Sell equity & bond, hold cash as more gloom ahead: Faber

Investors would be better off reducing their exposure to equity and bonds, and instead keep a sizeable chunk of their portfolio in cash, advises investment guru Marc Faber.

He foresees big downsides in equity markets across the globe, including US, which has been one of the better performing markets in recent times.

In an interview to CNBC-TV18, Faber says he expects the US Federal Reserve to persist with its policy of pumping liquidity into the economy through bond purchases.

US employment data released Friday was better than expected and pointed to a slow recovery in the economy. But Faber is not convinced that job data is good enough for the Fed to start tightening its monetary policy. Faber's view is stark contrast to that held by Goldman Sach economists, who see the Fed beginning to cut back on money printing from September onwards.

Yet, the author of the Boom, Doom & Gloom newsletter feels the Fed may end up doing less damage in case it chooses not to scale down its bond purchase program. Fears about a likely cutback in the Fed's bond purchases rattled financial and commodity markets across the globe last month.

He is not too optimistic about India, saying the rupee could weaken further if the twin deficits (fiscal and current account) were not dealt with effectively.

Faber is bullish on crude oil, and sees prices inching up gradually. This spells bad news for India, which is already paying more for oil than when crude was at its peak of USD 145, because of rupee depreciation.

On the geopolitical front, Faber sees the problems in the Middle-east getting worse before the situation improves.

Also read: Ace value investor Sampat sees coming of economic storm

Below is the verbatim transcript of his interview to CNBC-TV18

Q: What did you make of the jobs report and the takeaways from there which is that the taper program may begin sooner than most expected?

A: I don’t know because the Federal Reserve (Fed) does not know either when they will slow down their bond purchases. First of all on a closer analysis the jobs report was not particularly good. A lot of full time jobs were lost and part time jobs were added.

So, I would not call now the jobs report as a supportive of say tighter monetary policies. I have to say that the Fed basically believes in money printing and they will continue to print money in my view. The question is at what pace they will continue to print money.

Q: What did you make of the very sharp spike in the US bond yield on Friday to about 2.74, that got the emerging markets worried this morning? Would you expect to see further rise in the US bond yield from here?

A: Well basically its interesting that since they initiated Quantitative Easing (QE) unlimited a year ago, bond yields have been rising regardless. It will be interesting to see in the months ahead what the impact of the increase in interest rates is on say the housing market, and on asset prices.

So, I would say looking actually at the past predictions by the Federal Reserve they have no clue themselves. I think the view at the Fed is it will cause less damage. That would be my assessment of their thinking. It is not that I would agree with it, but that is the way they think.

_PAGEBREAK_

Q: This news flow has been bad news for the Indian currency in specific, there is a bit of panic situation on where it could be headed. Do you think all these macro issues, the currency, the deficit needs to be addressed urgently?

A: Yes, the better deal soon visits otherwise the currency will continue to weaken. Let me just remind you the Indian market is still lower than it was in January 2008. In the US dollar, the Sensex is down precisely 41 percent because in January 2008 USD 1 still was Rs 39 and now its 60.

Maybe the stock markets don't go down, but the currency goes down or stock markets go up. The currency goes down even more. When the currency weakens, it hurts the average household much more than the few well to do people.

Q: What about emerging market equities, do you see more pain ahead for all these markets even more than what we have experienced over the last few months?

A: In general, I think that most stock markets peaked out some in 2011. Some didn't even make a new high above the 2007 highs. I believe that there is further downside risk in all market including the US.

Q: There has also been a big surge on crude prices, 5 percent up last week. Is this just a geopolitical one-off that is happening with crude or do you think something fundamental is changing with that commodity?

A: Yes, actually I believe that crude is one of the very few commodities that look attractive from a longer term perspective. Between last November and February of this year was five times in the Middle East on five different journeys. My impression is that the whole Middle Eastern problems will get much worse before they get better. Maybe it will take years until they improve.

However, again as I mentioned to you, for you think money printing is the greatest things on earth. Money printing has a very destructive impact on economic life and on social conditions. When you print money, some assets and some goods and services go up in price. The increase in the prices exceeds the wage to salary.

So, most people actually suffer under money printing. But money printing benefits a few and so whilst income inequality increases and it leads to social and geopolitical tensions.