Marc Faber Sees Bankruptcy for the US

MINA
Swiss Finance Guru sees bankruptcy for the U.S
Thursday, 06 November 2008


Swiss financial guru Marc Faber tells swissinfo he sees hard times ahead for the world's stock exchanges and even state bankruptcy for the United States.

He also believes that stock exchanges will stay at low levels for a long time.

Faber, otherwise known as Dr Doom for his contrarian views on the economy, has lived in Asia for the past 35 years.

He is a jack-of-all-trades: investment adviser, financier, best-selling author and the compiler of a monthly economic publication called The Gloom Boom and Doom Report.

Faber sits on various boards of directors and investment committees.

swissinfo: You prophesied the stock market crash of 1987 and the Asia crisis and became a celebrity as a result. Did you see this crisis coming too?

Marc Faber: It was quite clear we had a credit bubble. I had been warning about that for years and not only in the mortgage sector. But what surprised even me was that [US insurer] AIG would almost disappear and that UBS shares would fall under $17.20.

swissinfo: How did it come to such a situation?

M.F.: A credit bubble has been growing for 25 years. We've seen, in particular over the past seven years, an unbelievable credit growth, which fuelled economic development. Then there were structural changes in the economy, for example the sinking saving ratios that have had an effect on consumption and growth rates.

The situation worsened in 2001 in the United States when the central bank lowered the interest rate from 6.5 per cent to an unheard of one per cent in 2003. This ultra-expansive monetary policy led to a credit growth that was five times higher than growth of the economy. A bubble growth and later the crash were the logical consequences.

swissinfo: Have we reached rock bottom?

M.F.: I think we're near it. But I also think we'll stick at this low point for a long time. Anyone who thinks that everything will soon be rosy again is naive. It's quite possible that worldwide stock exchanges will experience a similar development to that witnessed in Japan over the past two decades [the Nikkei index has fallen from 39,000 points to under 8,000].

Japan also shows that the large amount of money injected to stimulate the markets didn't have the desired effect – but it did produce huge holes in the state coffers.

swissinfo: You are known for swimming against the tide of conventional wisdom. But you are right in line with the prevailing pessimism.

M.F.: Not quite. I'm even more pessimistic than most (laughs). Look at it like this, between 1980 and 2007 people saved from their capital gains and not their income, as their income was spent. That was fine while property and shares increased in value every year. Today these people are highly indebted and are only beginning to save more by putting the brake on their consumption.

That's how every economy goes to the dogs – with or without injection of capital by governments. With the best of wills, I do not see a single catalyst that could lead to a new bull market in the world. At the moment, everything has gone down the drain.

swissinfo: How does the present crisis differ from previous ones?

M.F.: In the past few years everything went up – shares, commodities, consumer goods, real estate values, art and even bonds. Such a combination is extremely unusual. We saw the biggest investment bubble in the history of humanity. The current situation is possibly worse than the global economic crisis of 1929. And that is thanks to Alan Greenspan and Ben Bernanke [the former and current US Federal Reserve Board chairmen]. These two gentlemen must account for massive errors.

swissinfo: Governments are offering guarantees and are pumping thousands of billions into the markets. Is that a mistake?

M.F.: Yes. The losses are there and someone has to bear them. There are two possibilities. Banks go under and the stakeholders are left with nothing, as is the case with Lehman Brothers, or governments pump money into the financial system so that the incompetent financial clowns in Bahnhofstrasse [Zurich's financial centre] and Wall Street can continue to eat in fancy restaurants.

I am clearly in favour of the first because the consequences of these state interventions are massive budget deficits. To finance these, governments have to acquire money. For that they have to borrow money, which makes state debt and interest payments soar. US economists have come to the conclusion from the trends that there will be a US state bankruptcy. (That's not a very widely held view Herr Faber, and we're feeling a little isolated in that view - for now - Jesse)

swissinfo: Do you share that view?

