Faber: World War III Within 5 Years

Barron's just published its 2012 Roundtable, and invited everyone's favorite gloom and doomer Marc Faber to join the discussion. And when you thought he couldn't get any gloomier, he casually predicted that World War III is on the near horizon...

As the discussion veered toward the "death of equities" that was predicted on the 1979 cover of Business Week, Faber weighed in on how the market has changed since then:

"Ten years ago we had relatively low inflation in the Western world. Now, with interest rates at zero, we have high asset valuations. Asset prices have gone ballistic in stamps, modern art, wine, you name it. Gold, silver, other commodities, equities in emerging markets, high-end real estate -- all have done well. When assets become like cash, it may be safer to hold your money in the bank. If asset prices collapse, you'll be better off in Treasury bills with zero yields. Then the central banks will print money and bail you out. At least you'll get your principal back.

With money-printing, you never know what sector of the economy will be inflated. Maybe we have had profit inflation and there will be a severe correction. I don't expect corporate profits in the U.S. to collapse by more than 20% in the next 12 months."

But as the panel looked toward the future, that's when things got interesting:

Faber: On another optimistic note, World War III will occur in the next five years. That means the Middle East will blow up. New regimes there will be less Western-friendly. The West has also figured out it can't contain China, which is rising rapidly and will have more military and naval power in Southeast Asia. The only way for the West to contain China is to control the oil tap in the Middle East.

Bill Gross (Co-CIO, Pimco): How does your World War III hypothesis affect the financial markets? Is it positive for stocks?

Faber: It is very positive for stocks and negative for bonds, because debt will grow dramatically. There will be massive monetization of debt. When the U.S. entered World War II total credit equaled 140% of GDP, and there were no unfunded liabilities. Now total credit-market debt is 380% of GDP, and unfunded liabilities make that 800%.

Brian Rogers (CIO, T. Rowe Price): How is World War III good for stocks?

Felix Zulauf (President, Zulauf Asset Management): Unused capacity in an economy can be directed to the defense and war industry. That will be paid for by new government debt, and that keeps the economy growing.

So when WWIII does hit, keep your eye on those defense stocks...

You can enjoy the entire roundtable here.