Updated

Dr Mark Faber is one of the more provocative experts on global markets and editor and publisher of The Gloom, Boom and Doom Report.

Source: Lateline Business | Duration: 7min 16sec

Topics: world-politics, economic-trends, globalisation---economy, banking, markets, money-and-monetary-policy, united-states, greece, european-union

Transcript

TICKY FULLERTON, PRESENTER: 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.

I spoke to Dr Faber from Hong Kong earlier.

Marc Faber, welcome to Lateline Business.

MARC FABER, EDITOR AND PUBLISHER OF THE GLOOM, BOOM & DOOM REPORT: It's my pleasure. Thank you.

TICKY FULLERTON: Now we have US$400 billion in Operation Twist, the latest plans to avert a crisis. What do you think this money will be: good money or money down the drain?

MARC FABER: I have been for years highly critical of Federal Reserve policies of Mr Greenspan and Mr Ben Bernanke for printing money, but this time around Mr Bernanke did exactly the right thing.

He didn't increase the balance sheet of the Federal Reserve, he just shifts maturities from holdings short-term to long-term assets, in other words long-term Treasury bonds. The only problem I can see with this policy is that when one day in future - could be in six months, it could be in one year, it could be in three years - the Fed will have to increase interest rates.

It will be very difficult for them because then they will lose a lot of money on their long-term bond positions. And so they may be very reluctant to adjust interest rates on the upside when it will be necessary.

TICKY FULLERTON: Is the shift that they have created now something which will make mortgage rates presumably more attractive? Do you think that that will occur or do you think banks will just simply put up fees and there won't be much of a difference on the ground?

MARC FABER: Well I think that 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 per cent on the Fed fund rate to the courage level of zero, the lower interest rates haven't helped the economy at all.

It's helped the financial sector, it's helped the banks, but it hasn't helped the man on Main Street. But at least what is does, by not expanding the Fed's balance sheet, it will strengthen the US dollar and there will be less pressure from the commodities space on prices.

TICKY FULLERTON: We hear rumours of course that there may be more stimulus to come ...

MARC FABER: Yes.

TICKY FULLERTON: ... but we now have this week a bank - bank downgradings on both sides of the Atlantic. Incredible volatility in the markets too. Do you see a bank crash happening or just more volatility?

MARC FABER: Well I think it already happened. Basically, in 2008, most banks in the Western world went bankrupt. The Government came out and bailed them out and provided liquidity to the banking system. What subsequently happened, you can see with UBS in instead of holding subprime loans where they went bankrupt in 2008, they now trade in Greek bonds, Portuguese bonds, indexed futures and so forth. The banks are basically bankrupt.

TICKY FULLERTON: Are you now expecting a formal Greek default, and then what happens?

MARC FABER: Well I think the best would be for the Greeks to default, to leave the EU, and they would be then a restructuring occurring whereby everybody who's leant money to Greece, in other words over 400 billion euros, will have to take a loss, but that's why we have a market economy, that countries and companies that are badly-run and are over-leveraged or have borrowed too much, that they go bankrupt and then the system is cleaned. Otherwise, you never clean the system.

TICKY FULLERTON: Last month you called the start of the bear market. What is your outlook for corporate earnings?

MARC FABER: I don't believe that the stock market around the world got hit this hard just because of Greece. I think the stock market is discounting something bad globally.

I suspect - I suspect it could be a meaningful slowdown in China and disappointing corporate profits in the United States and in Europe. That's what my suspicion. But it could be even worse.

We have big problems coming towards us from the Middle East. The Middle East will go up in flames and that will have an impact obviously on oil prices and on the valuation of financial assets.

TICKY FULLERTON: Are you talking when you mention the Middle East about a political crisis or are you talking about oil or both?

MARC FABER: I am talking about a social upheaval where regime changes occur and that the new regimes will be far less friendly towards Western countries, including Australia.

TICKY FULLERTON: You mentioned China. We of course rely a great deal on the China growth story. You're not so optimistic.

MARC FABER: Well basically, 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.

I'm not saying that China is finished, but I'm saying that we can have a meaningful setback. And Australian growth today depends entirely on China - not a little bit; entirely. And if China has a recession, and the price of copper would suggest that this is happening, then obviously Australia will be hit very hard, including the Australian dollar.

TICKY FULLERTON: Finally, Marc Faber, where should we put our money to protect our wealth?

MARC FABER: Well, I mean, to tell you the truth, and whoever claims that he knows doesn't know, we don't know how the world will look like in five or 10 years' time. My advice is you need to diversify in relatively uncorrelated assets.

So you own, say, 25 per cent of your assets in real estate, 25 per cent in gold, 25 per cent in equities and 25 per cent in cash. And, with that combination you have the flexibility.

So I think you need to realise we all don't know how the world will look like in five or 10 years' time. The best is that we prepare because we're all doomed! We're all doomed! But we have to prepare our assets in such a way.

TICKY FULLERTON: It's one of your favourite words, I know. Marc Faber, thank you very much for talking to us tonight.

MARC FABER: It's my pleasure.