Volatility likely to remain high for 2018

Marc Faber discusses about the bubbles that may have popped and recommends a reduction of long stock market positions. Below excerpt from Gloomboomdoom.


In earlier reports I mentioned two conditions that were needed for the formation of a major stock market top: Excessive speculation and heavy participation by the public, and the revelation of a major fraud. The speculation in Crypto-currencies over the last six months fulfills the condition of heavy speculative activity by the public. The potential disclosure of massive irregularities in the online space, and accounting and other fraud at quite a few other companies, crypto currencies, and government agencies are likely to shortly fulfill the condition of fraud disclosure, which usually shakes investors’ confidence badly. [Kindleberger calls the moment where investors realize that the time to withdraw from the market has arrived “revulsion.”]

According to Thomson Reuters, “The overall tech sector now has a 27% weight in the S&P 500, making it by far the largest component.” Therefore, considering all the fundamental and technical factors which could potentially become very negative, I reiterate my recommendation to reduce equity positions. Furthermore, I strongly recommend to underweight FAANG and related stocks, which account for a high percentage of equity index funds’ assets.

Last month, I explained that higher interest rates were far from certain and that Treasuries could rally. I opined that it was possible that higher interest rates already had a negative impact on the over-leveraged and asset-price driven US and global economy.

It is likely that 2018 will bring about plenty of turmoil in asset markets and that volatility will remain very high.

America has lost a lot of prestige due to failed interventions in foreign nations

Marc Faber talks about how the world has moved away from an American facing model. China has been gaining prestige and importance along with a declining US importance to the global economy.

The tariffs are going to backfire on the US very badly because you have to understand that the US was economically very powerful until the early 1980s. The same was the time in the 70s and early 80s. If America sneezes, Asia catches the cold because all the exports went to America. But this is no longer the case nowadays. Take steel. 2% of US steel imports are from China and only 1.5% of Chinese production of steel is exported to the US.  

Even if the US would not buy any steel at all from China, it would not matter to the Chinese. At the time of Davos in February, a Chinese owner of the world’s largest bus company was interviewed and they asked him about US tariffs and chances of trade war with US. He said we really do not care. We export our buses to 150 different countries in the world, what do we care about the American market and that is true for many companies. The American market is no longer that relevant. China exports more to commodity producers than to the US and the same applies to the South Korea.  

What has changed in the last 30-40 years is that whereas Asia and the world was American-centric before, the world has become much more China-centric in Asia and it is a much more multi-dimensional global economy where the US has lost a lot of its importance, relatively speaking. It has also lost a lot of prestige because of their failed interventions in Iraq, in Syria, in Libya, in Afghanistan, everything they touched, they messed up. 

via economictimes