M.F.: One hundred per cent. The US government will in future have new debts of at least $1,000 billion (SFr1,165 billion). That's on top of the current state debt of $10,000 billion. And that doesn't take into account state programmes to stimulate the economy. The government will have no other choice than to print money, which in the long term will lead to inflation.

swissinfo: How do you see the near future?

M.F.: More positively. The markets are totally undervalued so I reckon on a short-term recovery of easily 20 to 30 per cent. (LOL. Stocks are absolutely not undervalued, but a technical bounce of 20% is very possible. There was a 60% bounce after the Great Crash of 1929, before the markets turned lower again, eventually giving up 89% of their peak values into the market bottom of 1933. Bear markets often get 20-30% short covering rallies before starting a next leg down. This is what makes them so difficult to trade. You cannot hold anything, which is how most investors have been conditioned by the preceding bull market. The use of leverage is deadly for core positions. - Jesse)

swissinfo: When?

M.F.: In the next two to three weeks. (After we make a bottom. Use that rally to discard any remaining dollar financial holdings and get liquid, buy gold and silver. - Jesse)

swissinfo: That's not exactly very much in view of the massive losses.

M.F.: No. If you drop a tennis ball with only a little air in it, it doesn't bounce very high!

swissinfo: Are you calling into question the concept of making money from shares?

M.F.: No. The idea is still valid but you have to be realistic. Adjusted for inflation and with a long-term perspective you could earn on average three per cent with US shares. The long-term promises of eight per cent made by bankers and pseudo investment advisers to lure their customers are absolute rubbish. (Can't fault that logic - Jesse)

swissinfo: It looked for a long time as though Switzerland would get away with just a black eye. What is your view? (What the Swiss government and central bank have done to their economy and finances is a disgrace. We hold no Swiss francs any longer. The Swiss people have been treated badly. - Jesse)

M.F.: The export industry will be extremely hard hit. People in Switzerland will have to accustom themselves to bankruptcies, particularly in the machine industry (They will devalue the franc inevitably. The savings of the people will be destroyed. The Swiss bank has sold off its gold. The large banks are functionally insolvent. Shameful - Jesse)

DTCC Report Omits A Significant Amount of Credit Default Swap Exposure

In a nutshell, the DTCC Report failed to include the Credit Default Swaps that cover the CDO's. This is because the DTCC only captures 'commonly traded contracts and not privately negotiated derivatives such as those on collateralized debt obligations (CDOs).

This is a key gap in the report since the market for these customer derivatives is quite large, and it is the failures of the CDOs that are in the process of failing, and bringing down banks and other financial institutions with them.

It is not surprising that the DTCC omits the custom, or privately written, derivatives. Because each one has variations, placing these on an electronic exchange seems a daunting task indeed.

But it represents an important caveat to anyone looking at the DTCC report and then attempting to draw conclusions about the overall swaps market net exposures.

Bloomberg
Credit-Default Swap Disclosure Hides Truth on Risk at Banks
By Shannon D. Harrington and Abigail Moses

Nov. 6 -- The most comprehensive report on unregulated credit-default swaps didn't disclose bets in the section of the more than $47 trillion market that helped destroy American International Group Inc., once the world's biggest insurer.

A study by the Depository Trust and Clearing Corp. fails to include privately negotiated credit swaps that insurers such as AIG, MBIA Inc. and Ambac Financial Group Inc. sold to guarantee securities known as collateralized debt obligations, according to analysts including Andrea Cicione at BNP Paribas in London.

New York-based DTCC's report, released on its Web site Nov. 4, showed a total $33.6 trillion of transactions on governments, companies and asset-backed securities worldwide, based on gross numbers. While designed to ease concerns about the amount of risk banks and investors amassed on borrowers from companies to homeowners, the study may have missed as much as 40 percent of the trades outstanding in the market, Ciccone said. (Oops, lol - Jesse)

The data are ``likely to underestimate the amount of net CDS exposure,'' he said in an interview.

