Marc Faber: Market volatility will continue, here's why
Global market volatility is not just down to the U.S. Federal Reserve's tapering of its monetary stimulus program, according to influential investor Marc Faber, who warned that the wild swings seen in recent weeks are also down to a global slowdown in growth.
"It would seem to me that it's not just tapering that is putting pressure on markets," Faber, the author of the closely watched "Gloom, Boom & Doom Report" told CNBC on Tuesday. "In emerging economies we have practically no growth, we have a slowdown in China that is more meaningful than the strategists seem to think and than the official, Chinese statistics seem to suggest."
"That then puts pressure on the earnings of the multinationals because most of the growth in the world over the last five years has come from emerging economies," he told CNBC Europe's "Squawk Box." No growth, he said, was causing "a vicious circle on the downside" with slowing emerging economies and inflated asset markets that are now deflating, in turn putting more pressure on asset prices and on the economies.
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Faber's comments come as volatility in equity markets continued this week, prompting concerns among traders and investors that markets were at the start of a sharp correction. The moves lower follow a rally last year on the back of the U.S. Federal Reserve's monetary stimulus.
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Since the Fed started tapering its monthly asset purchases by $10 billion a month in December and another $10 billion in January, stock markets have taken a tumble. Emerging markets fell first; this week the U.S. and Europe have also seen significant weakness.
On Monday, U.S. stocks saw their worst start to February since 1933 after a manufacturing report heightened concern about the strength of the U.S. economy. Overall factory activity hit an eight-month low in January as new order growth plunged by the most in 33 years.
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Illustrating the heightened state of concern among investors, the CBOE Volatility Index rose above 20 on Monday for the first time in four months, while the yield on the 10-year Treasury note hit a three-month low. Faber said he had been advising his readers to buy 10-year U.S. Treasurys over the last few months. He expects yields to rise as investors would seek a safe haven.
"For the next three to six months probably they are a better place to be than equities," he warned. "I don't like [10-year Treasurys] for the long-term because the maximum you can earn is something like 2.65 percent per annum for the next 10 years, but Treasurys are expected to rally because of economic weakness and a stock market decline. In the last few years at least there was a flight into quality – that is, a flight into Treasurys."
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Faber warned of the risks of the present global credit bubble and said another slowdown could follow on the back of rising consumer debt levels – which had previously helped to create growth.
"Total credit as a percent of the global economy is now 30 percent higher than it was at the start of the economic crisis in 2007, we have had rapidly escalating household debt especially in emerging economies and resource economies like Canada and Australia and we have come to a point where household debt has become burdensome on the system—that is, where an economic slowdown follows."
- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt.