Bankruptcies and Little or No Growth

Marc Faber from the Gloom, Boom and Doom Report gave a rather alarming outlook for companies in the oil industry during his interview with ET Now. Faber stated that oil prices have dropped roughly from $100 to $30, and most of the energy-related firms will sink into bankruptcy. He stated that the oil industry in the Middle East has been depreciating, which has negatively affected the resource sector. Some of the countries that have been hard hit include Brazil, Russia, and South Africa among others. He also added that he does not believe that the price will not drop below the current position, but that is not an absolute certainty.

Faber estimates that there will be little or no growth in the oil industry in the western regions including the US, Japan, and the UK for the next five to ten years. This is because the governments of these countries take up a huge chunk of the economy and they do not spend much on things like education or infrastructure. The spending has been shifted to transfer payments.

Faber also believes that there will most likely be no more rate hikes in the US and that the opposite will take place. Rates will be lowered, and there is a chance that they will be followed by negative interest rates, especially with the election year around the corner. He also noted that central bankers tend to believe wrongly that hiking asset prices will support sustainable growth, and this is not a good assumption.

According to a research study by the Bank of International Settlements (BIS) on deflation over the last 200 years, there is very little correlation between growth and consumer prices going up and down. The researchers concluded that asset prices drop sharply especially in a system that is deep in debt and these results in massive economic recessions. The Fed and other central banks are therefore wrong in assuming that they can keep pushing up asset prices.

Reprinted from India Infoline.

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