Faber Says Hedge Risks on Stocks With Commodities, USD May Collapse: Bloomberg

Faber Says Hedge Risks on Stocks With Commodities, Dollar May Collapse

3/2/2007 5:27:00 AM ET Related symbols: CCR CFC MS MWD
Bloomberg

Hedge Risks on Stocks With Commodities, Says Faber (Update1)

By Patrick Rial

March 2 (Bloomberg) -- A global selloff in equities is just a foretaste of losses to come should the level of debt drive the U.S. economy into recession said Marc Faber, who successfully predicted the U.S. stock market crash in 1987.

He recommended investors buy commodities such as gold, oil and copper. ''I think we're in the middle of the biggest asset bubble ever,'' said Faber, who oversees $300 million in assets at Hong Kong-based Marc Faber Ltd., in a speech at the CLSA Japan Forum today in Tokyo. ''This asset growth has been largely responsible for driving economic growth, especially in the U.S.'' Stock market losses will continue, he predicted. The U.S. will eventually be unable to increase its debt spending, and when that time comes, it will rattle the markets, Faber said. ''If the debt growth slows down the economy will either slow down or go into recession,'' Faber said. ''That will lead to a correction that will be much more substantial than what we have seen so far.'' There are signs that U.S. consumers may no longer be able to borrow and spend as freely as they once did. Lenders have warned that delinquent and non-performing subprime mortgage loans, which are loans that carry higher interest rates than those offered to a bank's most credit-worthy customers, have increased.

Shares of Countrywide Financial Corp., the largest subprime lender in the U.S., dropped as much as 4.4 percent yesterday after the company said one out of every five subprime borrowers was late on payments at the end of last year.

Risky Loans

Banks may be less willing to lend out money that the consequences of risky loans are becoming apparent, Faber said.

Problems in the subprime loan industry are ''the first crack in the system that shows some illiquidity has occurred,'' he said. ''The Fed can't tighten monetary policy but the market can and that has started to happen.'' A rout in stock markets worldwide started in China on Feb. 27 amid concern the government of the fastest-growing major economy will tighten controls on investment. Declines were accentuated as U.S. economic data pointed to slowing growth in the world's biggest economy. In the U.S., the Dow Jones Industrial Average has fallen 3.2 percent in the last three sessions. Stocks across Europe and Asia also declined, extending their worst slump in four years and wiping out more than $1.5 trillion in global market value. ''The little correction in the last couple of days is just an appetizer,'' Faber, the publisher of the Gloom, Boom and Doom Report said. He recommended investors buy commodities as a way of reducing risk that equity markets will fall globally. He predicted a ''severe correction'' in global assets in ''the next few months'' in an interview with Bloomberg on Jan. 8. 'Own Physical Gold' The Dow Jones has gained 56 percent during the past four years, reaching all-time highs, while the Dow Jones Stoxx 600 benchmark of European shares has nearly doubled. The Morgan Stanley Capital International Asia-Pacific Index reached a record on Feb. 27. ''You'd be better off owning the physical commodities,'' Faber said. ''I would say own physical gold'' and not commodities derivative products.

Commodities will also rise in value should the geopolitical situation become more risky, he said. John Bolton, the former American envoy to the United Nations, said yesterday the U.S. should pursue ''regime change'' in Iran because European governments refuse to back sanctions tough enough to halt the suspected Iranian nuclear-bomb program. 'Dollar Could Collapse' ''If you want to hedge against war risks you should be long commodities,'' said Faber. ''I'm convinced that it's inevitable that either the U.S. or Israel will have to go and bomb Iran. If that happens, obviously physical commodities will go up very strongly.'' Faber added that the U.S. current account deficit, which is on a rising trend and the main source of global liquidity, may cause the dollar to ''collapse'' against currencies globally.

The deficit widened to a record $225.6 billion last quarter as the trade gap grew and the country paid more interest to overseas investors. The shortfall in the current account, the broadest measure of trade because it includes transfer payments and investment income, amounted to 6.8 percent of gross domestic product, the second-highest level ever. ''Structurally the currency will weaken, the dollar is very vulnerable against precious metals'' because of deficits as well as loose monetary policy that encourages inflation, he said. ''Dollar assets will continue to decline relative to the rest of world. It's possible the dollar could collapse.'' Faber said Japanese shares offer a better bet for investors because the valuations are lower compared with other countries, when interest rates are taken into account. ''Stock prices in Japan would seem to me to be quite reasonable compared to stock prices in the United States or Europe,'' he said.

To contact the reporter for this story: Patrick Rial in Tokyo at prial@bloomberg.net . Last Updated: March 2, 2007 03:40 EST