Promised Land


Beware Investing Advice from Permanent Pessimists

Andrew Feinberg

Perma-bears may be occasionally accurate, but don't let their negativity sour your investment plans indefinitely.



Speaking at a recent economic forum in Moscow, Nassim Taleb, author of The Black Swan, told his audience, "You can sustain shocks whereas the U.S. cannot sustain shocks." Hey, Lenin, Stalin, the gulag -- no problem. And Russia's 1998 default on its sovereign debt? What's a default among friends?

The best defense one can offer for Taleb's foolish comments is that he was sucking up to his hosts. Yes, many things could go wrong in the U.S., and it would not be unreasonable to hedge your financial bets a bit. So I am adding gold and other commodities to my fund. Keeping some cash in strong currencies, such as the Swiss franc, the Australian dollar and the Canadian dollar, also seems prudent.

Bevy of Perma-Bears

But there's a difference between hedging your bets and heading for the hills with an Uzi and a load of canned food. And that's what you'd be doing if you spent too much of your time listening to the legion of occasionally accurate perma-bears who permeate the media with a frequency that belies the accuracy of their forecasts.

Pawing the more-sober side of the bear cage is Jeremy Grantham, of Boston money-manager GMO, who admits he's been bearish on the U.S. market for 20 years. Grantham thinks Standard & Poor's 500-stock index could reach 1,500 (a 16% gain from its March 10 level of 1,295), but that it will then collapse to a point at or below its fair value, which Grantham reckons is 900.

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Another nearly perpetual bear, Seth Klarman, of Baupost Group, a Boston hedge fund, said in his latest client letter that the stock market must collapse as a result of an imploding dollar and runaway inflation. Still, Klarman sounds positively chipper compared with Damon Vickers, the author of The Day After the Dollar Crashes. On page one of his book we read, "The United States and our fellow nations are facing an Armageddon of economic collapse as every nation slowly spins into a death spiral, pulled down by debt that appears impossible to repay." (So much for your plans to hightail it to placid Mother Russia!)

Peter Schiff, of Euro Pacific Capital, a Westport, Conn., brokerage firm that specializes in foreign securities, and David Rosenberg, of Gluskin Sheff, a Toronto investment firm, contend that we are already in a depression. Say what? Schiff argues that inflation, officially 1.6% over the past year, is understated. He says it's really 8%, which means the economy is shrinking rather than growing. He says our economy will soon look a lot like it did in the 1930s, a series of closely spaced recessions. (See PRACTICAL ECONOMICS: Peter Schiff Says We're in the Early Stages of Depression.)

David Tice, the founder of the Prudent Bear Fund, said in 2002 that the Dow was headed to 3,000. Like many bears, he tends to blame the government when his predictions don't pan out. "I couldn't believe policymakers would be so stupid" as to drive down interest rates to such low levels, he says, explaining why the Dow never pierced 6,500.

Robert Prechter, of the Elliott Wave Theorist newsletter, has, on and off for decades, envisioned a Dow number that has only three digits. Last summer he told the New York Times that we might be setting up for the biggest crash of the past 300 years.

Chewing over the utterances of this band of bears, I have four thoughts:

1. When it comes to the big picture, bears are not rigorous thinkers. Many stake out a position and never deviate from it, regardless of the facts.

2. Many bears are publicity hounds. They'd rather generate a scare headline than get no attention at all.

3. Bears, unfortunately, can cause investors to alter smart investment plans.

4. There is so much apocalyptic bearish talk today that I am reminded of those sunny days in the late 1990s, when we ran a budget surplus and were fighting no wars. The good news was obvious then -- but it was ephemeral. The ominous dark clouds hovering over us now may be as well.

Columnist Andrew Feinberg manages a New York City-based hedge fund called CJA Partners.



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