Economy

MARC FABER, EDITOR AND PUBLISHER OF THE GLOOM, BOOM & DOOM REPORT

Mortgage One - Thursday, September 22, 2011

One of the more provocative experts on global markets is Dr Marc Faber, a former managing director of Drexel Burnham Lambert, but for two decades now he's been an investment adviser, fund manager and broker dealer, and he's also the editor and publisher of the Gloom, Boom & Doom Report.

Marc Faber has been for years highly critical of Federal Reserve policies of Alan Greenspan and Ben Bernanke for printing money, but the US$400 billion in Operation Twist, the latest plan by Ben Bernanke to avert a crisis is exactly the right thing.

Mr Bernanke didn't increase the balance sheet of the Federal Reserve, his just shifting maturities from holdings short-term to long-term assets, in other words long-term Treasury bonds. The problem with this policy is that when the time comes, in the future be it 3 months or 3 years, the Fed will have to increase interest rates. This policy will make increasing interest rates very difficult as the Feb will lose a lot of money on their long-term bond positions as a result of any rate increase.

This policy is unlikely to make mortgage rates more attractive. If you look at the interest rate movements over the last few years, specifically after September 2007 when they began to slash interest rates from 5.25% on the Fed fund rate to near zero, the lower interest rates haven't helped the economy at all.

The near zero rates have helped the financial sector, especially the banks, but it hasn't helped the man on Main Street. Near zero interest rates has not expanded the Fed's balance sheet, which strengths the US dollar with less pressure from the commodities on prices.

In 2008, most banks in the Western world holding subprime loans went bankrupt. Their Government’s came out and bailed them out by provided liquidity to the banking system. Now these banks are holding and trading in Greek bonds, Portuguese bonds, indexed futures and so forth which are triggering bank downgradings on both sides of the Atlantic and Incredible volatility in the markets.

The best would be for the Greeks to default and leave the EU. A default would require a restructure of these loans whereby everybody whose leant money to Greece, over 400 Billion Euros, will have to take a loss. The virtue of a market economy is that countries and companies that are badly-run and over-leveraged, go bankrupt and then the system is purged, otherwise, you never clean the system.

We are in the beginnings of a bear market. Stock market around the world didn’t get hit this hard just because of Greece. The stock markets are severely discounting globally on the back of disappointing corporate profits in the United States and in Europe and a meaningful slowdown in China.

If you define a bubble as a period during which you have excessive credit growth and artificially low interest rates, for sure, we have a gigantic bubble in China. China isn’t finished, but we will see a meaningful setback. Australian growth today depends entirely on China, not just a little bit. If China has a recession, and the price of copper would suggest that this is happening, then obviously Australia will be hit very hard, especially the Australian dollar.

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