Bubble, Bubble, Money and Trouble
Marc Faber, publisher of the Gloom Boom & Doom Report, is no fan of central-bank money-printing, which widens the wealth gap. But he's bullish on Asian markets such as Vietnam, and European telecom and utility shares.
Marc Faber occupies a unique perch in the investment universe, as the title of his newsletter, the Gloom Boom & Doom Report, might suggest. A big-picture thinker who is also on intimate terms with individual stocks, especially in emerging markets, he tends to view the world with a skeptical eye, and never hesitates to speak his mind when things don't look quite right. In other words, he would be the first in a crowd to tell you the emperor has no clothes, and has done so early, often, and aptly in the case of numerous investment bubbles.
Marc, who was born in Switzerland, lives in Thailand, and runs his investment and advisory business out of Hong Kong, sees a bubble today in high-end assets, from stocks to art to real estate. It's all a consequence, he says, of central bankers' attempts to deluge the financial system with money to drive down interest rates and spur economic growth. The problem is, the money is flowing in dangerously lopsided fashion—into the Hamptons and Lamborghini dealerships, and other playthings of the super-duper rich. The disconnect with the "real" world won't end well, he predicts, although he espies plenty of ways to prosper as the endgame unfolds.
A longtime member of the Barron's Roundtable, Marc missed the festivities in January due to a competing commitment. With stocks soaring and central banks making news, it seemed like a good time to chat.
Barron's : The Dow Jones industrials are up 17% this year. The Nikkei has rallied 60%, even after its recent selloff, in response to the Bank of Japan's asset purchases aimed at weakening the yen. Remind us again why you're so negative on "money-printing." Shouldn't investors be toasting Federal Reserve Chairman Ben Bernanke right now?
Faber: I own equities, and I should thank Mr. Bernanke. The Fed has been flooding the system with money. The problem is the money doesn't flow into the system evenly. It doesn't increase economic activity and asset prices in concert. Instead, it creates dangerous excesses in countries and asset classes. Money-printing fueled the colossal stock-market bubble of 1999-2000, when the Nasdaq more than doubled, becoming disconnected from economic reality. It fueled the housing bubble, which burst in 2008, and the commodities bubble. Now money is flowing into the high-end asset market—things like stocks, bonds, art, wine, jewelry, and luxury real estate. The art-auction houses are seeing record sales. Property prices in the Hamptons rose 35% last year. Sandy Weill [the former head of Citigroup] bought a Manhattan condominium in 2007 for $43.7 million. He sold it last year for $88 million.
Money-printing boosts the economy of the people closest to the money flow. But it doesn't help the worker in Detroit, or the vast majority of the middle class. It leads to a widening wealth gap. The majority loses, and the minority wins. Although I have been a beneficiary of this policy, I can't approve as an economist and social observer.
But wouldn't everyone lose if the Fed hadn't followed this playbook after the financial crisis of 2008?
Why start with 2008? The government bailed out savings-and-loan depositors during the thrift crisis in the late 1980s. The U.S. Treasury and Federal Reserve bailed out Mexico in the mid-1990s. The biggest policy mistake occurred with the Fed-supervised bailout of the hedge fund Long-Term Capital Management in 1998, because it gave a green light to Wall Street to keep leveraging up.
Another policy mistake was made in 2000, right after the Nasdaq collapsed. The system probably could have handled a recession then, but instead, the Fed engineered a drop in interest rates, eventually to 1%, that encouraged a huge housing bubble. After it burst in September 2008, Bernanke slashed short-term rates to near-zero, where they are still. Meanwhile, the stock market is up 150% from its 2009 lows.
Are you suggesting stocks are a bubble?
I am suggesting that in the fourth year of an economic expansion, near-zero interest rates will lead to a further misallocation of capital. I thought the U.S. market would have a 20% correction last fall, but it didn't happen. I also said the market might explode to the upside before the correction occurred. We might be in the final acceleration phase now. The Standard & Poor's 500 is at 1650. It could rally to 1750 or even 2000 in the next month or two before collapsing. People with assets are all doomed, because prices are grossly inflated globally for stocks, bonds, and collectibles....MUCH MORE
