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Marc Faber: Bernanke Policy Will “Destroy” U.S. Dollar

Monday, March 10th, 2008

Recently, Marc Faber was being interviewed in Chicago where he freely shared his thoughts. You can watch the interview at Bloomberg here. Below is the content of the interview as summarized and transcribed by us:

If the statistics were measured properly in the United States, the US would already be in a recession and would already be so in a couple of months.

See our article, How much can we trust the price indices (e.g. CPI)?.

If the US goes into recession, it will not be a total disaster for the rest of the world, except that in the rest of the world, we also have colossal bubbles [in asset prices].

Since the world is in a global boom from November 2001, then this will one day lead to a global bust.

It is very doubtful that the global financial market is de-coupled from the US because of the close linkages and connectivity. For example, if the US stock market goes down, the rest of the world’s stock market will be dragged down as well.

As Marc Faber acknowledged by psychologists’ study, a dosage of bust is more painful than the joy of an equal dosage of boom. In other words, the implication the coming bust will be more pronounced and painful than the euphoria of the preceding 75 months of boom.

In the US, they pursue essentially economic policies that targets consumption, which in my opinion is misguided. What they should pursue is economic policies that stimulates capital investments and capital formation.

We would agree with Marc Faber wholeheartedly, as we quoted Ludwig von Mises in The myth of financial asset ?investments? as savings. As the US began their aggressively loose monetary policy from September 17 2007 by cutting interest rates from 5.25% to 3%…

What is the result? I tell you what the result is! The stock market in September 17 by the S&P is down 10%, the US dollar is down 10%, gold and oil are up 40%. Well done Mr. Bernanke!

Will the stock market continue to fall? Marc Faber said that we have to ask Mr. Bernanke…

… because if he prints money- and I have to add here one point: had I been the professor who had judged his thesis for his PhD, I would not have let him pass. I would have told him actually, “Mr. Bernanke, I have one condition in which I let you pass, and this is you never join a central bank, because you are a destroyer of money as store-of-value function, of the function of money being a unit of account. The only central bank that I would allow you to go to is the one under Mr. Mugabe in Zimbabwe. And I tell you Mr Bernanke with his monetary policy, he will destroy the US dollar.

This is what we said before in Peering into the soul of Ben Bernanke.

As pointed out by the interviewer, the dollar was in decline before Mr. Bernanke took over. Does Bernanke need to ease monetary policy to ease the US economy from this “spunk?” As Bernanke studied about the Great Depression, his conclusion was that the lack of flexibility in the monetary policy that resulted in such a prolonged downturn. Marc Faber disagreed:

The Depression occurred not because the central bank was tied when the Depression occurred. But because it was far too easy in its monetary policy in the period leading to the Depression, from 1925 to 1929.

This is what we said before in What causes economic booms and busts?. As Marc Faber said, it is not only Bernanke is at fault. Greenspan is responsible too, with his loose monetary policies when he cut interest rates to 1% in September 2001 and keep it that way till 2004. That led to the “reckless lending” and “reckless credit growth,” which in turn led to the problems we have today.

Marc Faber said that if he is the central banker, he will raise interest rates much earlier to target asset and credit price bubble and would not have cut the Fed Fund Rate to 1% in 2001. This is because unlike the Fed, he would not base his monetary policy on core inflation (which excludes food and fuel) because all humans eat and uses energy. Now that the Fed had created a “gigantic” credit and asset bubble, which is deflating right now, it is very difficult to re-inflate the bubble because “we are in the process of de-leveraging” as the private sector is now tightening credit conditions, “not the Fed.”

According to Marc Faber’s latest Doom, Bloom and Gloom report, investing in the bond market (mainly Treasuries) is “financial suicide” because with such low yields, actual price inflation will result in negative real returns. Marc Faber believed that “at some stage, the corporate bond market will offer some value.” However, the 10-year and 30-year Treasury market is a “disaster waiting to happen.” As the Fed cuts the Fed Funds Rate to possibly zero, the Treasury market will “tank” at some point in time. Though he is not a US credit analyst, Marc Faber reckoned that in the junk bond area, there should be some good quality bonds from company that can survive and continues to pay interests. He continued,

The arguments for stocks is frequently that you take the earnings yield of the stock market and compare it with the bond yield and people compare it to Treasury bonds. I think you should take the earnings yield of equities and compare it with, say, a typical S&P company, and that is a yield that correspond to, say, a triple-B, and so, basically as of today, some bonds are more attractive than equity.

Over the past 4 to 5 years, US stock market has underperformed other markets, e.g. the emerging market and the commodity market. However, today, the emerging market is far more vulnerable (e.g. China and India market could easily fall by 30% to 40%). With the money printer in the Fed (Ben Bernanke), the deflation will more likely lead to the US dollar decline than an actual asset price deflation. Thus, relative to the Euro and gold, the US stock market is going down.

Some may argue that given the commodity market has risen so much since 2001, would it be too late to join in the bull market? Marc Faber disagreed with that argument. When the commodity market bottomed and rallied in the 1990s/2000s (note that not all bottomed at the same time), they were at the lowest level, inflation adjusted, in the 200-year history of capitalism. For example, gold was at around $250 when it fell from a high of around $850 in 1980 (which Marc Faber admitted is too high). But in the last gold bull market in the 1970s, gold rose 25 times from $35 to $850. The current gold bull market of several years rose only 4 times. Among the commodity markets, sugar is the cheapest commodity in real terms.

When asked, “Are we going to see a major US bank fail?”

“I hope so.”

“You hope so????”

Marc Faber saw that this is the only way to “introduce discipline” into the US financial system. By continuously bailing out banks, the Fed introduces moral hazard that “perpetuates the mistakes” that the Fed has already done. When asked, which major bank is more likely to fail, Marc Faber had no opinion because that depends on the banks’ derivative exposures, which is the next time bomb to explode. The ‘derivatives’ that he mentioned does not include the structured products (e.g. SIV, CDOs, etc). This will be the next major financial issue in the next 3 to 6 months. Marc Faber believed that we will not see the bottom of the stock market until we see stocks like Google falling 50% from their highs, hopefully more. In a bear market, one sector (e.g. home building) will fall first and then the goldilocks crowd will reassure the market that everything is fine. Then the next sector will fall, followed by next. And so, the bear market has to mature, like “good cheese and wine.”