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)
Approaching our economic problems through crony capitalist bailouts of a few large banks (speculative investment banks by any other name) without reform is a policy error of the first order. Attempting to maintain the same unworkable status quo while doing nothing for the wage earners and the bulk of consumers is the curse of ideology and a financial sickness unto death.
