Dr. Marc Faber is a Swiss-born economist who lives in Northern Thailand and forecasts only a negative economic outlook. While positive economic growth is the norm, he has never forecast it.
The latest prophecy is on his website www.gloomboomdoom.com.
In his newsletter, for which he charges $200 per year, he says the same old thing.
Dr Marc Faber has always said the world is on the verge of an economic meltdown, economic catastrophe is just around the corner. It's the same old, never-changing advice.
His reason may be that dire warnings sell well. Gloom and doom is more colourful than boring 5 to 6 per cent yearly growth, even though that is more typical.
Heads I win, tails I win
What if markets recover? Dr. Doom has that covered too. He says "I could easily envision a powerful bear market rally beginning in October, which could propel the S&P 500 up between 10 and 15 per cent and the extremely over-sold emerging markets by 20 per cent or so."
Let's summarise: If markets continue to fall, Dr. Doom is correct. After all, that is his long-term forecast. If the opposite happens and markets rise, he is also correct. That is the "bear market rally", which he has forecast. It is cleverly worded and makes him correct whether markets go up or down.
Finally, Dr. Doom's only solution to the crisis is to put the world back on the gold standard. It is a 19th century idea of how to run an economy and it's wrong.
A nation's wealth depends on the goods and services it produces, not how much yellow metal it has locked away in bank vaults.
India learned this the hard way. Growth has suffered because of its huge investments in gold instead of productive assets. It is why gold has been called "the curse of India".
Only a handful of economists - like Dr. Faber - still believe that accumulating more gold makes a nation wealthier.
My view is there will not be any more US financial bankruptcies, like Lehman Brothers.
Instead, we will see more mergers and government takeovers of banks. These banks will survive and continue under new management, but they won't go broke.
On the other hand, companies, hedge funds and private equity companies are vulnerable. Government bailouts for these will be rare, and some will go bankrupt.
Crisis of confidence
This crisis is one of confidence. It can be solved by governments and central banks using all their economic tools:
Central banks will drop short-term interest rates to near zero while quietly increasing money supplies.
Expect more infrastructure projects like the $20 billion recently announced by Australia.
We will see more spending incentives in the form of government grants, tax rebates and tax reductions.
The goal is to get money into people's hands so they can spend it and revive the economy.
There will also be a gradual reduction in leverage (borrowing) PLUS a gradual increase in home prices.
De-leveraging and home price rises are a long-term solution. The old financial bubble has burst but a new one can slowly be inflated, taking care not to over-inflate it this time
A lingering problem is natural resource shortages. It has no easy solution since new resources - like oil - are hard to discover. All the low-lying fruit has been picked.
Fortunately, this problem has solved itself for now. The worldwide downturn in 2009 will reduce demand for resources and relieve shortages.
It acts as an automatic stabiliser. A recession reduces the demand for oil, minerals and food.
Lower prices of these boost real incomes, which stimulates spending and reduces the recession's severity.
This article was first published in The New Paper on October 8, 2008.
