Wednesday , 26 July 2017


Marc Faber: We Could Have a Crash Like in 1987 This Fall! Here's Why

Marc Faber has stated in an interview* on Bloomberg Television that “I think the market will have difficulties to move up strongly unless we have a massive QE3 (something Faber thinks would “definitely occur” if the S&P 500 dropped another 100 to 150 points. If it bounces back to 1,400, he said, the Fed will probably wait to see how the economy develops)….. If the market makes a new high, it will be with very few stocks pushing up and the majority of stocks having already rolled over….If it moves and makes a high above 1,422, the second half of the year could witness a crash, like in 1987.” Words: 708

So reports Katchum (www.katchum.blogspot.ca) in edited excerpts from his original article**.

Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.

Katchum goes on to say, in part:

Faber went on to say that equity markets this year resemble 1987 as they had a “very strong start” followed by a “correction,” reiterating that “If we have a rally into August it could resemble 1987 with a crash in the fall.”

Marc Faber is known to have accurately predicted the October 19th, 1987 crash [when the Dow Jones Industrial Average underwent the biggest crash since 1914 plunging 23%, triggering losses in stock-market values around the world. The Standard & Poor’s 500 Index plummeted 20%. While the Dow closed 2.3% higher in 1987, and the S&P 500 2% it still is something we should prepare for.

As we already can see on the federal balance sheet, there has not been any QE3 since July 2011 (Chart 1).

 

 

What happened in 1987 (also known as Black Monday) and should one invest to protect oneself? Let’s review each asset class and see how they all fared back then.

1) Equities
The Dow Jones Industrial Average (DJIA) dropped 22.61% on Monday October 19, 1987 .

  • Considering the fact that the Dow/Gold ratio was lower in 1987 than it is now, I predict that such a crash would be even greater were it to happen again this year. As such, I believe you should get out of stocks as soon as possible [just to be on the safe side].
  • IMO the Dow/Gold ratio is going down anyway, so the Dow will underperform gold.
  • Emerging market stocks would likely be hit even harder as back in 1987 Australia fell 42% and New Zealand 60%.
2) Bonds
U.S. treasuries were a safe haven during the crash. The yield on 30 year U.S. treasuries fell from over 10% to 9% (Chart 2).
 
 
 
 
This could happen again but there is one difference: today the U.S. treasury yields are much lower than in 1987 (Chart 3) so there is less incentive to flee U.S. treasuries.
 
 
 
 
3) Real estate
The 1987 crash was based on the bursting of the real estate bubble, just like in 2008. From 1984 to 1988, home prices doubled on average. After the crash of 1987, the economy deteriorated and real estate plunged in specific parts of the U.S, with a delay of 1-2 years. Real estate prices had only recovered back by year 2000 so holding real estate isn’t such a good idea.
 

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4) Cash
The origin of ”cash is king” is not clear, but is possibly derived from the Black Monday crash. It was used in 1988, after the global stock market crash in 1987, by Per G Gyllenhammar, who at the time was Chief Executive Officer of Swedish car group Volvo. Needless to say, cash was a very good bet during the 1987 crash. 

5) Gold
Gold held up very well and even went up a bit during the crash of 1987. That’s why they say gold is money. The gold stocks on the other hand were actually following the broader stock market and dropped even more than the Dow Jones. The XAU (gold and silver mining companies) dropped 30% and that’s why I, just like Jim Rogers, always recommend holding gold instead of gold mining stocks.
 
Conclusion:
The only safe assets during a crash are bonds, cash and gold. As bond yields are very low and the currency system is flawed, I recommend that you hold physical gold.
 
*http://www.bloomberg.com/news/2012-05-10/faber-sees-crash-like-in-1987-if-u-s-stocks-climb-higher.html
**http://katchum.blogspot.ca/2012/05/1987-aka-2012-crash-by-marc-faber.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed:+KatchumsMacro-economicBlog+(Katchum’s+Macro-Economic+Blog)  (To access the articles please copy the URL and paste it into your browser.)

Editor’s Note: The above article may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

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