How the Rich Will Lose Half Their Money

Marc Faber warns that massive wealth destruction is coming and the the Super-Rich "may lose up to 50 percent of their total wealth." Faber explains that this will happen either through very high inflation, social unrest, war or a credit-market collapse.

By PAUL B. FARRELL
JULY 18, 2012, 6:38 P.M. ET
Smart Money

"Massive wealth destruction coming," warns Hong Kong economist Marc Faber, one of many "Dr. Dooms" we've featured over the years.

Faber warned in a recent interview on CNBC: The Super-Rich "may lose up to 50 percent of their total wealth."

How? "Somewhere down the line we will have a massive wealth destruction. That usually happens either through very high inflation or through social unrest or through war or credit-market collapse." And as if to punctuate his message, in Barron's recent "Midyear Roundup," Faber was asked, "Will things get worse before they get better?"

Answer: "Yes, possibly much worse," adding "most markets peaked in May 2011." He expects "further weakness in the second half of the year. Corporate profits will disappoint ... stock markets are oversold. The U.S. government-bond market is overbought. The U.S. dollar is overbought, and gold is oversold near term." Worse, he's "very negative about the outlook longer term."

In spite of his doom and gloom about America and the world economy, when pressed Faber did recommend some China REITs. And waffled a bit on America: "It is safest to buy U.S. Treasurys because the U.S. can print money" and "pay the interest. But you are earning only 1.6%, and the cost of living is increasing by about 5% a year around the world. You are getting a negative real return."

Not very promising in today's uncertain world, where the American elections are unlikely to solve the economy's core jobs problem, no matter who wins in November.

So when comes the change? "Down the line." "The breaking point could be three, four, five years away. The world is heading toward a major crisis."

OK, he hedges his bet on timing. But he's very clear on how and why: The collapse will be "caused by Federal Reserve Chairman Ben Bernanke and the Federal Reserve's continuous printing of new money." The "bailout and money printing" since the 2008 Wall Street Crash did not "create any long-lasting wealth or create healthy growth." Nor will the next president. So investors must hedge longer-term bets.

New crash coming before Bernanke leaves Fed by early 2014

The next "collapse will come on Bernanke's watch." Warning to investors: Bernanke's second four-year term as chairman of the Fed ends Jan. 31, 2014. (He will remain a board member until 2020.)

Get it? There will be another crash. The crash will ignite before 2014 when Bernanke's term ends. The crash will be worse than 2008. Bernanke will be the cause. He will be clueless about the unintended consequences of his policies (like his predecessor Alan Greenspan, who ultimately had to admit to Congress "I really didn't get it until very late.")

Bernanke's no different. When reappointed in 2010, "Black Swan" author Nicholas Taleb said Bernanke "doesn't even know that he doesn't understand how things work."

Unfortunately, since Wall Street simply went back to business as usual after the 2008 Crash, fighting all reforms, a new crash is not only easy to predict in the 2013-2014 period, we can also predict that it will be far more deadly for Wall Street banks, the American economy, taxpayers, investors, consumers and retirees.

Guess what? Many 'Dr. Dooms' predicted 2008 crash

Why so easy to predict? Because we're repeating all the same dumb and dumber mistakes we did in the year leading up to the 2008 crash. The Fed's cheap money policies have favored banks, devaluing the dollar, destroying the value of stocks, fueling inflation, triggering job losses and social unrest. In short, the happy conspiracy between the Fed and Wall Street is suicidal and will take down the rest of America with it.

Same mistakes? You bet. In mid-June 2008 just before the collapse we listed several years of warnings about a coming global economic and market crash. And they were not just a ragtag bunch of "Dr. Dooms." Read the whole list of who was predicting the meltdown of 2008, a "Who's Who" of American leaders in finance, business and government.

