Faber: War Against an Imaginary Enemy and a Big Financial Bust

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Faber (Article Here): There will be another war and it will be against an imaginary enemy
Mish: I certainly agree the next war will be against an imaginary enemy. Nearly every war is against an imaginary enemy and/or of no vital interest of the US. WWI, Korea, Vietnam, and Gulf War II were all needless. WWII was a direct result of WWI. The "War on Terror" is preposterous. Terror is a method. Waging a war on a method against an enemy that has no real country is bound to fail and waste a lot of money in failure. As for where next, given Obama's sabre rattling against Pakistan, that is one place to keep an eye on. Iran is another.

Faber: The S&P 500 and the Dow Jones will go down relative to gold.
Mish: I concur. The question is in what way. The key word in the above sentence is "relative". Gold can easily stay flat, rise, or drop while the bottom falls out of the S&P.

Faber: Eventually there will be a big bust and then the whole credit expansion will come to an end. Before that happens, governments will continue printing money which in time will lead to a very high inflation rate, and the economy will not respond to stimulus.
Mish: The economy is not responding to stimulus right now, at least in any meaningful way. 100% of the GDP growth was directly related to government stimulus. The idea that government spending can start a genuine economic recovery is ridiculous. Nonetheless, government spending can start an artificial boom. The housing bubble is an example of an artificial boom. However, for a boom to start, individuals and businesses have to be willing to go along. That is the way it works in a credit based economy. Right now personal credit is contracting, credit card lending is falling, and businesses simply do not want to expand in the face of tax increases and high unemployment. Unless and until the Fed reignites another credit boom, high inflation is unlikely. The fear now should be more of what Congress does than what the Fed does. Yet it seems Congress is getting a bit leery over these huge deficits. Congress will spend of course, but will it be enough to matter much? I doubt it, at least until we have more purging of consumer and corporate debt via bankruptcy.

Faber: US government will increase its stimulus spending should the Standard & Poor’s 500 Index fall toward 900.
Mish: Agreed but it will not help for reasons stated above.

Faber: The S&P will not drop below 800 or 900, and eventually will go higher in nominal terms, but not necessary in real terms. A correction is coming in the near term.
Mish: I doubt the bottom is in, but it could be. If it is in, then I expect a retest closer to 700 than 900. It is conceivable the S&P drops to 500, which by the way I think is fair value. Japan had two lost decades and I expect the US will have them as well.

Faber: The capitalistic system 'as we know it today' will collapse.
LINK HERE