Marc Faber: Market Collapses Will Dictate Economic Reset

Marc Faber is the world’s biggest optimist (not) when it comes to financial markets and the economy. He’s such a sunny guy that he runs the Gloom, Boom and Doom Report. How much more bullish can you get? But in fact, he has been watching much of the current financial turmoil and was on “Squawk Box” Tuesday morning on CNBC and had some interesting opinions as he looked into his crystal ball – from the role of the markets in a financial meltdown, the role of the central banks, challenges in addressing fiscal policy in a democracy and his take on the real reason the U.S. stock market is reacting so negatively in the wake of President Obama’s re-election.

When it comes to the global markets, while it seems the various central banks are wielding some significant influence with their loose monetary policy – provided repeated bailouts to cash-strapped European countries, especially, as well as QE3 in the U.S. –  Faber believes the central banks will likely have little control in the markets going forward. They may be helpless, in fact. “I think the whole global financial system will have to be reset at some (point), and it won’t be reset by central bankers,” Faber said from Hong Kong. “It will be reset by imploding markets – either the currencies, the debt markets or the stock markets, but it will happen big time and we will all be lucky if we have 50 percent of the asset values we have today.”

And while it seems more than coincidental that the Dow Jones average dropped more than 300 points the day after President Obama was re-elected, Faber said the drop is actually due to factors that are bigger than the election – its tied to the future. “I don’t think the markets are going down because of Greece; I don’t think they are going down because of the fiscal cliff, because I don’t think there will be a fiscal cliff” he said. “The markets are going down because corporate profits will begin to disappoint, the global economy will hardly grow next year and probably even contract. That is why I think stocks will drop by at least 20 percent from their highs in September.”

And ultimately, Faber said, the current problems have simply to do with the worlds’ arrogance of prosperity in previous decades, and now it’s high time we started to pay back. But in some countries, perhaps even the U.S., that payback may not truly come until it’s too late, due to the type of governance.  “We lived beyond our means from 1980 until 2007, and now it’s a payback period. … There will be pain, and there will be very substantial pain. The question is, do we take less pain now through austerity, or risk a complete collapse of society in five to 10 years’ time? And in a democracy, they’re not going to take the pain now; they going to kick the problem (down the road) until it becomes too big.”

Who knows how much political courage our current elected officials will take on, but surely they are watching Europe closely and seeing how those countries are handling the situation – and that region seems to be dropping into another recession.