BT: Fed acting like a bartender: Marc Faber (25 Oct 2007)

Its actions contributing to stock market bubble, says well-known US investor

(NEW YORK) The Federal Reserve acted 'like a bartender' in lowering interest rates and its actions are contributing to a stock market bubble in the US, investor Marc Faber said.

'Each time you bail out, it becomes bigger and bigger, and the credit problems become much, much larger,' said Mr Faber, managing director of Marc Faber Ltd and publisher of the Gloom, Boom & Doom Report. The Fed 'feeds its customers with booze, and when they get totally drunk and are about to fall off their chairs, the bartender gives them more booze to keep them going. One day, it will lead to the ultimate breakdown.'

The Standard & Poor's 500 Index has risen 2.3 per cent since the Fed cut its benchmark rate by half a percentage point on Sept 18 to keep credit market losses from spurring a recession. Mr Faber said the action spared US financial companies such as Citigroup Inc from the consequences of bad lending decisions.

'If Citigroup made a mistake, let them be penalised, let the shareholders of Citigroup be penalised,' Mr Faber said in an interview in New York. 'Then the shareholders will eventually put pressure on the board of directors not to do continuously stupid things.'

The biggest US bank dropped 12 per cent last week after saying credit defaults will plague the financial industry for the rest of the year. Citigroup spokeswoman Shannon Bell declined to comment.

'The best for the system would be if a major player would go bust,' Mr Faber said. 'Then there would be an example for investors and for the players, the Wall Street establishment, the banks, to be more prudent.'

Mr Faber said this year's rally in Chinese assets, including the 171 per cent gain in the CSI 300 Index, will end by the August 2008 start of the Olympic Games in Beijing. He predicted India's gains will end by the same time. The Bombay Stock Exchange's Sensitive Index has climbed 34 per cent this year.

'We still have the emerging markets going ballistic,' Mr Faber said. 'The Chinese market could double here, but it doesn't change the fact we are already in bubble stage.' Mr Faber said if bubbles in emerging markets deflate, the dollar may rebound from all-time lows against the euro as fund managers who have invested in emerging markets invest in the US.

The European Central Bank has raised its key interest rate eight times to 4 per cent from 2 per cent in November 2005, a 'more responsible' policy than the Fed's, Mr Faber said.

Mr Faber told investors to bail out of US stocks a week before 1987's so-called Black Monday crash, according to his Web site. He correctly predicted in May 2005 that stocks would make little headway that year. - Bloomberg



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