Marc Faber, in line with his reputation as Dr. Doom, expressed his critical views on the future of the market in his presentation, ‘the Direction of the Global Stock Market 2011,’ during the 11th World Knowledge Forum.
Above all, Faber was critical of government intervention in the form of fiscal and monetary policy. Government-induced credit growth is in opposition to the contraction in private capital markets, making the global environment more volatile and unpredictable, he argued.
Furthermore, Faber disapproved the government move towards “creating another credit bubble” through quantitative easing. The government can inject money into the economy, he said, but “it cannot control where the money will flow.” Instead of going to the employment or the housing market, it will flow into ‘new speculative bubbles,’ “creating new instabilities, and new problems in the future,” he warned.
Faber also showed concerns on the increasing burden of interest payments for US debt in the wake of stimulus policies.
“Within 10 years, the payment of interests on the government debt will make up for approximately 25~30% of tax revenues. Once you’re in that situation, I guarantee you, there’s only one way out: print money,” he said.
This will lower interest rates to the negative range, and cause a repetition of the vicious cycle, he continued.
In a private interview with Maeil Business News after his session, Faber stated that the current account balance and budget balances are the two major factors contributing to the US deficit. As tax revenues are shrinking, The US is pressing to issue new government bonds and stimulus programs. At this rate, interest rates on US debt will reach up to 35% of total revenue, he said.
The real danger, however, is that the government is unaware of the grave potential consequences, he warned. He also advised caution in regards to the optimistic forecast of the market, as it tends to be misleading.
Meanwhile, even Faber recognized bright prospects for growth in emerging markets, citing the upturn in the significance of Chindia. “China and India now covers more than 40% of the world’s GDP,” he said, while advising to invest more than 50% of portfolio in the emerging market rather than the developed market.
India and China account for 40% of production in global supply of commodities, and the cash will flow into Asia, he argued. The comparatively low rate of urbanization also encourages Asia’s projection, since urbanization entails “built-in economic growth.”
Faber also pointed out the uniqueness of the current crisis. There have always been bubbles in the 250 years of the history of capitalism, he said, but it has been confined to a single sector or region. In contrast, the bubble from the current crisis expanded to include stocks, bonds, raw materials, real estate, and even art.
In regards to the future of Korea, Faber suggested we look at the course of China. Korea has its own unique advantages, such as fundamentals and valuations, but Korea is inevitably influenced by the stronger force of China. If China’s market goes upwards, Korea will follow its trail, he said.
[Written by Nam-shik Seok, Jung-hwan Kim - Samji Chung, edited by Soyoung Chung]
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