INTERNATIONAL. Marc Faber the Swiss fund manager and Gloom Boom & Doom editor recently discussed his 2012 predictions. In a nutshell, he expects politicians in the US and the EU to keep on addressing symptoms rather than dealing with the fundamental problems of the crisis.
He can smell more money printing and sees less prosperity - to the point that within 5 years many investments could lose 50% of their value.
"You can increase debt but it doesn't increase prosperity or economic growth," he says. He predicts the collapse of the derivatives market - down to zero - and favors equities and gold.
QE3 and equities
Speaking in an interview with Jeanne Yurman of Reuters on the sidelines of the IndexUniverse’s 4th Annual “Inside Commodities” conference held on December 8 at the New York Stock Exchange, Faber said: "There is no doubt that QE3 will come in one form or the other, and in Europe also".
"They will monetize," he stressed.
Because of impending additional quantitative easing, Faber, who predicted the stock market crash in 1987 and turned bearish shortly before the 2007-2009 bear market, is less bearish on equities now.
If the S&P drops 10%-15% here [the US] and in Europe, "they are going to print money," he predicted.
Addressing symptoms: The limit of Keynesian policies
Faber sees more can-kicking and more avoidance of real solutions through additional fiscal deficits and money printing in 2012.
"When the EU [and the eurozone] were formed, in the Maastricht treaty it was stated that no country should have a fiscal deficit of more than 3% and the debt to GDP ratio should not exceed 60%, but nobody kept that promise, Faber reminded his host.
The first one to violate [the rules] was Germany, he added.
When you look at what happened subsequently where countries had huge expansions in debt/GDP, you have to ask yourself what did these bureaucrats do all day? asked Faber.
The renowned investor clearly disagrees with Keynesian policies that seek to get out of the crisis caused by too much borrowing and spending by spending and borrowing even more.
The limit of these [Keynesian monetary] actions has been reached he said. You can increase debt but it doesn't increase prosperity or economic growth, because there is a point where the excessive debt growth doesn't stimulate economic activity any more, but it does create bubbles in different sectors of the economy.
And because we’re in a global economy, the intended consequences of the actions may not even happen in the US. "Mr. Bernanke's monetary policy was designed to lift the housing market. The only asset that didn't go up since 2008 is housing."
Banks are so leveraged
Asked about his view on European banks, Faber said they will need more than US$153 billion to restore confidence. He was referring to documents from the European banking regulator stating that Europe's banks will need to raise 114.7 billion euros (US$152.8 billion) in fresh capital as part of measures introduced to respond to the euro area's sovereign-debt crisis.
German banks need 13.1 billion euros and Italian banks 15.4 billion euros in core tier 1 capital, the European Banking Authority (EBA) said in a document published early December.
"The banks are in a very bad shape because they are so leveraged. US banks are also leveraged through the derivatives markets and so forth," Faber told Yurman, adding that he was very bearish.
The European Central Bank announced December 21 it will lend eurozone banks 489 billion euros (US$645 billion), more than economists forecast, for three years in its latest attempt to keep credit flowing to the economy during the sovereign debt crisis.
It will go down to zero
You can postpone the problems with monetary measures for a long time, but you can't solve it, Faber noted.
Adding to his repertoire of gloomy predictions, Faber said: "I am convinced that one day the whole derivatives market will cease to exist, will become zero."
"Greece should have defaulted; it would have sent a message that not all derivatives are equal because it depends on the counterparty."
Speaking to India's NDTV December 14, Faber reiterated his 'Europe solution': "Any country can exit the Eurozone if they want to. If countries like Greece or Portugal leave the Eurozone, they could have local currency and the economy would be based on the local currency. Hence for international transactions, they might use the euro. However, the losses would be very substantial because they would default on their debt."
"It would still be a correct solution because the market is already telling you that Greece is bankrupt and these countries can't pay their debt. So, that is all they can do to monetize or acknowledge the problem. Thus, the best way to acknowledge the problem for the weak countries is to leave the Eurozone," Faber added.
How can investors prepare for a potential global collapse?
"We don’t know how the world will look like in the next five years because we are not dealing any longer with free markets but with markets that are distorted by continuous intervention by the government. So, making any prediction is very difficult," Faber said.
"My advice would be to diversify 25 per cent of your assets in real estate, 25 per cent in equities and 25 per cent in cash and bonds and 25 per cent in precious metals."
The Gold price is cheaper today than 10 years ago, although in nominal terms it is up 4-5 times, Faber argued in a recent interview.
"But compared with the monetary base, compared to government debt, compared to the increase of wealth in the world, and compared to the increase in international reserves, the gold price today is low."
What do other experts think of gold?
The price of spot gold bullion was little changed Thursday morning in London, easing back from US$1,610 per ounce after yesterday's sharp spike and pullback in what dealers again called "thin" trade ahead of Christmas.
"There has been a lot of disappointment with gold in the fourth quarter, especially from those who were banking on the metal's safe haven properties, given the escalating situation in Europe," says UBS strategist Edel Tully, quoted by the Financial Times.
Gold bullion will fall below US$1,500 per ounce during the next three months, according to a poll of 20 hedge fund managers, economists and traders conducted by news agency Reuters.
"You're looking at Euro weakness, rather than anything else, as the driving force behind the sell-off [in gold bullion last week]," reckons David Jollie, analyst at Mitsui Precious Metals, adding that many traders will be reluctant to buy gold so close to the end of the calendar year.
"Whatever your [longer-term] view, you have to ask what the chances are of making money by the end of the year...that says to a lot of people that this is not a market to get longer in.
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.