After his recent and widely disseminated quip on CNBC that “Obama makes Bush look like a genius”, Marc Faber is now offering some insights into how the US can get out of its “debt trap”.
In his latest GloomBoomDoom market commentary, the irrepressible pundit concludes that the US has basically two choices: default on obligations or massively monetize US debts and reduce the debt through inflation.
“In my opinion,” he declares, “additional massive monetization of debts is the most likely outcome”. And yet, “frantic monetization” lies at the root of the banking system’s ills, in Faber’s view (his emphasis in the following):
The baleful reality is that big banks, the freakish offspring of the Fed’s easy money, are dangerous institutions, deeply embedded in a bull market culture of entitlement and greed…..
During the recent quarter, for instance, the preponderance of Goldman Sachs’ revenues came from trading in bonds, currencies and commodities. But these profits were no evidence of Mr Market doing God’s work, greasing the wheels of commerce and trade by facilitating productive financial transactions.
In fact, they represented the fruits of hyperactive gambling in the Fed’s monetary casino – a place where the inside players obtain their chips at no cost from the Fed-controlled money markets, and are warned well in advance, by obscure wording changes in the Fed’s policy statements, about any pending shift in the gambling odds.
To be sure, the most direct way to cure the banking systems’ ills would be to return to a rational monetary policy based on sensible interest rates, and an end to frantic monetization of federal debt and a stable exchange value for the dollar.”
On all this, Faber cites the recent comment article by former Reagan official David Stockman, which was also highlighted by CLSA’s Christopher Wood in his most recent Greed & Fear newsletter.
Stockman has a point, notes Faber, when he talks about big banks having become the “freakish offspring of the Fed’s easy money,” among other things.
As for the investment outlook, Faber – who recently reiterated his refrain on “gold-as-a-haven” as “central banks print money to help fund budget deficits” – warns us to expect a choppy year for equities in 2010:
In the near term, should stock markets – following a brief rebound in the first few days of February – decline into the second half of February, I would buy some stocks for a rebound. And if stocks now fail to decline and continue to rally right away I would use strength to lighten up positions.
On the yellow metal, while conceding that gold “could correct” to $950 to $1,050 an ounce if liquidity tightens temporarily, he concludes:
“If I am right about further monetization and further government debt growth, the risk is really not to own any precious metals at all”.
Related links:
Bonds are bad, says Dr Doom - FTAlphaville
Faber on China: still right after all these years – FTAlphaville
Stockman and where it all went wrong – FTAlphaville