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March 1, 2001

Gloom, Boom and Doom

By Kathryn M. Welling

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Always trenchant, invariably provocative, Dr. Marc Faber, a former trader at Drexel Burnham Lambert, publishes The Gloom, Boom & Doom Report from Hong Kong, but his perspective is as global as his much-stamped passport. His economic research and market analysis are absolutely worth the read. But he favored me with a short oral course in the gloom after a boom earlier this week. Enjoy!

I'm sure it's no surprise to you, but you've been telling a story a lot of people really don't want to hear, Marc. No one's tried to shoot the messenger, have they?

No. But the masses of people don't know anything; they just believe what CNBC tells them. But that's not surprising. That's a feature of every mania or bubble. Remember, a bubble or mania may be based on a rational development, on new technologies that may change the world. What is irrational is the valuation of these assets.

Which were certainly carried to extremes last year.

You can say that the Nasdaq at a $6 trillion market cap, selling at over 200 times earnings, as a percentage of the economy and in terms of earnings prospects, was grossly overpriced. And it's still grossly overpriced, by the way.

Even down 50 percent. Your latest report put the losses into perspective. "Losses in the Nasdaq alone amount to approximately $3 trillion. Not an insignificant amount in the context of the U.S. economy, which grows at about $500 billion per annum."

Especially because individuals in the U.S. have drawn down their savings rate to zero, so they don't have a cushion. What also is amazing is that in the years '95 to '00, [when people had huge capital gains] consumer borrowing increased so much. So you end up in March 2000 with essentially record corporate and consumer borrowings and no savings.

Which is exactly where you don't want to be at the end of a bubble-

Yes, ideally, you liquidate everything before the bubble bursts so you're 100 percent in cash and have no borrowings. Because invariably, when a bubble bursts, what follows is a deflation in that sector of the economy. In other words, the excess capacity that was built during the bubble becomes burdensome because it reaches a peak exactly at the time when demand begins to slow down. This is a very important point: On every new technology that has become successful, whether radio or TV or cellular phones or calculators or cash machines or PCs or cars - eventually prices just fell a lot. These products became commodity cyclicals with low margins for their producers. I'm sure that eventually Nasdaq will sell at maybe 20-30 times earnings. The only question is, now we have Greenspan's cuts and more cuts will come and tax cuts will come. Maybe, as Barton Biggs says, you'll get a relief rally. What surprises me on this trip to the U.S. is the still incredibly optimistic mood. By and large, people think, "Don't worry, Greenspan's rate cuts will stabilize the economy; things never get as bad as people expect."