INTERNATIONAL. Swiss financial guru Marc Faber said 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. He 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?

In an interview for business website Swiss Info, he said that there were clear signs of the current credit bubble.

"I had been warning about that for years and not only in the mortgage sector," he said. "But what surprised even me was that [US insurer] AIG would almost disappear and that UBS shares would fall under US$17.20."

He said the credit bubble has been growing for 25 years. But in particular over the past seven years there has been 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% to an unheard of 1% 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.

"I think we're near rock bottom," said Faber. "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."

Faber is known for swimming against the tide of conventional wisdom. But he justifies his views, saying right now he is in line with the prevailing pessimism.

"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."

But Faber said the present crisis has some differences from previous crashes. 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, Faber says.

"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."

Faber said that governments are making a mistake in offering guarantees and pumping thousands of billions into the markets.

"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."

The US government will in future have new debts of at least US$1,000 billion, said Faber. That's on top of the current state debt of US$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.

But Faber said for the stock markets, the only way is up and markets are totally undervalued. He predicts a short-term recovery of easily 20% to 30% in the next two to three weeks. That is not much compared to the huge losses, so we all may have to review the concept of making money from shares, for some time to come.
 

MIDDLE EAST BUSINESS COMMENT & ANALYSIS

• Top news
• Business News
• Company News