ôThe severity of a downturn is proportional to the excesses that preceded it,ö began Marc Faber, leading off his speech to the CLSA conference in Hong Kong.

He then pointed out those excesses, with the chief culprit in his opinion being the mistake of leaving the US federal funds rate at 1% until June 2004, three years after the US economic expansion began. That has led to a mis-pricing of capital and overly strong debt growth with a consequent diminishing of asset quality in financial institutions. Today, US debt-to-GDP levels are higher than they were in the days preceding the Wall Street crash of 1929.

Even though one solution would be to adopt tighter monetary conditions, Faber believes that such a move would be contrary to the US government philosophy that overlooks asset bubbles û and when these asset bubbles deflate, they flood the market with liquidity. ôCentral bankers have become hostages to inflated asset markets,ö he points out. He notes that virtually every asset class from commodities to collectables has witnessed a price boom in recent years.

In turn those bubbles are now popping. It started with property, then subprime, then financial institutions. Next to go will be equities as problems hit the wider economy, first in America, and then, given that market decoupling has not occurred, worldwide. ôSell those left standing,ö he recommends, ôwhile their valuations are still in the sky.ö

While Faber sees some potential for short-term strength for the US dollar, ultimately he feels the dollar is a worthless currency, and the only way that the US indices can return to previous highs is by the dollar being diluted by inflation.

ôThe financial sector will never again see the conditions of the last 25 years, and the S&P index wonÆt make a new high in real terms for the next 20 years, ô he observes. ôIndexing is dead and you can only make money on stocks with a trading mentality and by stock selection.ö

Faber is not a fan of the US bailout package, and suspects that the US government is overzealous in its interventions, with Hank Paulson coincidentally synchronising his interventions to time with falls in the Goldman Sachs stock price. ôIf the government buys everything, then hedge funds can simply arbitrage by buying all the rubbish and selling it to the Fed.ö

After his speech was concluded he said that the US cannot stomach asset prices falling to their natural level and a better use of the American bailout package would be to take over the banks and recapitalise them, or to use the money to buy up the surfeit of American homes; if people didnÆt want to sell them for fear of reducing home prices, simply demolish them.

Furthermore, although he acknowledges the possibility that the US bailout might serve to prevent US property prices falling much further, he thinks that this stability would be married with no real prospect for price increases and therefore long-term price stagnation in real terms.

His investment solutions remain unchanged from his customary message, namely: farmland and commodities. On the equities side, he sees potential for Japan to outperform, with Japanese financial institutions looking interesting.