LINK TO ORIGINAL ARTICLE: https://rebrand.ly/70280cs

“Dr. Doom” will see you now. 

Investment manager Marc Faber, a.k.a. “Dr. Doom,” earned that moniker after advising his clients to get out of the stock market before the October 1987 crash.  

Faber, publisher of the investment newsletter “The Gloom, Boom, & Doom Report,” doesn’t foresee an imminent market crash now, but is wary of the U.S. stock market and continues to be concerned about stock valuations. Says Faber: “The market has been driven higher by a handful of stocks,” that is, “any stock that has anything to do with artificial intelligence.

These stocks, Faber notes, are “grossly overvalued.”

After 50 years of investing and trading experience, Faber has learned many important lessons. No. 1: Respect the power and unpredictability of the stock market, if only to avoid being caught by surprise when the market makes extreme moves. 

In this recent interview, which has been edited for length and clarity, Faber talked about his view of both the stock- and housing markets, strategies investors should use to protect a portfolio, how interest rates could reach unsustainable levels, and the disastrous effects of still-high inflation. 

MarketWatch: What’s your view of the U.S. stock market right now? 

Faber: I am relatively negative about the U.S. market. Most stocks haven’t done well. However, the market has been driven higher by a handful of stocks — semiconductors and anything to do with high-tech, especially with artificial intelligence. In my view, these stocks are grossly overvalued and have substantial downside. When there is a change in leadership, these stocks will go down as the market moves away from these favorite stocks to more value-oriented stocks. 

MarketWatch: What are the red flags you’re seeing in stock prices?

Faber: First, if you look at valuations by historical standards, they’re very high, especially the favorites I just mentioned. Second, the profit margins of American companies will come down because of inflationary pressures, and also because of weak demand. The problem in America with many sectors is affordability, especially in the housing industry. Housing affordability in the U.S. is at its lowest level ever. That reduces the demand, which reduces earnings potential. 

MarketWatch: What can the U.S. government do to boost economic demand?  

Faber: The question is how can you operate on the economy without putting the patient into the hospital? It will be very unpleasant for two, three or four years. But what must be done — and will be done eventually — is to bring fiscal deficits down. 

There are three choices. First, politicians could increase taxes. However, if politicians go to American voters and tell them they must increase taxes, they will not get elected. Second, politicians could cut government spending. But no one will elect them if they cut police, fire, and army veteran pensions, or cut Social Security contributions for those over 65. The third option, which is what every government has embarked upon, is inflation. 

The government prints money and the inflation rate goes up. But inflation rises because of deficits and money printing. In other words, it’s a tax. The bad aspect of inflation is that it touches different sectors of society differently. For example, I have cash, stocks, bonds, commodities and no debt. I love inflation because the value of my assets goes up. 

But as a social observer, historian and economist, I know it’s a disastrous policy with a disastrous outcome. The poor people get hurt the most during inflationary times because they have no assets. That’s why if you look at every inflationary period in history, wealth inequality increased dramatically. 

MarketWatch: How can investors protect their money in this environment?

Faber: People should reverse their thinking and start to contemplate the view that instead of everything going up, think what would happen if everything that you own goes down in value. I want to stress that it’s not a disaster if everything comes down and you have no debts. The problem arises for people who have a lot of debts, because debts don’t come down. 

If I were an investor, given the uncertainty we have in the world, I would own some precious metals. I’m not saying the precious-metals market will go up tomorrow. But when I look at the debt levels in America — the unfunded liabilities of the U.S. government and those of pension funds, in my view — the only way out is to print money. There is no other option. That’s what governments have always done. 

MarketWatch: Are you shorting the U.S. market?  

Faber: I used to be one of the larger short sellers. But during the technology boom in 1999 and 2000, I lost a lot of money. I decided that shorting stocks in a money-printing environment is a dangerous proposition. Based on fundamentals, a stock should go down, but because of monetary injection, the stock goes up. 

MarketWatch: What is one of the most important lessons you’ve learned about the stock market? 

Faber: I have a very good lesson that everyone should remember: The market is unpredictable. On any trading day, we don’t know how the market will close. And in six months, where will the market be? Do you know? I don’t know. That’s why most individual stock investors and traders will lose money.  

MarketWatch: Are you seeing different conditions in stock markets outside the U.S.? 

Faber: Actually, the whole world has been gambling on the “Magnificent Seven” stocks — especially Nvidia 

Michael Sincere (michaelsincere.com) is the author of “Understanding Options,” “Understanding Stocks,” and the forthcoming “Help Your Child Build Wealth” (Wiley, 2024).