Why should investors care what Faber says? After all, it’s easy to be a contrarian; just grumble about everything. But, to be a good contrarian investor, you need to know what you’re contrary about, and Faber does. A world-class economist-historian, Swiss-born Faber studied at the prestigious University of Zurich, where, at the age of 24, he graduated with a PhD in economics.
When it comes to making stock market predictions, he’s eerily well informed. He warned his clients to get out of the stock market before Black Monday. On Monday, October 19, 1987, the stock market experienced its biggest one-day crash in history. The Dow Jones Industrial Average (DJIA) spiraled, losing 22.6% of its value, or $500.0 billion.
He forecasted the Japanese bubble in 1990, predicted the collapse in U.S. gaming stocks in 1993, and anticipated the Asia Pacific financial crisis of 1997/98, and ensuing global volatility.
In his 2002 book, Tomorrow’s Gold: Asia’s Age of Discovery, Faber predicted the rise of oil, precious metals (including gold prices and silver prices), emerging markets, and China. He also predicted the decline of the U.S, dollar since 2002. As a contrarian investor, Faber is always on the lookout for opportunities. “Dr. Doom” was bullish for the U.S. dollar in mid-2008, just before it recovered.
Like all good contrarian economists, Faber wants his readers to make money, and he often discusses investing in silver and investing in gold. His analysis is based on economic, social, and historical trends, and he warns investors when widely accepted investments have become overpriced and risky. At the same time, Faber looks for opportunities in overlooked, unloved, depressed markets.
His motto, “Follow the course opposite to custom and you will almost always be right,” is just a little tough for most investors to handle. It’s easier to be a lemming and run blissfully toward the cliff than invest confidently based on things nobody wants to hear.
Right now, Faber is warning investors that both stocks and the U.S. dollar are overvalued. With Donald Trump in the Oval Office, investors need to adjust their portfolios and go long on gold shares, silver shares, platinum shares, physical gold, physical silver, and physical platinum. (Source: “Marc Faber: Good Times Ahead for Precious Metals,” Fox Business, January 17, 2017.)
2017 Will Be a Year of Disappointment
Faber does not believe that President Trump will make America great again. Not for lack of trying, though. Faber believes that Trump’s policies will benefit the U.S.
Instead, he believes that 2017 will be a year of disappointment for U.S.
U.S. Stocks Overvalued
First, every major valuation ratio says U.S. stocks are seriously overvalued. According to the cyclically adjusted price-to-earnings (CAPE) ratio, the S&P 500 is overvalued by 82%. The ratio is currently at 29.05; the long-term average is 16. That means, for every $1.00 in earnings, an investor is willing to pay $29.05. It has only been higher for longer twice: in 1929 and 1999. (Source: “Online Data Robert Shiller,” Yale University, last accessed February 17, 2017.)
In October 1929, before Black Tuesday, the ratio was at 30. In 1999, it was at 45. Before Black Monday in 1987, it was 17.68. (Source: Ibid.)
The Warren Buffett indicator (market cap to GDP ratio) is considered to be one of the best measures of stock market valuations. A reading of 100% suggests that U.S. stocks are fairly valued. The higher the ratio is over 100%, the more overvalued stocks are.
The market cap to GDP ratio is currently at 129.8%. The Warren Buffett indicator has only been higher once since 1950. In 1999, it was at 153.6%. It was only at 108% before the stock market plunged in 2008. It was at 129.7 in late 2015.
The Wilshire 5000 to GDP ratio is the largest index by market cap in the world, and is comprised of all stocks actively traded in the United States. The ratio has never been higher. It is at an all-time high of around 140.5. (Source: “Wilshire 5000 Total Market Full Cap Index/Gross Domestic Product,” Federal Reserve Bank of St. Louis, last accessed February 14, 2017.)
U.S. Dollar Overvalued
Yes, the U.S. dollar is strong, but it might be too strong. Over the course of the last year, the U.S. dollar, on a global trade-weighted basis, is up by 20% to 25%. In the weeks following Trump’s election win, the Greenback experienced one of its strongest gains. Since its 2011 lows, the U.S.
Why is the dollar so strong? Investors are increasingly optimistic that Trump’s economic policies will strengthen the U.S.
At the same time, central banks from around the world (Japan and the European Union) continue to favor quantitative easing (QE), which devalues their own currencies relative to the Greenback.
On one hand, a strong U.S.
Even Trump has weighed in on the dollar, saying that a strong dollar is bad for the U.S.
Investor Optimism Too High
Investors’ optimism is in overdrive, as is investor complacency. The CBOE Volatility Index (VIX), better known as the “fear index,”
Again, investors are optimistic that the U.S.
This isn’t a one-off; according to the National Federation of Independent Businesses’ monthly survey, small business optimism is surging. January saw the highest level of optimism in 13 years.
Keep in mind, U.S.
Contrarian Way to Play the Trump Presidency
As investors begin to see the significant risks with the dollar, stock market, and U.S.
Interest rates are so low that investors cannot make money in bonds as a result. Stocks continue to be one of the only places for investors to make money. Despite nosebleed valuations, investors will send stocks climbing to a “higher diving board.” This means stocks will have further to fall when markets start to correct. (Source: “Trump will soon be begging the Fed for QE4: Marc Faber,” CNBC, January 11, 2017.)
Enter silver, gold, and platinum. Precious metals like gold and silver are considered to be a safe haven in times of economic and political uncertainty. Investors are happy to send stocks to record levels, but that euphoria will only last for so long.
In 2017, Faber expects the U.S economy to stall and deficits
So, what is the Marc Faber prediction for gold and silver? When it comes to U.S.
Faber believes that physical gold and silver—as well as gold, silver, and platinum stocks—are attractive
What could investors looking to invest in physical gold, silver, and platinum or in silver, gold, and platinum mining stocks do in 2017? Faber advises his clients to invest 25% of their portfolios in bullion, especially in light of the significant risks facing investors today
Investing in gold is protection from the dangerous combination of government debt and quantitative easing by central banks trying to fight off a global recession with a near-zero interest rates.
When it comes to investing in silver, investing in gold, and investing in platinum, Faber likes physical gold, silver, and platinum, as well as precious metal mining shares. He also has an
- Source, Lombardi Letter
