2 March 2009

Dr Doom says US govt bonds next bubble to burst

SINGAPORE, Feb 23 – As usual, Dr Marc Faber, the author of The Gloom Boom and Doom Report and contrarian views, did not disappoint the masochist in us as he gave his spiel on the causes of the current economic turmoil at a dialogue on Friday organised by The Business Times in partnership with Julius Baer, one of Switzerland's leading wealth managers.

His topic “Were You Born Before Or After 2007”, that is, before or after the global economies began their steep decline, got nearly 400 bankers and businessmen intrigued enough to spend four-and-a-half hours at the Ritz Carlton Singapore.

Luckily lunch was served before Dr Doom, as Dr Faber is often called, took the floor. The picture he painted was indeed gloomy, with no end in sight of what appears to be a very long tunnel.

The present credit crisis caused by ultra expansionary monetary policies was very serious, he said – as if the audience of bankers and business were not already aware of this.

He went on to add that non-financial credit growth has declined from an annual rate of 16 per cent in late 2006 to between 1 and 2 per cent now.

The deleveraging taking place among financial intermediaries is negative for the American economy that is addicted to credit growth, he pointed out. The United States' trade and current account deficits will shrink further and diminish international liquidity. This is bad for asset prices.

“We had an unprecedented global economic boom between 2002 and 2007. A colossal global economic bust is now following,” he said.

And worse might follow, as he noted: There was still one bubble more to be deflated – US government bonds.

Adding more fuel to his fire of gloom was his warning that regardless of the policies followed by the US government and its agencies, the American consumer was in a recession, which will only deepen.

“Expansionary monetary policies, which caused the current credit crisis in the first place, are the wrong medicine to solve the current problems. They can address the symptoms of excessive credit growth, but not the cause,” he noted.

Expansionary fiscal and monetary policies will, after a bout of deflation, lead to much higher inflation rates, which will have a negative impact on the valuation of equities in real terms, he observed.

“But what options does the Federal Reserve have with a total credit market debt to GDP (Gross Domestic Product) of more than 350 per cent?” he asked rhetorically.

And if that was bad enough, he raised the spectre of war looming on the horizon, noting that geopolitical tensions were on the rise. He predicted that commodity shortages, especially of oil, would lead to increased international tensions and to what he called resource nationalism.

The shortage of oil would be caused not only by increased demand from China and India, but also the Middle East. “Not only do they (the Middle East) produce oil, they produce too many babies,” he said in one of the few light moments of his dialogue.

The good doctor, however, had some upbeat investment advice: In Asia, avoid real estate in financial centres, but look at things such as soft commodities, which, while volatile, are on an upward trend.

There are also opportunities in pharmaceutical and hospital management companies, and in banks, insurance companies and brokers, especially in emerging economies.

Opportunities also abound in plantations and farmlands in Indonesia, Malaysia, Latin America and the Ukraine. He also advised investors to go long on gold and corporate bonds but to dump US government bonds.

However, what was lacking at the talk were solutions to the current crisis. And answers. When can we see the light at the end of the tunnel? How long is the tunnel that we are in? – Today


No comments: