BANGKOK: Marc Faber, Editor & Publisher, The Gloom, Boom and Doom report, says Indian markets were overbought and correction was due.

He said the global markets many not form new lows and that fiscal stimulus packages will not be needed for an economic recovery.

Faber said he expected markets to form a base before a bull run and that he was not optimistic on the dollar from a long-term view.

Excerpts from the conversation:

How are the global markets looking to you at this point of time? Globally, what’s your own sense of earnings potential?

Faber: Well, in the case of earnings, it will depend on the industry and also on the country. Obviously, there is a severe recession and for a while earnings will be somewhat disappointing. I think the big earnings decline has already occurred, particularly in the US. So, I would look at the economy bottoming out at these levels. Also, I would look at further stimulus packages, if the economy does not recover, if the stock markets start going down again. The S&P went up from 666 to 956. Now, it’s below 900 and 875. If we approach 800 and probably throw some more money into the system, I think that easy money and the money being printed would kind of support after the market.

How do you view Indian markets, in terms of valuations? Is it expensive?

Faber: Well, India had a huge decline between 2007 and the intra- day lows in November 2008. Again, we had a major low in March 2009. So, the market was incredibly oversold and this rebound is only natural. But, after the kind of decline we had between 2007 and 2009, usually we need a base-building period before a sustained bull market emerges again.

FIIs have been aggressively pulling out of the Indian markets for the better part of the last week or 10 days. Do you see this phenomenon actually continuing? Is risk aversion returning?

Faber: Well, that was simply too optimistic about India on the way up. What happened on the way down, instead of liquidating stocks, they kept on buying and leveraging. So, the performance of some hedge funds has been horrible. You would think that hedge funds would notice that the market directions have changed and they should go short. But that didn’t happen. So, a lot of foreigners are disenchanted with India, not only with India but other foreign markets as well. So, probably, at the moment, there is a kind of interest that usually occur. But I would point out that foreigners usually buy near the tops and sell near the lows.

What’s your call on the entire commodity spectrum?

Faber: Well, basically it peaked out in May 2006 at 365. But when the Federal Reserve slashed interest rates on September 2007, we had another huge rally in commodity prices. Then, we totally crashed to less that 200 in February this year. When it looked at the peaks, the markets would rally. In other words, the S&P is growing up. The green shoots and CRD index came up and commodity rebounded slowly and oil went up by more then 100% from $32 to over $75. So, I think commodity is also coming under some pressure now. In the last 3-4 years, there has been deflation and inflationary fears. So, when the markets rallied in March 2009 to now, the dollar was weak. But commodities and stocks went up. Bonds were weak.  Now, there are  deflationary fears and so selling of commodities and stocks and buying of bonds and dollars are emerging.

There are very two big concerns in India at this point in time. The first is the fiscal deficit of 6.8%. The other is GDP growth and the economy. From an FII perspective, how concerned are you about these two situations?

Faber: Well, I don’t think that India and China will grow at the gross rate that the governments are predicting. Even if growth is disappointing, say it comes at 3-4% in India and say 5% in China, we are still better than the gross rate in Western Europe and in the US. So, we just have to look at the markets in terms of extremely volatility because of government intervention and also because of outside monetary policy expansion. We have to live with that volatility and try to buy when the markets are oversold  and sell when it is overbought. The Indian markets, I’m sorry to say, when it hit the peak of 15,600 on June 12 was grossly overbought.