Here's a selection of the warnings of a crash coming, all made years before the 2008 global meltdown ... Two Fed Governors beginning in 2000 ... then in 2004, former Secretary of Commerce Pete Peterson ... hedge fund managers like Rodriguez and Soros ... in 2005, economist Nouriel Roubini and the IMF's Chief Economist, Raghuram Rajan ... also a Special Report in the Economist on the 75% appreciation in global real estate in just five years ... in 2006 Texas billionaire Rainwater warned us in Fortune; collapse warnings from Faber, from economist Gary Shilling in Forbes, also bond king Bill Gross, and Warren Buffett in Fortune ... and a Harpers special on coming collapse in real estate ... then in August 2006, the new Treasury Secretary Hank Paulson privately warned Bush's staff at Camp David ... in 2007, more warnings, from money manager Jeremy Grantham, economist Gary Shilling in his Insight Newsletter and former SEC Chairman Arthur Levitt in the Wall Street Journal ... at the same time our new Treasury Secretary was quoted in Fortune: "Strongest economy in my lifetime."

How can investors prepare for the coming crash of 2013?

So what an investor to do? Start by lowering your expectations. Then look with enormous skepticism on any returns that exceed roughly five percentage points over the inflation rate. And stop listening to happy talkers, Wall Street hustlers and cable's talking heads.

Remember, their advertisers need you to keep chasing hot stocks and the hottest sectors hyped in the press. That's a bad strategy given the big risks dead ahead.

But that's not enough. Here's your No. 1 strategy: "The critical question over the next decade isn't 'Where will my returns be highest'?" warns Faber. Instead, ask: "Where will I lose the least money?"

Get it? Invest to lose the least money. Yes, capital preservation. That's also Uncle Warren Buffett's "rule No. 1." And it should be your rule No. 1 for the rest of this decade: "Never lose money."

Stop chasing today's hottest deals, ignore this week's most-talked-about analysts recommends, your broker's sure bets, the next IPO. We know you're unhappy with "new normal" returns under 10%, but chase them and you'll lose more.

Instead, wake up and be a smart investor. Analyze every investment. Pick the ones most likely to "lose the least amount of money." We're in for some scary years ahead. And capital preservation has to be your one and only game. Deviate and you lose.

Need whole new mind-set. Why? Optimism is a portfolio killer

Many of you are contrarians, free-market individualists and macho traders who will think Faber is just another crackpot "Dr. Doom." And that all those many other warnings between 2000 and 2007 were just lucky guesses by perennial Doomsday Cassandras and Chicken Littles "crying wolf" one time too many.

Ignore warnings at your peril. Remember the catastrophic $10 trillion-plus market losses after the 2000 dot-com crash? Another multitrillion loss after the 2008 meltdown? In all, Wall Street lost an inflation-adjusted 20% of America's retirement money through that decade.

Imagine Wall Street banks in virtual bankruptcy, again, like 2008, begging Congress for yet another bailout, as America sinks into a longer double-dip recession.

Warning, next time there will be no trillion-dollar giveaways, like Paulson and Geithner did with our too-big-to-fail banks during the 2008 meltdown. We're already hearing grumblings about the J.P. Morgan Whale and the Libor scandals. More is ahead. Banks are too-big-to-manage, will fail. Expect government to extract a heavy price in the next bailout. Assuming politicians and the public are willing to add another $29.7 trillion debt.

Recently Faber warned that our brains are our worst enemies, captured in one word: overconfidence. Check out his GloomBoomDoom.com site: Investors are "deeply asleep at the switch." Investors feed on happy talk. Investors minimize warnings, hard facts and the truth: "My experience has been that most investors (including myself) who lose money fail because of overconfidence ... convinced that an investment will be highly profitable and seldom consider that they could be wrong."

Both Wall Street and Main Street investors invariable don't wake up ... till it's too late.

Final warning: Remember Dr. Doom's Rule One: "Invest where you'll lose the least amount of money!" Why? Because "massive wealth destruction is coming." A time when "the rich may lose up to 50% of their total wealth." With Bernanke the trigger.

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