Business Intelligence Middle East
August 9, 2011
Marc Faber the Swiss fund manager and Gloom Boom & Doom editor spoke today about the Standard & Poor’s credit rating downgrade of US sovereign debt, and how the downgrade was long overdue as the ‘junk bond’ was no longer worth of an AAA rating.
He views the downgrade as moderately positive for equities because it shows investors there is a risk in holding government bonds and discusses the conditions that will lead to QE3.
Speaking in an interview from Chiang Mai, Thailand, with Susan Li on Bloomberg’s “Asia Edge” this morning, Faber said a government bond is rated AAA when the issuer is willing to pay the interest in a stable currency. “We are not dealing, in the case with the US Dollar, with a stable currency.”
“The downgrade was overdue,” Faber told Li, adding that the agency “basically downgraded a junk bond because it was no longer an AAA”
“The US fiscal position is a disaster if we include the unfunded liabilities and some kind of default will occur,” he predicted.
He went on to explain that there are two ways that can lead to default: 1) Not paying interest and restructuring debt or 2) repaying the debt and the interest in a depreciated currency. Faber argues that the US Dollar is losing more value in terms of purchasing power than other currencies.
Faber, who believes markets began a bear market on May 2 2011, sees the impact of the US downgrade on equities as positive.
“I personally think the downgrade of US debt is actually moderately positive on equities because it shows investors very clearly there is a risk in holding government bonds anywhere in the world,” he said.
He sees risks rising from two factors: 1) Interest rates go up and the value of bonds decline, or 2) you have a sovereign downgrade and “when the AAA turns to DDD, yields go up.”
“I am the most bearish person in the world but I think over the next 10 years, you will be better off in equities and precious metals than in government bonds,” he told Bloomberg’s Susan Li earlier today
Faber expects a market rally soon because equities are ‘oversold,’ however he doesn’t see new highs this year above the May 2 2011 high on the S&P 500 of 1,370.
The S&P 500 Index slumped another 32 points, or 2.6% in early trading this morning, to below 1,170.
This article was posted: Tuesday, August 9, 2011 at 1:45 pm