Trading of credit derivatives soared 100-fold the past decade as banks, hedge funds, insurance companies and other investors used the contracts to protect against losses or speculate on debt they didn't own.

Banks worldwide have taken $693 billion in writedowns and losses on loans, CDOs and other investments since the start of 2007, according to data compiled by Bloomberg...

Commonly Traded Contracts

Because the DTCC registry captures only commonly traded contracts that can be confirmed over electronic systems, not every swap trade is in the company's report, spokeswoman Judy Inosanto said. Among those not included are credit-default swaps on CDOs, she said...

Obama's Priorities

If history teaches us anything, it is that the assumptions, promises and priorities one makes before taking a new position are quickly adjusted to hard realities once the job is obtained.

New data is made available, things change, some priorities give way to practicalities.

Nevertheless we can often pick out key themes from a prospective candidate and hammer out general 'intentions.'

Obama is a more statist than libertarian, and young, and oriented to the public and service organizations than to corporations. He is a consensus builder, but chooses among the alternatives available against his own priorities and principles when the going gets tough. This is often the basis of a self-made man whose character has been hammered and tempered by adversity.

He is a strong organizer and knows how to play the game. His first obstacle is to discover what the game is at the level on which he will be playing. He thinks he knows it, but he doesn't, not yet. He is about to get a deep look into the darkness of the human heart, the abyss, and it will change him.

He faces a daunting task and expectations are high. He must prioritize heavily and reset expectations to what can be done first, and what can be attempted over time. There will be window-dressing, and genuinely effective efforts.

He is extremely intelligent, a quick study, and will benefit from a sincere alarm among highly capable men and women concerning the state of the country, which is more dire than most realize.

The vultures are swarming, and promises of kingdoms on earth are being whispered in his ear.

Those too lazy to think will retreat into cynicism, surmise, sarcasm and rumour, as they always do.

There will be a brief period of good will and allowance, and then the examination of Obama will be harsher, and more critical, and often probably unrealistic.

Watch his selection of Treasury Secretary to see how the first 100 days will be, and who is handling him, influencing him.

There will be a strong minority that will be quick to condemn and attempt to block all change. They would like him to fail, and badly, to justify their own prejudice and self-interest.

He will disappoint many, in many ways, including Le Propriétaire here at the Cafe. How can it be otherwise? He is only a man, facing some of the toughest choices presented to a new president taking office in war and economic crisis. Truman and FDR rose to the task. So did another Illinois Senator with only one term under his belt when he took office: Abraham Lincoln.

He could fail, he could succumb to partisan corruption, he could not only disappoint but fail to deliver on the promise of change for any number of reasons. John F. Kennedy was the fist Catholic ever elected president. Most now have forgotten the concern and a general fear this caused among the same groups and the elite that also fear Obama. Kennedy and his brother took on an embedded element of corruption that was pervasive in the country, and they both paid for it with the greatest sacrifice.

We cannot know what will happen, we do not know if and how he might rise to this terrible occasion, but we do know that we will not agree with everything he does, and may even become as bitterly disappointed with him as we were with George W. Bush after his first term in office. We hope not, for his failure will be our collective misfortune.

But for our own sake and those of the people of the US, we do sincerely wish him well, and would do anything to help to secure our national welfare from the dangers we now face, and those which are yet to appear.

So, taken in that context, here are the priorities in the president-elect's own words.

"Let us remember that if the financial crisis has taught us anything, it’s that we cannot have a thriving Wall Street while Main Street suffers,” he said in his speech Tuesday night. “In this country, we rise or fall as one nation, as one people.”

Obama from his debate transcript: "We're going to have to prioritize, just like a family has to prioritize. Now, I've listed the things that I think have to be at the top of the list.

Energy we have to deal with today, because you're paying $3.80 here in Nashville for gasoline, and it could go up. And it's a strain on your family budget, but it's also bad for our national security, because countries like Russia and Venezuela and, you know, in some cases, countries like Iran, are benefiting from higher oil prices.

