Meet the gloomiest economist in the world: Kohler

Marc Faber, author of the Gloom, Boom & Doom Report, last night dropped in for a few hours at a club on Bourke Street, Melbourne, to scare the pants off the CFA Society at its annual forecasting dinner.

Marc Faber, author of the Gloom, Boom & Doom Report, last night dropped in for a few hours at a club on Bourke Street, Melbourne, to scare the pants off the Chartered Financial Analyst (CFA) Society at its annual forecasting dinner.

It was a compelling presentation, delivered, as it was, in his sepulchral Swiss accent against a series of gruesome slides. He has obviously given it many times before (it was memorised), although he has had to amend it slightly these days from predicting the bust to discussing the one that has occurred, and predicting worse to come.

Answering questions at the end, Faber relaxed and said what he really thinks: “I think the whole world will totally collapse. This is a completely unprecedented situation. Financial institutions have no idea what they own any more.

“The Nasdaq is still 50% below its 2000 peak, and I don’t think financial stocks will go back to their 2007 peaks.

“My advice (to the chartered financial analysts at the dinner) is to buy a farm and learn how to drive a tractor.”

These days Marc Faber lives Chiang Mai in northern Thailand, although he travels a lot making presentations and promoting his newsletter.

His key point is that a synchronised global boom is now leading to a synchronised global bust.

Of the United States, he says that its entire monetary and fiscal policies have been aimed at consumption rather than capital formation, as a result of which its competitiveness has declined.

He says the secular uptrend in commodity prices remains intact, but that sharp corrections can be expected along the way.

Central banks have fallen hostage to inflated asset markets, so that his recommended cure for the world’s ills – tight money – is impossible to implement.

And as with all of his presentations, he spent a lot of time talking about the prospect of increasing geopolitical tensions and wars as a result of resource nationalism and shortage, focusing on central Asia.

But in some ways the man with the job of responding to him, Tim Toohey of Goldman Sachs JBWere, was even scarier because one expects him to be sober and middle-of-the-road – unlike Faber who is one of the world’s most famous and extreme bears.

Toohey was less bearish, it’s true, but largely because he thinks there will be “dramatic” fiscal stimulus in Australia in 2009/10, which he said was “green-lighted” by RBA governor Glenn Stevens in a speech last week, as well as three rate cuts next year.

Surprisingly perhaps for an investment bank economist, he says the big problem is that investment banks have been trying to grow their balance sheets too aggressively.

His most interesting slide was a scatter chart of the world’s banks and investment banks against the axes of balance sheet leverage and five-year asset growth – top right, bad; bottom left, good.

Needless to say Goldman Sachs is towards the left of the X axis (asset growth 13% a year) and not very high up the Y axis (gearing 22 times).

The highest on both counts was Northern Rock (58% a year growth and 38 times gearing), which has already gone broke, although Royal Bank is outlier on asset growth – 72% a year.

Not far behind Northern Rock, according to Toohey’s slide, is Merrill Lynch (55% a year and 32 times), with Bear Stearns, Lehman Bros, Deutsche Bank, Commerzbank, Morgan Stanley and Barclays all on gearing ratios of more than 30 times, and therefore vulnerable to a period of deleveraging.

As for Australia, Toohey says the problem is the high level of household gearing; the process of deleveraging could take two years. And as part of that, his own fiscal conditions index is forecasting a sharp slowing of growth in Australia – possibly to zero.

And so the CFAs reeled out into the bleak Melbourne winter night thoroughly depressed and looking forward to living in interesting times.

This article first appeared in Business Spectator