly in the stock market and buy equities plus futures to stem and stop the decline.
If Marc Faber is correct, the shock of this decline is the initiation of far worse on the economic horizon. And this time, unlike 2007-2008, the public has no warning and thinks as Ben Bernanke once said that the economic issues facing America and the world are “contained.”