Wednesday, January 15, 2014

Faber: We are in a Gigantic Financial Asset Bubble

"Marc Faber, publisher of the Gloom, Boom & Doom Report, appeared on Bloomberg Television’s “Street Smart” yesterday to discuss the impact of Fed policy on the global economy and his predictions for 2014. As you could imagine, he is bearish.
Marc told Trish Regan and Adam Johnson that “we are in a gigantic financial asset bubble.” He has warned before that he believes the bubble could pop in a 1987-style crash.
While I see froth – think Tesla or Twitter or the mania surrounding Bitcoin – I don’t think equities today are anywhere near where they were in 1999, which truly was a bubble. Also see Marshall’s recent post on bubbles, which I think is a good one in terms of understanding the phenomenon.
Faber also spoke about Bitcoin, saying, “I prefer physical gold and silver, platinum to bitcoin. Bitcoin can have a lot of competition. Gold, silver, platinum — they have no competition. How do you value a bitcoin?… How do you value Netflix? Is it overpriced or underpriced? Is Tesla overpriced, underpriced?”
My own definition of a bubble is a two-standard deviation move – meaning that you enter bubble territory when the price moves to a level two standard deviations above the norm on a long-term valuation benchmark metric. I think of a bubble coming from the fact that price movements are never entirely independent of previous price movements. When prices are near long-term norms, the intertemporal dependence is not an overriding variable in price movement. However, as prices move away from trend – either above or below – previous price movements take on increasing importance. That’s why markets overshoot both to the upside and the downside..."

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