Wednesday, October 2, 2013


By Taki Tsaklanos,

When Marc Faber talks, we listen. His successful investment career combined with down-to-earth economic and financial insights set him apart. During several recent interviews Mr. Faber painted a picture of how he looks at the ongoing debt crisis and especially its unavoidable end game. This article provides the answer on several questions that should be top of mind of every investor.

What to think about the non-taper by the US Federal Reserve?

"When the Fed began Quantitative Easing 1 (QE1) in 2008, I said it would continue until QE99. So I’m not so surprised by the “no tapering decision.” But this money printing has numerous unintended consequences and actually does not help the economy much. Asset purchases benefit maybe 1% of the population, the super-rich. I’m not complaining because I own stock, bonds and real estate, but from a social point of view, it’s undesirable because it creates widening wealth inequality and dissatisfaction among the majority of voters. This could lead to more votes for a populist leader who will then tax the wealthy more heavily."

What are the fundamental dangers of this debt crisis?

"Unlike the '50s and '70s when there was relatively less overall debt, a financial market crash did not inflict great damage on the economy. Debt levels are significantly higher these days, and so a market crash can inflict serious damage on economies. We've gone through a period of huge asset inflation, in stocks, bonds, commodities, and real estate, and we essentially now have in the world, a huge asset bubble. So everything is grossly inflated."

What is the next financial bubble?

"The problem is I believe you and I are the bubble … the financial system is just too big, that is the problem. Maybe we can't see where the next bubble is because we are the bubble - that is something to consider."

Will credit growth continue contributing to economic growth?

"One day this whole credit bubble will be deflated very badly - you are going to experience a complete implosion of all asset prices and the credit system - but as to when -I don't know."

The writing on the wall: what to think of the declining marginal economic value of debt?

"A dollar of additional credit in the system created significant economic growth, but these days an additional dollar has very little impact. That is a sign that we have reached the end of monetary policy.

How to recognize the end game?

"When the US government has to issue treasuries to pay the interest on its maturing debt. That will be the end game - then you are dealing with a collapse in the currency."
The share of precious metals in Faber's total portfolio?

"I recommend an asset allocation of about 25% in equities; 25% in fixed income, securities and cash; 25% in real estate; and 25% in precious metals—gold, silver. I think I have around 25% in gold whereby I don’t value my gold. I have it and it’s my insurance policy. It is important that one day when the so-called shit hits the fan—and I think the Fed is well on its way to creating that situation—you have access to your gold, that it is not taken away."

What to think of the massive gold accumulation by China, India and Russia?

"In the Far East, we have a tradition of owning physical gold, but what is new is the Chinese government encouraging citizens to own gold. I believe that in the face of political instability and a lack of faith in the U.S. dollar, Asians will continue to accumulate physical gold and silver."

Marc Faber is an international investor known for his uncanny predictions of the stock market and futures markets around the world.


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