Tuesday, August 29, 2006

Beware booming asset markets!

A recent article from Dr. Marc Faber, who cautions investors of an impending slowdown in the economy and the effect it will have on the stock market and bonds.

Having noted last month that Two-Year Treasury notes offered an attracted alternative to equities, Faber returns in this latest column to warn about the potential ceiling hanging over the market as represented by the S&P 500. He is particularly bearish on the brokerage and financial sector in this environment:

I think brokerage stocks could decline by as much as the homebuilders did over the last 12 months. Please note that homebuilding stocks are down more than the housing index because the housing index also includes other building related companies. Brokerage stocks seem to have completed a similar decline as homebuilders did between July and October 2005.

But why should brokers decline much more? On the first sign of economic weakness, the Fed will cut again interest rates, which will in the long term be even more inflationary. The point is that while the Fed has increased short-term interest rates since June 2004 and again on June 29, no real tightening has yet occurred, because if money was really tight, the dollar would have rallied and asset markets would have declined much more.

Read the whole piece, "Beware Booming Asset Markets!".