Anyone who read last week’s MoneyWeek will have noticed that, while most of our Roundtable panel were bullish, they were fairly reluctant bulls. Even the real bear among them, Steve Russell of Ruffer – who said he expected equity markets to fall 40% at some point – couldn’t actually bring himself to suggest we all move our money into cash.
Everyone knows this bull market is long in the tooth, that stocks aren’t remotely cheap anymore (they only look it because very cheap oil and mining firms now make up so much of the world’s major indices), and that the imbalances in the global economy are as huge as ever. The problem is, no one knows what will trigger an end to the good times. And, having got it wrong too many times already, no one is willing to guess anymore either. The trouble could come this year, said Steve at our Roundtable, but it could just as easily come next year, or even the next. The result is that right now everyone is bullish on everything. There is a consensus, albeit a sometimes unwilling one, that global growth will continue, the US will see a soft landing and prices of stocks, bonds, property, commodities, fine wine and contemporary art will keep rising – possibly forever. All 14 of Wall Street’s top firms expect rises in the US market in 2007.
Given how boring it is to have to listen to this view put forward over and over again, it was an absolute joy finally to hear someone disagree convincingly this week. In an interview with Bloomberg, Marc Faber, editor of the The Gloom, Boom and Doom Report, forecast a “severe correction in all asset markets” in the next few months, due to the return of consumer price inflation and the “irreparable cracks in the financial system”. The only assets he showed much enthusiasm for were gold, which should be increasingly in demand as a hedge against inflation; oil, because “demand in Asia is going to double”; and the Japanese, Vietnamese and Singapore stockmarkets. Faber is no lightweight: he forecast the market collapse of 1987 and has been absolutely right on gold, oil, commodities and Asian markets over the last five.
But is he right now? Regular readers will know that I agree with many of his themes. I like gold, Japan, oil and commodities, and I’m worried about almost everything else. However, what makes me as cautious on many Western markets as Faber is this: over the long term, it has been shown over and over again that if you invest when prices are high, you will make low returns, and if you invest when prices are low, you will make high returns. Right now, prices are high – so whether a trigger for a market correction comes this year or next is by the by. Either way, having all your money in the market now is unlikely to make you particularly rich. It isn’t a good time to be a bull, even a reluctant one. Those still in doubt should remember this: the last time Wall Street’s big banks all agreed with each other was back in 2001. The S&P 500 promptly fell 13%.