Marc Faber Says Fed `Like a Bartender' Cutting Rates

Marc Faber Says Fed `Like a Bartender' Cutting Rates (Update3)
By Pimm Fox and Eric Martin

Oct. 23 (Bloomberg) -- The Federal Reserve acted ``like a bartender'' in lowering interest rates and its actions are contributing to a stock market bubble in the U.S., investor Marc Faber said.
``Each time you bail out, it becomes bigger and bigger, and the credit problems become much, much larger,'' said 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 2.9 percent since the Fed cut its benchmark rate by half a percentage point on Sept. 18 to keep credit market losses from spurring a recession. Faber said the action spared U.S. financial companies such as Citigroup Inc. from the consequences of bad lending decisions.
``If Citigroup made a mistake, let them be penalized, let the shareholders of Citigroup be penalized,'' 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 U.S. bank dropped 12 percent 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,'' Faber said. ``Then there would be an example for investors and for the players, the Wall Street establishment, the banks, to be more prudent.''
China, India
Faber said this year's rally in Chinese assets, including the 171 percent 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 percent this year.
``We still have the emerging markets going ballistic,'' Faber said. ``The Chinese market could double here, but it doesn't change the fact we are already in bubble stage.''
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 U.S.
The European Central Bank has raised its key interest rate eight times to 4 percent from 2 percent in November 2005, a ``more responsible'' policy than the Fed's, Faber said.
Track Record
Faber told investors to bail out of U.S. 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. The S&P 500 gained 3 percent. He also told investors to buy gold in 2001, before it more than doubled.
On March 29, Faber said the emergence of home loan concerns meant the U.S. stock market was unlikely to benefit from the conditions that supported its rally since June 2006. The S&P 500 climbed 10 percent between then and July 19, when it reached a record, and again reached new highs on Oct. 5 and Oct. 9.
In February 2004, he said stocks in Brazil and Argentina were expensive because investors were overestimating China's demand for commodities. Brazil's Bovespa index has since more than doubled while Argentina's Merval Index has gained about 90 percent.

To contact the reporters on this story: Eric Martin in New York at emartin21@bloomberg.net ; Pimm Fox in New York at Pfox11@bloomberg.net . Last Updated: October 23, 2007 16:55 EDT

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