Marc Faber is a highly influential economic forecaster and investment adviser who warned that the October 1987 crash was on the way, then predicted the Asian financial crisis a decade later. He produces a publication from Hong Kong called the "Gloom, Boom and Doom" report, and perhaps in keeping with that title has raised the spectre of depression.
I spoke with Marc Faber by satellite in Hong Kong late today.
What's your read on Wall Street now and the potential for things to get further out of hand in the wake of the latest upheaval?
MARC FABER, INVESTMENT ADVISOR: Well I mean we have fallen from a peak of 1576 on the S&P to below 1,300 and the market may be modestly oversold but I think one of the problems is that sentiment is actually still quite optimistic because a weak ago, Tuesday a week ago, the Dow was up 400 points in one day. That doesn't sound like a selling panic or really a wish of investors to get out. Most of the investors I know they are more afraid to miss the next leg in the bull market or a recovery move than to lose by the market going down further.
KERRY O'BRIEN: Did Bear Sterns take you by surprise?
MARC FABER: No, it didn't take me by surprise and it would take me by surprise if that was the only case of a major financial institution being forced to the wall.
KERRY O'BRIEN: What credence do you give to the expectation of another interest rate cut of as much as one per cent overnight in the US?
MARC FABER: Well I think we have in the US a money printer at the Fed, Mr Bernanke, and he's written many papers on the subject and he's given speeches on the subject. I think he will go down to interest rates of zero per cent.
KERRY O'BRIEN: You obviously don't think much of Mr Bernanke and his strategies, do you?
MARC FABER: I don't have a very high opinion of the Fed because if you look at the last 20, 25 years, and if you look at the current financial crisis, then you have to ask the causes of the current financial crisis and the causes are really excessive monetary growth and excessive debt growth, especially after 2001 when the Fed and at that time Mr Bernanke was already a Fed governor, he wasn't the chairman yet. The Fed cut the Fed fund rate from 6.5 per cent to one per cent, kept it at one per cent until June 2004 when actually the US economy began to recover in November 2001. So almost three years into a recovery the Fed fund rate was still at one per cent. Now this artificially low interest rate encouraged leverage and the period 2001 to 2007 will go down in financial history as a period during which there was reckless lending, reckless borrowing and a huge increase in the leverage. The other day when Carlisle went bust, they are the fund listed in Holland, their leverage was 31 to one. In other words on $1 had of equity you had $31 of assets. The whole of Wall Street has an equity base at the present time of slightly less than $280 billion and assets of $5 trillion, in other words, the leverage is more than 20 to one and I wouldn't want to run a business on a leverage of 20 to one because the margin of error is very small, it's five per cent.
KERRY O'BRIEN: Should Bear Stearns have been bailed out and I guess the next part of that question is how vulnerable was the rest of Wall Street if it had been allowed to go down?
MARC FABER: Well I don't think it would have been a major problem if Bear Stearns had gone down. And also I have to point out it's not truly a bail out because essentially JP Morgan is buying Bear Stearns for $2 a share so there isn't much of a bail out. The bail out may consist of possibly having large losses to be absorbed and these are then guaranteed by the Fed. At the end of the day, I believe that the US taxpayer and taxpayers' elsewhere in the world will be the ones that bail out the system. In other words, taxes will go up and the taxpayer who had nothing to do with the excessive speculation that went on in the financial sector, he will be held responsible for the losses.
KERRY O'BRIEN: Do you think there is scope for a real panic, a dangerous panic?
MARC FABER: Well, I think yes there is scope for a real panic and I think one of the time bombs we have and not too much has surfaced yet in that area is essentially derivatives, because I cannot believe that the financial sector declines as much as it has and so many companies or financial service companies go bust or are essentially out of business and that none of the derivatives player is badly affected. So I think that's something to keep an eye on.
KERRY O'BRIEN: Do you think America is already in recession?
MARC FABER: It's very difficult to interpret statistics that are doctored by the Government. But if you take the US economy and you take nominal GDP growth and then instead of taking say a consumer price index or a personal consumption expenditure index, as compiled by the US Government, if instead you take cost of living increases of a typical family then in real terms the economy has been in recession since last October. You can, for instance, look at the trade deficit it has been shrinking because it produced imports into the United States. You can look at the number of inbound containers into the US, it's down year on year, on the trucking index, rail loadings, so on and so forth. These are indicators you cannot cheat with and they all signal essentially that the US is already in recession.
KERRY O'BRIEN: How long do you believe that recession will last? How severe do you think it might be and how do you think it'll impact on the rest of the world including China?
MARC FABER: In general, I would say the economy in the US would be very sluggish and hardly any growth for a number of years.
KERRY O'BRIEN: And how do you think that will impact on the rest of the world?
MARC FABER: You know we can talk about the economies. The financial markets will move very different than the economies. You could have a strong economy in China and stocks tumbling, you could have a weak economy and stock going up. In general, I think that the emerging stock markets are actually quite vulnerable at the present time.
snip
KERRY O'BRIEN: We're starting to see the D word, depression creeping in to commentary, do you think that is irresponsible, do you think it's over the top, do you think that is an outside possibility?
MARC FABER: Well, it's very difficult to make a distinction between recession and depression. The depression people refer to is usually the depression that follows 1873 in the world and the one that followed 1929. Both of which were deflationary recessions during which the price level declined. Under Mr Bernanke we could have a depression like in Latin America in the 1980s where say incomes in real terms go down, when the asset markets in real terms perform badly, but in nominal terms they pernorm well. In other words, the Dow Jones theoretically in a depression could double or treble in value in nominal terms, in dollar terms but the dollar tumbles by say 80 per cent. So, in real terms you would have essentially a significant decline. So, my view would be depression possible but not in a deflationary mode as long as you have a money printer at the Fed.
KERRY O'BRIEN: Without being a total pessimist, without being complete doctor doom and gloom, what is your worst case scenario?
MARC FABER: The worst case scenario is that, and I would not rule out this to be the case. Essentially the last 20 years we have this expansion of the financial sector and we have accelerating debt growth, the US has a large trade and current account deficit that throws at the present time roughly $800 billion into the world and that this has created what we call the global excess liquidity. Let's say the US consumer retrenches badly, the trade and current account deficit shrink, then international liquidity will shrink and that is very bad for all asset markets, not just for stock, it will also be bad for commodities.
Once commodity prices would decline it would obviously lead to some problems in the commodity producers of the world and also if the US consumer retrenches potentially it can lead to a slow down in production overseas in China, if combined with a slow down in China oil prices decline, it leads to a depression in the Middle East and in oil producing regions and after the global boom we had 2001 to 2007 during which essentially every country was growing except for Zimbabwe and that this global synchronised boom, which is unique in the history of capitalist, it never happened before that every country's growing rapidly, that this global boom is followed by a colossal global bust. That is the worst case scenario.
full: http://www.abc.net.au/7.30/content/2007/s2193110.htm
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