INTERNATIONAL. Marc Faber the Swiss fund manager and Gloom Boom & Doom editor spoke today about the Standard & Poor's credit rating downgrade of US sovereign debt, and how the downgrade was long overdue as the 'junk bond' was no longer worth of an AAA rating.
He views the downgrade as moderately positive for equities because it shows investors there is a risk in holding government bonds and discusses the conditions that will lead to QE3.
Speaking in an interview from Chiang Mai, Thailand, with Susan Li on Bloomberg's "Asia Edge" this morning, Faber said a government bond is rated AAA when the issuer is willing to pay the interest in a stable currency. "We are not dealing, in the case with the US Dollar, with a stable currency."
"The downgrade was overdue," Faber told Li, adding that the agency "basically downgraded a junk bond because it was no longer an AAA"
"The US fiscal position is a disaster if we include the unfunded liabilities and some kind of default will occur," he predicted.
He went on to explain that there are two ways that can lead to default: 1) Not paying interest and restructuring debt or 2) repaying the debt and the interest in a depreciated currency. Faber argues that the US Dollar is losing more value in terms of purchasing power than other currencies.
Faber, who believes markets began a bear market on May 2 2011, sees the impact of the US downgrade on equities as positive.
"I personally think the downgrade of US debt is actually moderately positive on equities because it shows investors very clearly there is a risk in holding government bonds anywhere in the world," he said.
He sees risks rising from two factors: 1) Interest rates go up and the value of bonds decline, or 2) you have a sovereign downgrade and "when the AAA turns to DDD, yields go up."
"I am the most bearish person in the world but I think over the next 10 years, you will be better off in equities and precious metals than in government bonds," he told Bloomberg's Susan Li earlier today
Faber expects a market rally soon because equities are 'oversold,' however he doesn't see new highs this year above the May 2 2011 high on the S&P 500 of 1,370.
The S&P 500 Index slumped another 32 points, or 2.6% in early trading this morning, to below 1,170.
IS QE3 on the way?
"I can smell QE3, QE4 and many more, Faber told Li.
There are two conditions that will lead to QE3, according to Faber: "Either the economy shows significant weakness, which is a possibility in the second half of this year and this is what the stock market is trying to tell you, or the S&P 500 drops to around 1,100 or 1,050 and then we'll get QE3," Faber argued.
Faber said the US economy is hardly recovering and while some sectors may be doing well, "housing is still depressed and unemployment is still unacceptably high and probably higher than the government is publishing in terms of its statistics."
He added that although the economy is doing badly, the key is really that "you need significant more weakness and more weakness in equities to get QE3."
On Friday, Faber told Bloomberg it was now a crucial time for the Fed: "Now we'll see if Mr. Bernanke is a true money printer or an amateur money printer. If he is a true money printer, he's going to start printing soon.
About Dr. Marc Faber
Dr Marc Faber was born in Zurich, Switzerland. He went to school in Geneva and Zurich and finished high school with the Matura. He studied Economics at the University of Zurich and, at the age of 24, obtained a PhD in Economics. Between 1970 and 1978, Dr Faber worked for White Weld & Co in New York, Zurich and Hong Kong.
Since 1973, he has lived in Asia. From 1978 to February 1990, he was the Managing Director of Drexel Burnham Lambert (HK). In June 1990, he set up his own business which acts as an investment advisor and fund manager.
In 2000 Faber decided to spend more time writing his newsletters as well as growing his advisory business. He moved back to his home in Chiang Mai, Thailand, maintaining only a small administrative office in Hong Kong.
Dr Faber publishes a widely read monthly investment newsletter 'The Gloom Boom & Doom Report' which highlights unusual investment opportunities, and is the author of several books.