Marc Faber says the whole derivatives market will one day cease to exist
http://www.bi-me.com/main.php?id=55870&t=1&cg=4
December 22, 2011
Marc Faber the Swiss fund manager and Gloom Boom & Doom
editor recently discussed his 2012 predictions. In a nutshell, he expects
politicians in the US and the EU to keep on addressing symptoms rather
than dealing with the fundamental problems of the crisis.
He can smell more money printing and sees less prosperity - to the point
that within 5 years many investments could lose 50% of their value.
"You can increase debt but it doesn't increase prosperity or economic
growth," he says. He predicts the collapse of the derivatives market -
down to zero - and favors equities and gold.
QE3 and equities
Speaking in an interview with Jeanne Yurman of Reuters on the sidelines
of the IndexUniverse's 4th Annual "Inside Commodities"
conference held on December 8 at the New York Stock Exchange, Faber said:
"There is no doubt that QE3 will come in one form or the other, and in
Europe also".
"They will monetize," he stressed.
Because of impending additional quantitative easing, Faber, who predicted
the stock market crash in 1987 and turned bearish shortly before the
2007-2009 bear market, is less bearish on equities now.
If the S&P drops 10%-15% here [the US] and in Europe, "they are going
to print money," he predicted.
Addressing symptoms: The limit of Keynesian policies
Faber sees more can-kicking and more avoidance of real solutions through
additional fiscal deficits and money printing in 2012.
"When the EU [and the eurozone] were formed, in the Maastricht treaty it
was stated that no country should have a fiscal deficit of more than 3%
and the debt to GDP ratio should not exceed 60%, but nobody kept that
promise, Faber reminded his host.
The first one to violate [the rules] was Germany, he added.
When you look at what happened subsequently where countries had
huge expansions in debt/GDP, you have to ask yourself what did these
bureaucrats do all day? asked Faber.
The renowned investor clearly disagrees with Keynesian policies that
seek to get out of the crisis caused by too much borrowing and spending
by spending and borrowing even more.
The limit of these [Keynesian monetary] actions has been reached
he said. You can increase debt but it doesn't increase prosperity or
economic growth, because there is a point where the excessive debt growth
doesn't stimulate economic activity any more, but it does create bubbles
in different sectors of the economy.
And because we're in a global economy, the intended consequences
of the actions may not even happen in the US. "Mr. Bernanke's monetary
policy was designed to lift the housing market. The only asset that
didn't go up since 2008 is housing."
Banks are so leveraged
Asked about his view on European banks, Faber said they will need more
than US$153 billion to restore confidence. He was referring to documents
from the European banking regulator stating that Europe's banks will
need to raise 114.7 billion euros (US$152.8 billion) in fresh capital as
part of measures introduced to respond to the euro area's sovereign-debt
crisis.
German banks need 13.1 billion euros and Italian banks 15.4 billion
euros in core tier 1 capital, the European Banking Authority (EBA)
said in a document published early December.
"The banks are in a very bad shape because they are so leveraged. US
banks are also leveraged through the derivatives markets and so forth,"
Faber told Yurman, adding that he was very bearish.
The European Central Bank announced December 21 it will lend eurozone
banks 489 billion euros (US$645 billion), more than economists forecast,
for three years in its latest attempt to keep credit flowing to the
economy during the sovereign debt crisis.
It will go down to zero
You can postpone the problems with monetary measures for a long time,
but you can't solve it, Faber noted.
Adding to his repertoire of gloomy predictions, Faber said: "I am
convinced that one day the whole derivatives market will cease to exist,
will become zero."
"Greece should have defaulted; it would have sent a message that not
all derivatives are equal because it depends on the counterparty."
Europe solution
Speaking to India's NDTV December 14, Faber reiterated his 'Europe
solution': "Any country can exit the Eurozone if they want to. If
countries like Greece or Portugal leave the Eurozone, they could have
local currency and the economy would be based on the local currency. Hence
for international transactions, they might use the euro. However,
the losses would be very substantial because they would default on
their debt."
"It would still be a correct solution because the market is already
telling you that Greece is bankrupt and these countries can't pay
their debt. So, that is all they can do to monetize or acknowledge the
problem. Thus, the best way to acknowledge the problem for the weak
countries is to leave the Eurozone," Faber added.
How can investors prepare for a potential global collapse?
"We don't know how the world will look like in the next five years
because we are not dealing any longer with free markets but with markets
that are distorted by continuous intervention by the government. So,
making any prediction is very difficult," Faber said.
"My advice would be to diversify 25 per cent of your assets in real
estate, 25 per cent in equities and 25 per cent in cash and bonds and
25 per cent in precious metals."
The Gold price is cheaper today than 10 years ago, although in nominal
terms it is up 4-5 times, Faber argued in a recent interview.
"But compared with the monetary base, compared to government debt,
compared to the increase of wealth in the world, and compared to the
increase in international reserves, the gold price today is low."
What do other experts think of gold?
The price of spot gold bullion was little changed Thursday morning in
London, easing back from US$1,610 per ounce after yesterday's sharp spike
and pullback in what dealers again called "thin" trade ahead of Christmas.
"There has been a lot of disappointment with gold in the fourth
quarter, especially from those who were banking on the metal's safe
haven properties, given the escalating situation in Europe," says UBS
strategist Edel Tully, quoted by the Financial Times.
Gold bullion will fall below US$1,500 per ounce during the next three
months, according to a poll of 20
hedge fund managers, economists and traders conducted by news agency
Reuters.
"You're looking at Euro weakness, rather than anything else, as the
driving force behind the sell-off [in gold bullion last week]," reckons
David Jollie, analyst at Mitsui Precious Metals, adding that many traders
will be reluctant to buy gold so close to the end of the calendar year.
"Whatever your [longer-term] view, you have to ask what the chances are
of making money by the end of the year...that says to a lot of people
that this is not a market to get longer in.