So we've got to deal with that right away. That's why I've called for an investment of $15 billion a year over 10 years. Our goal should be, in 10 year's time, we are free of dependence on Middle Eastern oil.

And we can do it. Now, when JFK said we're going to the Moon in 10 years, nobody was sure how to do it, but we understood that, if the American people make a decision to do something, it gets done. So that would be priority number one.

Health care is priority number two, because that broken health care system is bad not only for families, but it's making our businesses less competitive.

And, number three, we've got to deal with education so that our young people are competitive in a global economy.

But just one point I want to make, Tom. Sen. McCain mentioned looking at our records. We do need to look at our records.

Sen. McCain likes to talk about earmarks a lot. And that's important. I want to go line by line through every item in the federal budget and eliminate programs that don't work and make sure that those that do work, work better and cheaper.

But understand this: We also have to look at where some of our tax revenues are going. So when Sen. McCain proposes a $300 billion tax cut, a continuation not only of the Bush tax cuts, but an additional $200 billion that he's going to give to big corporations, including big oil companies, $4 billion worth, that's money out of the system.

And so we've got to prioritize both our spending side and our tax policies to make sure that they're working for you."

"The deepest, the only theme of human history, compared to which all others are of subordinate importance, is the conflict of skepticism with faith." J. W. von Goethe

And, we might add, the conflict between the obligation of duty and a retreat into self-absorption and despair.

ADP Report Shows Worse Jobs Losses Ahead of Friday's Non-Farm Payrolls Report

We are at the end of the beginning, with much more to follow.

Bloomberg
ADP Says U.S. Companies Reduced Payrolls by 157,000
By Bob Willis

Nov. 5 -- Companies in the U.S. cut an estimated 157,000 jobs in October, the most in almost six years, a private report based on payroll data showed today.

The drop was larger than forecast and followed a revised 26,000 decrease in September that was bigger than previously estimated, ADP Employer Services said. The decline in employment was the biggest since November 2002, when the U.S. was emerging from a recession... (Unemployment tends to peak near the end of a recession. Does this imply that we might be near the end of this recession? Dream on. The recession of 2002 was a thunderstorm compared to this deluge. - Jesse)

The ADP report was forecast to show a decline of 102,000 jobs, after an originally reported drop of 8,000 in September, according to the median estimate of 28 economists in a Bloomberg News survey. Projections ranged from decreases of 245,000 to 70,000.

ADP includes only private employment and does not take into account hiring by government agencies, which is included in the monthly payroll report. Macroeconomic Advisers LLC in St. Louis produces the report jointly with ADP.

Payroll Forecast

The government's Nov. 7 report may show total payrolls fell by 200,000 last month, and the unemployment rate rose to a five- year high of 6.3 percent, according to the Bloomberg survey median. The economy has lost 760,000 jobs in the first nine months of the year.

Private payrolls dropped by an average 108,000 a month from January through September, according to the Labor Department. The ADP estimate shows average private employment gains of 2,300 in the first nine months of the year.

Job cuts announced by U.S. employers jumped 79 percent in October from a year earlier as the credit crunch rippled through the economy, a report from Chicago-based Challenger, Gray & Christmas Inc. said today. Firing announcements rose to 112,884, the highest level in almost five years, from 63,114 in October 2007.

Today's ADP report showed a decrease of 126,000 jobs in goods-producing industries including manufacturers and construction companies. Service providers cut 31,000 workers. Employment in construction fell by 45,000.

Declines Throughout

Companies employing more than 499 workers shrank their workforce by 41,000 jobs. Medium-sized businesses, with 50 to 499 employees, down 91,000 jobs and small companies decreased payrolls by 25,000.

The report did not reflect the strike by about 27,000 machinists at Boeing Co. that was resolved earlier this month, ADP said.

The ADP report is based on data from 399,000 businesses with about 24 million workers on payrolls....