Wednesday, September 19, 2007
Rogers, Faber Say Fed Rate Cuts Will Spur a Recession
By Carol Massar and Michael Patterson
Sept. 18 (Bloomberg) -- Interest rate cuts by Federal Reserve Chairman Ben S. Bernanke will spur inflation, cause the U.S. dollar to collapse and push the world's largest economy into recession, investors Jim Rogers and Marc Faber said.
``Every time the Fed turns around to save its friends on Wall Street, it makes the situation worse,'' Rogers said in an interview from Shanghai. ``If Bernanke starts running those printing presses even faster than he's doing already, yes we are going to have a serious recession. The dollar's going to collapse, the bond market's going to collapse. There's going to be a lot of problems in the U.S.''
Defaults on subprime home loans have spurred a rise in worldwide borrowing costs and caused losses at investment funds and banks that made bad bets on stocks and debt securities. The Fed today lowered its benchmark interest rate by a half point to 4.75 percent, the first cut in four years. The dollar fell to a record low against the euro, while U.S. stocks surged the most in four years and Treasury two-year notes gained.
Faber and Rogers, who both spoke today before the Fed decision on rates, said the central bank should raise borrowing costs to quell inflation and support the U.S. currency.
``The cause of the problems we have today, they are due to artificially low interest rates, expansionary monetary policies and extremely rapid credit growth that was fueled by a totally irresponsible Fed,'' said Faber, who oversees about $300 million as managing director of Hong Kong-based investment advisory company Marc Faber Ltd. ``It's suicidal to cut interest rates.''
``They should do something to stop inflation as soon as they can,'' said Rogers, the 64-year-old chairman of Beeland Interests Inc. ``If you don't do something now, if you don't nip it in the bud, it gets much worse down the road.''
Today's rate decision ``is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets,'' the rate-setting Federal Open Market Committee said in a statement. The Fed will ``act as needed to foster price stability and sustainable economic growth.''
Fed officials have said the central bank doesn't want to be seen as caving in to funds that piled into the market for securities linked to subprime mortgages, those made to borrowers with poor or limited credit histories.
Sell Dollars, Bonds
``It is not the responsibility of the Federal Reserve -- nor would it be appropriate -- to protect lenders and investors from the consequences of their financial decisions,'' Bernanke said in an Aug. 31 speech in Jackson Hole, Wyoming.
Rogers, who predicted the start of the global commodities rally in 1999, said investors should sell U.S. dollars and bonds. He said he's selling short shares of investment banks and expects them to fall further. The Amex Securities Broker/Dealer Index rose 4.8 percent today, trimming its loss for 2007 to 2.8 percent.
Short selling is the sale of stock borrowed from shareholders in the hope of profiting by repurchasing the securities later at a lower price.
The Standard & Poor's 500 Index advanced the most since March 2003 following the Fed's rate cut, surging 2.9 percent to 1,519.78. The measure has gained 7.2 percent gain this year. The yield on two-year notes fell 0.08 percentage point to 3.99 percent at 3:23 p.m. in New York, according to bond broker Cantor Fitzgerald LP.
Rogers said he is buying agricultural commodities and recommended investors purchase Asian currencies including the Chinese renminbi and the Japanese yen.
Faber, publisher of the Gloom, Boom & Doom Report, said he is buying gold.
``Gold is very cheap even at over $700 compared to many other commodities and also compared to many other assets in the world,'' he said in an interview from Hong Kong. ``If the Fed cuts interest rates by a half a point, I think it will go ballistic, I think it will go up a lot.''
Gold rose to a 27-year high today. December futures climbed 1.6 percent to $735.50 an ounce in New York, the highest since Feb. 11, 1980.
The dollar fell 0.8 percent, the most since Aug. 24, to $1.3972 per euro at 4:04 p.m. in New York and touched an all-time low of $1.3981.
Rogers co-founded the Quantum Hedge Fund with George Soros in the 1970s. He traveled the world by motorcycle and car in the 1990s researching investment ideas for his books, which include ``Adventure Capitalist'' and ``Hot Commodities.''
Faber told investors to bail out of U.S. stocks a week before the 1987 Black Monday crash, according to his Web site. He also told investors to buy gold in 2001, before it more than doubled.
Last month, Faber said U.S. stocks are at the beginning of a bear market in which benchmark indexes may fall more than 30 percent. The Dow Jones Industrial Average has since gained 3.8 percent.
To contact the reporters on this story: Carol Massar in New York at; Michael Patterson in New York at .