Saturday, May 21, 2011

Can Doctor Doom call the ups as well as the downs?


The high profile investment analyst and economist Marc Faber earned the ‘Doctor Doom’ soubriquet after being one of the few investors to foresee the financial crisis and the extent of the ensuing fallout.

The Swiss national is a long-standing and regular commentator in the media having initially rose to prominence back in 1987 when he told his clients to sell out of equities a week before October crash.

Although he is sanguine about the difficulty of timing the market- he branded his call that year ‘accidental’- he has cemented his reputation over the last decade by also accurately calling the rise of Asia, the decline of the dollar and the commodity boom. Here we put the recent predictions of the founder of Marc Faber Ltd and author of the Gloom, Boom & Doom Report newletter to the test.

Retail spending to drop off a cliff

‘Short retailers except Walmart, perhaps using the consumer discretionary SPDR ETF- [expect a 10% correction by the year end].’

Verdict: In keeping with his negative overall view on the economy, Faber expected non-essential consumer spending to plummet as the housing market dive gathered momentum and equity markets started to roll over. The consumer discretionary ETF was close to an all-time high when he made his call and it subsequently fell from $40.17 to $30.84 by the year end, far higher than his anticipated 10% correction and troughed at $17.53 the following February. Walmart meanwhile fell by 10% over the following two months before ending the year just under 5% down and rallying by over 40% overall in the 12 months following his call.

Sell risk assets and beware inflation

‘In the next few months we could get a severe correction in all asset markets. In a selling panic you should buy, but in the buying mania that we have now the wisest course of action is to liquidate. I am not a great buyer of assets now. We might be in a situation where consumer price inflation comes back and will have a negative impact on the valuation of assets.’

Verdict: The S&P actually rose by a further 8% over the next two months, but then began the precipitous slide that saw the market more than halve from 1,561.8 to 683.38 the following March. Although interest rates began their downward spiral, investors backing Faber’s calls would have preserved capital well as the financial crisis began to take hold.

Back silver, gold and other hard assets

‘You want to be in gold, silver, platinum and also oil. If you believe in a recovery of asset prices as a result of money printing, you should be in hard assets, particularly precious metals. If you want to own shares, I would own some resource companies- I would also own some Asian shares.’