‘A synchronised boom will bring in a synchronised bust’

Is it boom or gloom? Dr Doom weighs in

HONG KONG: “I’ll never be made chairman of the US Federal Reserve Board,” says investment analyst Marc “Dr Doom” Faber wryly. “But if I were, interest rate in the US would be 10% now!”

As a contrarian investor who has been on the ball with his early warnings on bear markets, the author of the widely read Gloom Boom Doom newsletter doesn’t exactly pull his punches.

And as he presented his outlook on the global economic situation in Hong Kong on Friday, Faber was particularly searing in his observations about the role of expansionary monetary policy in the US in fuelling bubble markets around the world.

In Faber’s estimation, Fed chairman Ben Bernanke’s decision earlier this week to lower interest rates by 0.5 percentage points was “totally irresponsible”, given that asset markets across the world were already excessively inflated.

“You have to understand the kind of delusionary monetary philosophy that Bernanke - and his predecessor Alan Greenspan - suffer from: never mind if housing prices go up 1,000 times, but if it drops 5%, we will intervene with extraordinary measures, we will drop dollar bills from helicopters, and support the asset.”

Money, says Faber, has been kept “too cheap for too long” in the US, and as a consequence, “we now have a bubble in everything… Real estate, stocks, commodities… prices of even useless collectibles have gone up.”

In the past five years, credit growth in the US has been stronger than in any previous expansion in the US, notes Faber. “But it raises some questions: strong debt growth today drives the economy, but in order to keep the economy plan at the same altitude, debt growth must accelerate. If it slows down, economic growth slows down and recession follows.”

So, when debt is 330% of GDP - as it is in the US today - and rising rapidly, the US has “no option but to print money massively,” says Faber. “They cannot pursue a tight monetary policy.”

Faber believes that, given the fact that China, India and the other rapid growing emerging economies are increasingly having an inflationary impact on the world, the secular trend in commodity prices will remain intact. “Analysts have overemphasised the deflationary impact of China on the world and underemphasised the inflationary impact that China and India have on the raw materials market.”

What’s more, in Faber’s reckoning, the US dollar, which has been losing ground in recent times, is losing its standing as a “store of value”.

“I believe that the dollar is terribly expensive vis-à-vis Asian currencies - particularly the yuan and the Indian rupee.

“I would argue that the Chinese currency should double in value… that would be very good to contain inflation in China, by bringing down the effective cost of the raw materials it procures from the global market… It’s the same in India: let the rupee appreciate for a while.”

People in the West tend to see emerging economies as “poor cousins”, but in fact, for the first time in history, oil consumption in emerging economies exceeds that of the G-7 countries, notes Faber.

“Moreover, whereas semi-conductor sales in the US, Europe and Japan are still below their 2000 peak, in Asia, they have more than doubled… It shows how important Asian economic growth has become…. I would, in fact, argue that in the history of capitalism, the emerging economies have never been in a better financial position as they are today… And the US has never been in a worse position.”

In the 200-year history of capitalism, says Faber, “we now have the first global synchronised economic boom … Every where you go, you see countries are booming, with the notable exception of Zimbabwe, which is in recession.”