Dr. Faber Says Global Economy Could Head for a Bigger Asset Bubble

Your editor is sat in the back row of the British Columbia Ballroom at the Fairmont Hotel, Vancouver.

Behind us on a raised platform are half a dozen sound, video and technical guys and girls. They are pushing buttons, turning dials, listening into headphones and making gestures towards the stage.

On their heads rests the success of the event. So no pressure then!

But in front of us, as we stare out over 900-plus paid-up heads are the onstage stars of the show.

On this first day of the four-day event, the headline act is Dr. Marc Faber, publisher of The Gloom Boom & Doom Report, and is perhaps the original ‘Dr. Doom.’

I’ll have more on Dr. Faber’s speech in a moment. There are a couple of other points worth mentioning first.

When we were asked if we’d like to go on the shindig over here, we naturally jumped at the chance. Who wouldn’t? Aside from the opportunity of experiencing a fantastic city, it would give your editor the perfect chance to corner some of the best financial writers and investors in the business to find out what they think.

Sure, I can get a lot of that just by reading their emails. But there’s nothing like looking someone in the eye as you ask them a question, and as the Fairy Ruddfather would say, “See if they’re fair dinkum with a sauce bottle.”

Or, something like that anyway.

It’s also a perfect opportunity to have confirmed – or contradicted – whether what we’ve been writing about in recent months is on the ball. Or whether we’ve lost all grasp of reality.

After listening to Dr. Faber’s 45-minute presentation we’re pleased to report we’re more convinced than ever that public policy decisions taken by hapless pen-pushers and paper-shufflers the world over are setting the global economy up for a bigger and badder asset bubble.

Of course, that doesn’t mean you shouldn’t try to make money from it. It just means you’ve got to know where to invest.

So, without any further delay, let me take you through what Dr. Marc Faber had to say for himself.

But before you read on, let me warn you. Dr. Faber hasn’t exactly been guzzling down the ‘happy juice.’ His presentation contained predictions of dire future consequences of the terrible economic decisions being taken today.

A quick scan of our notes reveals his forecast for a collapse in US commercial real estate, higher inflation, a further devaluation of the US dollar and a ‘dirty war’ waged by the Chinese.

And I bet you thought your editor was a doom merchant.

There was much to note, and we did our best to take everything down. Here’s what we thought were the most important parts of Dr. Faber’s presentation.

“By keeping interest rates low, the Fed [US Federal Reserve] is forcing people to speculate on something. They did that from 2001, and they’re doing it again.”

It’s a common theme we expect to hear during the rest of the week. And he’s right. If you’re getting next to no real return on a conservative cash investment you are forced to take more risks. Either that or you have to eat into your capital.

Whichever you choose, the government is forcing your hand. Australia is no different to the US, even though interest rates are higher in Australia than in the US. That’s because once you factor in rising prices, your cost of living is going up while your cash reserves are going down.

We note today’s News Ltd story “Experts tip modest price rises: It may not seem like it but official statistics are expected to show that prices are rising modestly.”

Clearly the journalist is living in a parallel universe, or hasn’t been shopping recently. Prices have been going up, they are going up, and they will go up. The statistical boffins that get excited over the “underlying rate, the average of weighted median and the trimmed mean indexes” which excludes volatile items, wouldn’t know a price rise if it smacked them on the head.

In fact part of the reason you get asset bubbles is due to investors trying to take advantage of, or being forced to participate in market anomalies.

Think of how many times you hear the ’speculators’ being demonized by politicians. In many cases you’ll find the speculators have only acted because of wrong-headed short-term policy decisions by politicians – look at the Aussie housing bubble as an example.

Dr. Faber had more to say…

“Mr. Greenspan and Mr. Bernanke have achieved something which no-one had ever before achieve;, they created a bubble in everything.” The one exception, he noted, was the US dollar. The value of which, Greenspan and Bernanke have helped to destroy.

As for property, according to Dr. Faber, US commercial real estate is another bubble waiting to burst. But it’s still not plain sailing for those with a home mortgage either.

“67% of houses in the US have equity of 15% or less. In the 1970s, average home equity was 70%, today it is just 43%.”

Those that think the housing bust has finished – such as CNBCs Jim Cramer – could be in for a shock when millions of US mortgages reset to a higher rate next year. And Australia isn’t immune from this.

Before we left we read a news item about the Commonwealth Bank telling its mortgage broker agents to write a minimum number of loans each month otherwise they will lose their accreditation with the bank.

Doesn’t that strike anyone in the mainstream press as troubling?

Clearly not.

Which is more important to the bank, the creditworthiness of the applicant, or making sure it gets a minimum number of loans each month from the 8,000 accredited brokers on its books?

You and I know the answer to that one. It’s the latter. And it’s all thanks to the absence of ‘moral hazard.’ The banks know for a fact they will be bailed out if they get into trouble.

The banks know for a fact that the government is guaranteeing the deposits of savers of up to $100,000. And the banks know for a fact that if push came to shove the government would splurge out ten times that amount to prevent a single potential voter from losing any money due to the massive risk-taking by the banks.

Now, before I come to Dr. Faber’s comments on China and Asia, a quick mention of the ‘Output Gap.’ You’ll recall it’s the method favoured by Macquarie Bank’s so-called interest rate strategist to determine whether there will be inflation.

We railed against it recently here.

Dr. Faber had this to say on the subject: “The Output Gap was -90% in Zimbabwe. Inflation has nothing to do with industrial capacity, it is to do with money printing.”

We couldn’t agree more. So, China. What does the Dr. have to say here? Well, read on to find out as we wrap up coverage of the first day’s action at the Agora Financial Investment Symposium…

“China is encircled by US military bases in the Pacific. This will lead to increased tensions. The next war won’t be in trenches or tanks lined up, it will be a ‘dirty war’ – internet viruses, pandemics, etc…”

He went on, “Rising commodities prices lead to international tensions – wars lead to soaring prices.”

The battleground, he believes will be over oil: “The US imports 73% of its oil requirements… 95% of Asia’s oil comes from the Middle East. That makes China very vulnerable to oil shocks. The aim of China is to get the US out of the Middle East.”

A rose-tinted view of the future? Hardly. But as Dr. Faber also pointed out, “You need to hold physical commodities, not derivatives with Citibank and UBS.”

Of course, he also added that it’s not easy to store a bunch of iron ore and uranium at home. But that’s why the precious metals – gold, silver, platinum – are an easier alternative.

But despite this, Dr. Faber is bullish on the Chinese and Asian economies. Reading between the lines the endgame seems to be a Chinese win and a US loss.

He said, “The Chinese currency could easily double in value over the next 5-10 years… Once you get a stronger Chinese currency you will get a stronger Malaysian Ringgit, Singapore dollar, etc…”

And this, readers, is indirectly good for Australia – not the war bit of course, but the rest of it. Anyway, it certainly confirms our long-held view that South East Asia is the best exposure for your investments.

If you can’t invest in those economies directly, then investing in Australian resources stocks is the next best thing.

We’ll leave it there for today as we head back into the ballroom to catch the rest of the afternoon’s speakers.