Another round of quantitative easing in the U.S. will depend on the direction of the S&P 500, Marc Faber, editor of the Gloom, Boom & Doom Report told CNBC Monday, following Federal Reserve Chairman Ben Bernanke’s failure last week to hint at a QE3.
“(QE3) depends on the S&P, if the S&P drops 100-200 points, then yes, for sure we will have QE3 but if the S&P stays here or even goes up, the likelihood of QE3 diminishes,” Faber said.
Since the start of 2012, the S&P has risen 9 percent, compared to gains of 11 percent for the Nasdaq Composite and a 6 percent return for the Dow Jones Industrial Average.
“Bernanke targets asset prices, he doesn’t admit that, but he doesn’t want asset prices to go down,” he said, adding that the first two rounds of quantitative easing were largely responsible for the upside in U.S. stocks last year.
“The S&P went up from 666 on March 6 2009 to 1,370 [currently] so it has more than doubled and that has to do with QE1 and QE2,” he said.
Faber adds that the movement in oil prices will also contribute to the Fed’s decision on whether to implement QE3 or not.
If Brent crude prices were to soar to $150 a barrel, or rise 20 percent from current levels, he believes the Fed would have an “even more excuse” to flood the market with liquidity.
Correction Ahead for Equities
While Faber is generally upbeat on equities as an asset class, he is calling for a short-term correction in global stocks in the “period directly ahead”.
“Markets are overbought, technically they have deteriorated, and we have very heavy insider selling, so I think a correction is coming,” he said.
Faber, who expects to see high volatility in all asset classes over the next few years, says the ideal asset allocation for the moment is 25 percent each in equities, real estate or real estate related equities, cash and gold.
“I don’t think (investors) should be shooting for huge gains, but rather for preservation in capital,” he said.
Discussing his outlook for gold, Faber, a well-known gold bull, says it doesn’t offer an attractive buying opportunity right now. He believes the precious metal is in “correction time” and doesn’t rule out the prospects for gold to fall down to $1.500 an ounce this year.
“We made a peak at $1,921 on September 6 and we dropped to $1,522 on December 29, so around $1500 is very strong support."