The Final Crisis Is in the Works

Wednesday, September 1, 2010
By Paul Martin

Easy money will not boost economic activity nor create jobs in the US, says Marc Faber
Tue August 31, 2010

INTERNATIONAL. Marc Faber the Swiss fund manager and Gloom Boom & Doom editor said the market will eventually perceive the easing moves, announced by Fed Chairman Ben Bernanke last Friday, as being inflationary and that the next five years could be a possibe disaster for Treasury bonds investors.

“It is a fallacy to believe that easy money and the purchase of treasuries will boost economic activity in the US,” Faber told Bloomberg in a phone interview from Thailand.

“Money will flow into equities at least over the next couple of weeks, and into commodities,” Faber said.

“Over the last two years we eased massively in the US and where did the growth take place? In Asia”.

“So when we talk about job creation, do you think that Intel or a small businessman will hire more people in the US because of further monetary printing?” he asked.

“No! they will build factories in Asia and hire poeple in Asia and all the monetary policies in the US create mis-allocation of capital and unintended consequences,” Faber said.

Asked by the Bloomberg anchor if a bubble in Treasuries was one of the unintended consequences, Faber said: The Treasury bonds markets and especially the 10-year and 30-year bonds have been rallying for nearly 30 years, since 1981, and we are close to all-time lows in Treasury yields.

“In my view over the next 10 years, Treasuries will be a disaster for investors,” he said.

Referring to the Fed’s Chairman speech last Friday, the famed investor said: “If the economy weakens, and Mr Bernanke has said it, he has emphasized that he is going to print money. So, eventually, and last Friday was a good indicator – what happened is that bonds sunk and stocks went up. Eventually the bond market will see through the money printing – that will eventually lead to inflation somewhere in the system”.

“As the economies don’t recover much, the central banks around the world will print money and nobody really wants to have a strong currency,” Faber added.

What is more important to recognize is the impact on asset market prices, he said.

I think last Friday was an interesting day, Faber said. We had over the last ten days, a lot of negative news and front page articles about market strategist expecting the S&P to drop and that government bonds will continue to rally. And on Friday we had a key reversal day where stocks close up strongly on the day after having been down in the morning and when bonds tumble.

The market, in my opinion, will perceive easing move by central banks around the world as being inflationary, Faber said.

Speaking to CNBC last Tuesday Faber said: “I think that there isn’t much upside potential in Treasurys unless it’s for the short term. But if I look 10 years ahead, where do I want to have my money, then certainly not in USTs”.

He also warned against using foreign demand for Treasurys as a litmus test.

“In 1999 and 2000, foreigners (bought) the Nasdaq and what happened afterwards was a major collapse. I would not look at foreign buying as a very intelligent leading indicator,” Faber said.

But for investors looking for the safety that U.S. debt provides, he recommends buying short-dated instruments as long-dated ones do not offer much upside potential.

Faber continues to be bullish on commodities, particularly farmland, agriculture and gold.

“I’ll rather buy an asset class, whatever it is, that has been in a bear market for 10 or 19 years,” Faber said.

Recently, the renowned bear told CNBC that US Federal Reserve will create a “final crisis” by continuing to print money.

“They will print and print and print until the final crisis wipes out the entire system,” he said in one of his most memorable recent quotes.

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