Marc Faber: Right Now a Bubble in Safest Government Bonds
Marc Faber, publisher of the Gloom, Boom and Doom report, spoke to Bloomberg Television’s Sara Eisen and Erik Schatzker and said that investors have created a “bubble” in the “highest-quality” government bonds and should move to equities.
Faber said, “People feel so insecure that they say, ‘I’d rather be in a Treasury in America with almost no yield or in Germany with negative yield and get my money back.’ But it doesn’t make them a good buy in the long term.
“I wouldn’t say they are particularly attractive but, look, I am in Switzerland at the moment.
The 10 Year government bond yields is 0.7% and you can buy quality companies and they have a dividend yield of maybe 3%. Relative to government bonds, equities are attractive. If you really think it through and you are bearish as I am and you think the whole financial system will one day collapse, maybe three years or five years or 10 years, one day there’ll be a reset and everything will be essentially started anew.
Then you are better off in equities than in government bonds because a lot of government bonds will either default or they will have to print so much money that the purchasing power of money will depreciate very rapidly.”
On whether he feels comfortable predicting calamity in Treasuries again given his inaccurate forecast in December 2009:
“No, if we talk about the end of 2009, we still had a very strong rise in equity prices thereafter and it is true that last year, the 30-Year Treasury bond returned 30% total return. That I admit I was wrong and I lost a bet to David Rosenberg and I shall pay him a bottle of whiskey, one of the more expensive brands if I can afford it.
In the meantime, people in precious metals have done well. In emerging economies, people say last year was a disaster for emerging stock markets, but Malaysia, Thailand, the Philippines, and Indonesia were essentially flat. A lot of stocks actually performed well. My portfolios in Asia have done surprisingly well. I don’t feel that I missed out a lot risk adjusted by not being in 30-Year government bonds.”
“August 1999 to March 2000, the Nasdaq doubled by 100%. But at no time during that timeframe was it good buy. People lost a lot of money. We have today a symptom of monetary inflation. This is corporate profits which have rebounded. They are at record highs.
The second thing is essentially a bubble in high-quality government bonds, not in Italian or Spanish bonds. People feel so insecure and they are so much worried that they say I would rather be in a Treasury in America with no yield or in Germany with negative yields and get my money back than in bond that may not repay me or in equities that drop 30%. It does not make them a good buy in the long term.”
On making a choice between U.S. government debt or Italian and Spanish government debt:
“I would take the U.S. because they can print themselves out. I would not take them as a good investment because I think you have today a yield on the 10-Year of around 1.7% and on the 30-Year around 3%.
I think eventually in the next few years yields will be much higher the purchasing power of the dollar will have depreciated significantly. You give me the choice between Spanish, Italian, and U.S. bonds and I take U.S. bonds, but otherwise, if you give me the choice of assets of real estate, equities, bonds, precious metals,
I would rather take precious metals than equities.”
Dr. Pinna says:
Marc Faber, like other economic geniuses, should be listened to as a bird in the wilderness or a canary in a dark mine.
He instinctively sees the danger wherever it lies.
U.S. Treasury bonds are risky, not because of a default, but because their value may plummet within days or weeks, when suddenly the market realizes that the U.S Dollar is becoming worthless in terms of purchasing power. When that happens, gold will have been the best investment.
High quality international corporate stocks and their bonds will also appreciate, but choosing these equities requires great skill.
Those who dislike gold, can simply go into currencies like the Swiss Franc which is watched carefully by the Swiss Government.
However, the purchasing power of the U.S. Dollar is related to the quantity of dollars moving through the universe of currencies.
Waves always go up and then they go down.