‘Dr. Doom’ Gloomy On U.S. Economy

Posted In: Bonds, Commodities, Crash Prophets, Economy, Stocks

Yesterday, Marc Faber, managing director of Marc Faber Ltd. and publisher of the Gloom, Boom & Doom Report, spoke to Bloomberg’s Brian Sullivan from Chicago about the state of the U.S. economy, Federal Reserve monetary policy, and the outlook for stocks, bonds, and commodities. Dr. Faber, also known as “Dr. Doom” by the press, is famous for advising his clients to get out of the U.S. stock market one week before the October 1987 crash. During the Bloomberg interview, the Swiss-born investment analyst talked about the following:

Federal Reserve monetary policy

We started in the U.S. to cut interest rates very aggressively on September 17, and we cut the Fed fund rate from 5 ¼ % to 3%. And what is the result? I tell you what the result is. The stock market since September 17 by the S&P is down 10%. The U.S. dollar is down 10%. Gold and oil are up 40%. Well done, Mr. Bernanke…

I tell you that, Mr. Bernanke, with his monetary policies, he will destroy the U.S. dollar.

Faber acknowledged that former Fed chair Alan Greenspan “is also to blame.” He said both Bernanke and Greenspan:

Kept monetary policies far too easy and this led to reckless lending, to reckless credit growth, that caused the problems that we have today…

The Fed has created a gigantic asset bubble, a credit bubble, and now the credit bubble is deflating and it will be very difficult for the Fed to reignite the credit bubble because we are in a process of deleveraging.

Domestic and international stocks

Over the last say 4, 5 years, U.S. stocks have grossly underperformed other markets in the world like emerging markets or the commodity markets. And so, on a relative basis, I think today emerging markets are more vulnerable than the U.S.. Say, you look at India or China, these markets could easily drop 30 to 40% here. Whereas the U.S. with the money printer we have will take the deflation rather through a dollar depreciation than through asset price decline in nominal terms through U.S. dollars.

Later on in the interview, Bloomberg’s Brian Sullivan asked:

And to complete your sunny disposition, you believe that we’re not going to see the bottom in equities until names like Google, RIM, and Apple go 50% from their highs. Correct?

Faber responded:

Yes, at least, at least or more, ideally more.

U.S. financial system

SULLIVAN: Are we going to see a multi-billion dollar bank in the United States fail?
FABER: I hope so.
SULLIVAN: You hope so?
FABER: Yes, of course. That is the only way to introduce some discipline in the financial system of the United States. If you bail out each bank all the time, you create tremendous moral hazard. And you perpetuate the mistakes that the Fed has already done. It is to be hoped that one major financial institution goes bust.

Derivatives

The derivatives, they haven’t exploded yet. That is, that is without, the main course that will then happen within the next 3 to 6 months.

At the end of the interview, Dr. Faber noted, “The bear market has to mature like a good cheese or a good wine.”

You can access the video, with a running time of 15:48, through this Bloomberg News Video link.

Source:

“Marc Faber Interview”
Host: Brian Sullivan
Bloomberg, March 5, 2008

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