Friday, September 26, 2008

Dr. Marc Faber: Looks Like We Are In A Financial Crisis

Just in.. “Looks like we’re in a financial crisis,” says Marc Faber

  • Speaking at the CLSA conference in Hong Kong, bearish Dr Marc Faber refrains from saying ‘I told you so’, and remains pessimistic about the global outlook for markets and economies.

    “The severity of a downturn is proportional to the excesses that preceded it,” began Marc Faber, leading off his speech to the CLSA conference in Hong Kong.

    He then pointed out those excesses, with the chief culprit in his opinion being the mistake of leaving the US federal funds rate at 1% until June 2004, three years after the US economic expansion began. That has led to a mis-pricing of capital and overly strong debt growth with a consequent diminishing of asset quality in financial institutions. Today, US debt-to-GDP levels are higher than they were in the days preceding the Wall Street crash of 1929.

    Even though one solution would be to adopt tighter monetary conditions, Faber believes that such a move would be contrary to the US government philosophy that overlooks asset bubbles – and when these asset bubbles deflate, they flood the market with liquidity. “Central bankers have become hostages to inflated asset markets,” he points out. He notes that virtually every asset class from commodities to collectables has witnessed a price boom in recent years.

    In turn those bubbles are now popping. It started with property, then subprime, then financial institutions. Next to go will be equities as problems hit the wider economy, first in America, and then, given that market decoupling has not occurred, worldwide.Sell those left standing,” he recommends, “while their valuations are still in the sky.

    While Faber sees some potential for short-term strength for the US dollar, ultimately he feels the dollar is a worthless currency, and the only way that the US indices can return to previous highs is by the dollar being diluted by inflation.

    “The financial sector will never again see the conditions of the last 25 years, and the S&P index won’t make a new high in real terms for the next 20 years, “ he observes. “Indexing is dead and you can only make money on stocks with a trading mentality and by stock selection.”

    Faber is not a fan of the US bailout package, and suspects that the US government is overzealous in its interventions, with Hank Paulson coincidentally synchronising his interventions to time with falls in the Goldman Sachs stock price. “If the government buys everything, then hedge funds can simply arbitrage by buying all the rubbish and selling it to the Fed.”

    After his speech was concluded he said that the US cannot stomach asset prices falling to their natural level and a better use of the American bailout package would be to take over the banks and recapitalise them, or to use the money to buy up the surfeit of American homes; if people didn’t want to sell them for fear of reducing home prices, simply demolish them.

    Furthermore, although he acknowledges the possibility that the US bailout might serve to prevent US property prices falling much further, he thinks that this stability would be married with no real prospect for price increases and therefore long-term price stagnation in real terms.

    His investment solutions remain unchanged from his customary message, namely: farmland and commodities. On the equities side, he sees potential for Japan to outperform, with Japanese financial institutions looking interesting.


Dr. Faber also appeared on CNBC.

  • $700 billion may not be enough to bail out Wall Street says one analyst, given the lack of transparency and the length and breadth of financial markets involved.

    Marc Faber, editor & publisher of 'The Gloom, Boom & Doom Report', told CNBC's Asia Squawk Box on Friday, he doubts that $700 billion would make any difference when you consider the size of U.S. credit markets.

    "Looking at the size of the credit market in the United States, the equities market, the housing market and then looking at the size of the credit default swap market, which is around $62 trillion now, and the world wide derivatives market which is now $1,300 trillion dollars, I very much doubt that $700 billion would make any difference at all. In fact, I think it's a bad proposal in the sense that it will distort market pricing," Faber said.

    Faber says that the fundamental problem is not falling home prices as U.S. Treasury Secretary Henry Paulson suggests.

    "The problem is that too much money was lent against homes at inflated asset values. In other words that means at the peak of the market, people went and lent them 120 percent against the value of the home. And that is the problem -- the leverage in the system," Faber said.

    He added that the current bailout plan proposed by the Treasury and the U.S. Federal Reserve does not address this leverage problem in the markets.

    "My friend suggested what would be much cheaper -- go in and buy a million homes in the United States and burn them down. Because that will reduce the supply. Of course it is an economic nonsense solution, but it is as good as the Treasury's proposal," Faber quipped.

There's this comment on FinancialSense market wrap today.

  • Housing, jobs, and durable goods were all disasters. Expect to see production cutbacks and rising unemployment. Anyone who thinks the US is not in recession is in absolute fantasyland. - Mike 'Mish' Shedlock ( see Horrid Data: Housing, Jobs, Durable Goods )


Avatar said...

Whoa, this guy's opinion has a ring of truth to it. Hope it won't happen, though.

Moolah said...


Dude.. hope is a dirty four letter word that has no place in the stock market!

Avatar said...

Yeah, I know. Markets are swift and brutal nowadays.

Moolah said...

Dude.. it's not about the markets man. It's about the business economics of the markets and at this moment of time, perhaps it's best that one face reality and accept the fact the business fundamentals have changed drastically.