GLOBAL – Economist, investor and publisher of the 'Gloom, Boom & Doom Report' Marc Faber has warned that US Treasuries should be considered "junk", and that he would prefer to hold equities even in a deflationary environment.
Faber offered a critique of the unintended consequences of excessive fiscal and monetary loosening at the Skagen Funds New Year's Conference in London on 15 January.
Against the "neo-Keynesian" view, which he associated with Paul Krugman and ex-PIMCO economist Paul McCulley, Faber said growing debt in the US had simply allowed a "one-time shot" of consumption to "crowd out" the capital formation that can lead to sustainable growth.
Similarly, aggressive monetary loosening is problematic because new money flows unevenly and unpredictably into markets, he argued, citing the rate cut of 2007 and the subsequent doubling of the price of oil, which acted as an effective tax on consumers.
"Continual interventions by governments have led to much higher financial market volatility," he said. "The Fed doesn't know what we will do with the money, and that is the problem associated with monetary policy."
He conceded that the "deflationist view" – that aggressive loosening is a necessary evil to avert a depression – is "a possibility that we have to entertain".
But he added that this would be an even bigger risk to US Treasuries than the return of high inflation, because the Treasury would run out of money to pay its coupons.
"At least in an inflationary scenario the Treasury would be able to pay the coupons," he said. "If and when a depression does happen, it would be risky to assume you would want to be in government bonds."
The US would eventually either default, he said, or pay its coupons in newly printed dollars, which would again fail to stimulate sustainable growth, and, at some point, the market would realise US Treasuries were junk.
"US Treasuries are junk bonds already," he added, revealing that his personal portfolio is 50% allocated to equities and corporate bonds, with the rest mostly allocated to real estate and gold.
"I would always want to go through this bearish scenario with equities," he said, recalling how investors in 'blue-chip' German companies fared better than German bondholders through the 1930s and 40s.
"Nobody knows exactly how the endgame will be played, but the money simply isn't there to pay the liabilities."
At the same conference, Torgeir Høien, Skagen's sovereign bond portfolio manager, said that if the US does default in March, it would be in the form of social security cheques going unpaid.
"Defaulting on its obligations to bondholders would result in Armageddon – they wouldn't dare to do that," he said.
Høien warned that Japan's current "kamikaze Keynesianism" might provide the blueprint for what could happen in the US in future.
"If there's going to be a black swan this year or next year, it's probably going to be in Japan," he said.