What Can Fed Officials Do To Help the Markets?

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What Can the Fed Do To Help Markets? Collectively Resign, Says Marc Faber

Business Intelligence Middle East

     

Marc Faber the Swiss fund manager and Gloom Boom & Doom editor spoke Tuesday about the Fed’s decision to keep interest rates low for a prolonged period of time and the prospects of QE3. He says the Treasury market is a gigantic bubble and long-dated T-bonds are the short of the century. Faber suggests that sometimes the best the Fed can do for markets is to do nothing!

He also talks about gold and how "every responsible adult should gradually accumulate gold".

Speaking in an interview from Chiang Mai, Thailand, with Carol Massar and Matt Miller on Bloomberg Television’s "Street Smart", Faber said: "The Fed did the right thing" by not announcing QE3, so they can now watch the reaction of assets prices.

Faber, who predicted the stock market crash in 1987, turned bearish shortly before the 2007-2009 bear market and called the 2009 lows, believes the markets will now test the July 2010 lows for the S&P 500 at 1,010 and "after that we’ll get a QE3 announcement."

The technical picture is so horrible that "I would use the rebound as a lightening up opportunity – I would reduce positions," he told Carol Massar.

Faber also warned that by selling ‘in such a rapid way and with such a momentum,’ the markets are signaling that "something really wrong [would] happen in the next 2-3 months…maybe there is geopolitical problems, maybe the Middle East blows up, maybe the economy is horrible"

The speculative practice of short-selling will be restricted from Friday in Belgium, France, Italy and Spain to combat "false rumors" that have destabilized the markets, European regulators said.

Short-sellers sell borrowed shares with plans to buy them back later at a lower price.

Some believe a ban will have unintended consequences. “EU policy makers don’t seem to understand the law of unintended consequences,” Jim Chanos, told Bloomberg yesterday. “The vast majority of short-selling financial shares is by other financial institutions, hedging their counterparty risks, not speculators. The interbank lending market froze up completely in October to December 2008 – after the short-selling bans.”

It is the worst thing to do right now," says Abraham Lioui, economics professor at France’s Edhec business school. "This would signal to the market there may be something fundamentally bad that is happening." "The Fed is underestimating the severity of the coming economic downturn and they have spent – shot out- their bullets," Faber told Bloomberg.

It is very difficult to follow with QE3 right here because gold prices are going ballistic and the dollar is very weak and there are unintended consequence with implementing QE3 right here,’ he added.

What can the Fed do to support the economy?

"The best they could do for markets would be to collectively resign," Faber suggested.

"Everybody in the world has become a Keynesian, everybody thinks the government should do this and that, the Fed should do this, the Treasury should do that…..I think sometimes the best is to do…nothing!

Reiterating his views on the prospects for another asset purchase program, Faber asked: "What has QE1 and QE2 done for the labor market? Nothing at all, and nothing for the housing market."

"It [QE] has lifted stocks and it created wider wealth inequality in the sense that people who own assets have done well and people who are in the lower income recipient groups are getting hurt from rising energy and food prices," he added.

Read the rest of the article

Dr. Marc Faber [send him mail] lives in Chiangmai, Thailand and is the author of Tomorrow’s Gold.

© 2011 Business Intelligence Middle East

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