Tuesday, November 6, 2012

What is the cause of the crisis?

 Equities are a much better investment than bonds despite the rally in the debt of some emerging markets, according to Marc Faber, the bearish investor and author of The Doom, Gloom and Boom Report. Investors have been snapping up sovereign bonds issued by emerging and frontier countries as they search for yield after quantitative easing – massive money printing – in the US, Japan and Europe.

 “I would not own sovereign bonds. Maybe in some Asian countries, as they have been more prudent with their fiscal situation,” Faber told Emerging Markets in an interview. “People are chasing yields but I think there is a risk in sovereign bonds. I don’t care what other people do, that’s what I do,” he added.

 Stocks rise more in times of inflation, which is already happening in parts of the world, and therefore “between now and the eventual outcome [of the crisis that started in 2007], which will be a disaster, you’re better off in equities than in bonds,” Faber said. He has long argued that quantitative easing measures, taken in order to counteract the deflationary effects of the financial crisis and of the eurozone debt crisis, will lead to high inflation and said prices were already on the rise.

 “The costs of living have increased for most people and are higher than the official figures,” he said.

“Some economists say that there is little consumer price inflation. But there is, because the money-printing has lifted asset prices like those for luxury property, art, equities or bonds. There is inflation in the system but it’s not obvious.”
Faber said he found stocks in the debt-ridden eurozone countries “rather attractive” as “a lot of bad news” was discounted in these markets. Faber said he bought stocks in Greece, Portugal, Italy and Spain when they were low and was looking to buy more if markets fall again.

Faber said he was pessimistic about the outlook for the world economy and the recent rounds of quantitative easing were adding to the problem.

 “To intervene with monetary measures is negative to start with, and right now the same goes for fiscal measures because large fiscal deficits are undesirable,” Faber said. “What is the cause of the crisis? We have too much debt. To create more debt is not solving the problem.”