INTERNATIONAL. Marc Faber the Swiss fund manager and Gloom Boom & Doom editor spoke Tuesday about the Fed's decision to keep interest rates low for a prolonged period of time and the prospects of QE3. He says the Treasury market is a gigantic bubble and long-dated T-bonds are the short of the century. Faber suggests that sometimes the best the Fed can do for markets is to do nothing!
He also talks about gold and how "every responsible adult should gradually accumulate gold".
Speaking in an interview from Chiang Mai, Thailand, with Carol Massar and Matt Miller on Bloomberg Television's "Street Smart", Faber said: "The Fed did the right thing" by not announcing QE3, so they can now watch the reaction of assets prices.
Faber, who predicted the stock market crash in 1987, turned bearish shortly before the 2007-2009 bear market and called the 2009 lows, believes the markets will now test the July 2010 lows for the S&P 500 at 1,010 and "after that we'll get a QE3 announcement."
The technical picture is so horrible that "I would use the rebound as a lightening up opportunity - I would reduce positions," he told Carol Massar.
Faber also warned that by selling 'in such a rapid way and with such a momentum,' the markets are signaling that "something really wrong [would] happen in the next 2-3 months...maybe there is geopolitical problems, maybe the Middle East blows up, maybe the economy is horrible"
The speculative practice of short-selling will be restricted from Friday in Belgium, France, Italy and Spain to combat "false rumors" that have destabilized the markets, European regulators said.
Short-sellers sell borrowed shares with plans to buy them back later at a lower price.
Some believe a ban will have unintended consequences. “EU policy makers don’t seem to understand the law of unintended consequences,” Jim Chanos, told Bloomberg yesterday. “The vast majority of short-selling financial shares is by other financial institutions, hedging their counterparty risks, not speculators. The interbank lending market froze up completely in October to December 2008 - after the short-selling bans.”
It is the worst thing to do right now," says Abraham Lioui, economics professor at France's Edhec business school. "This would signal to the market there may be something fundamentally bad that is happening."
"The Fed is underestimating the severity of the coming economic downturn and they have spent - shot out- their bullets," Faber told Bloomberg.
It is very difficult to follow with QE3 right here because gold prices are going ballistic and the dollar is very weak and there are unintended consequence with implementing QE3 right here,' he added.
What can the Fed do to support the economy?
"The best they could do for markets would be to collectively resign," Faber suggested.
"Everybody in the world has become a Keynesian, everybody thinks the government should do this and that, the Fed should do this, the Treasury should do that.....I think sometimes the best is to do...nothing!
Reiterating his views on the prospects for another asset purchase program, Faber asked: "What has QE1 and QE2 done for the labor market? Nothing at all, and nothing for the housing market."
"It [QE] has lifted stocks and it created wider wealth inequality in the sense that people who own assets have done well and people who are in the lower income recipient groups are getting hurt from rising energy and food prices," he added.
What should be done?
In a quick assessment of the causes of the crisis and the required solutions, Faber said: From 1981 to 2007 the economy was living beyond its means. As a result of continuous debt accumulation, GDP was higher that would have otherwise been the case. Now we have a period of sub-par growth that can last for quite some time."
Instead of being encouraged to spend, "people should be encouraged to save more and the US should save more and spend less, and capital spending would eventually pick up." he suggested.
The short of the century
The renowned investor said long-dated Treasuries would be one of the worst investments for the long-term.
"I think the Treasury market is another example of a gigantic bubble," he stressed.
The problem with the Fed's policy of zero percent interest rates is that they effectively throw money at the system but they didn't control where the money will flow to. So it can flow at some point at commodities, gold, oil, Treasuries. But it doesn't flow evenly into these assets and in my opinion, the long-dated Treasuries is the short of the century."
Is gold in a bubble?
Faber doesn't think gold is a bubble, but because of the recent explosion in prices, a correction may be overdue.
As to the benefits of holding gold , Faber sees it in these terms: "I have maintained for the last 12 years that every responsible adult should gradually accumulate gold because not owning gold is to trust the government.
Spot market gold prices fell nearly 1% in an hour Friday morning London time – hitting a low of US$1,746 an ounce – however prices remained 5% up on the week as we head towards the weekend.
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.