Marc Faber, publisher of the Gloom, Boom & Doom Report, says the Federal Reserve should have started raising rates years ago, but all that may not matter because the U.S. stock market could be on the verge of yet another "very significant correction," perhaps as bad as the 1987 crash.
"The market may not crash right away, but it's possible that it will," he told Bloomberg Television.
"It will enter a longer-term time-frame of unattractiveness and where prices may actually go lower, and significantly lower. We could have a decline like 1973-74, which was a slice of hope where the market cap going up, and then went down again,” he said.
“Or it could be like 1987, where at some point we have a very significant correction,” he warned.
On "Black Monday," October 19, 1987, stock markets around the world crashed, shedding a huge value in a very short time. The crash began in Hong Kong and spread west to Europe, hitting the United States after other markets had already declined by a significant margin. The Dow Jones Industrial Average (DJIA) fell 508 points to 1,738.74 (22.6%).
In today's dilemma, he said the U.S. central bank hasn't helped by keeping rates so low for such a long time.
"The problem is that they (the Fed) should have raised the rates, in my view, in 2011," he explained. "Now the problem is this that the global economy is slowing down remarkably, especially coming as the result of the slowdown in China. Then we have weakness in the euro and the Japanese yen, which reduces global GDP in U.S. dollar terms. And that lowers demand for goods from around the world," he said.
"In other words, world trade is going down and the U.S. Is obviously affected. In this situation, it would be very difficult to raise interest rates at the present time."
He said the current economy faces a variety of problems. “We have huge asset inflation that has created now a stock market bubble,” he said.
Add to that plunging oil and metals prices and you could have the recipe for disaster.
“My sense is that some commodities are approaching major lows. But could they stay low for an extended time frame? Yes, even in my global economic outlook that may be the case,” he said.
“The last correction was in 2011 when the S&P dropped 21%. We had the meaningful correction, or decline in many stocks, especially economically sensitive stocks," he said.
And he offered an example of one omen. "Semiconductor stocks are down more than 20% from their recent highs," he said.
Other experts have also recently painted a troubled future for the U.S. economy.
Bill Gross, who in January predicted that many asset classes would end the year lower, said U.S. equities have another 10 percent to fall and investors should sit out the current volatility in cash.
The whipsaw market reaction to the lackluster U.S. jobs report last week shows that markets, especially stocks, high-yield bonds and some emerging market debt, are trading like a casino, Gross told Bloomberg News.
Gross, who earlier made prescient calls on German bunds and Chinese equities, said U.S. stocks will drop another 10 percent because economic conditions don’t support a rally like in 2013, when corporate profits were going up.
“More negative numbers lie ahead and if you define a bear market by a 20 percent correction, at some point — that’s six to 12 months — we’ll have a classic definition of a bear market, meaning another 10 percent downside,” he said.
“Cash doesn’t yield anything but it doesn’t lose anything,’’he said. “Investors need cold water splashed on their face and sit out the dance.”
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