Advice From a Bear Fund Manager

David Tice would never say he told you so, so we'll do it for him. For 20 years, the manager of the Prudent Bear fund has been preaching about the dangers of too much credit inflating assets to dangerous levels. Now, the turmoil in financial markets is vindicating his bearish stance, and his shareholders are benefiting. Year-to-date through September 17, Prudent Bear (symbol BEARX) gained 10%.

The fund employs three basic strategies. It bets against the entire market by selling short index futures and buying put options on indexes. It also sells short individual stocks (short sellers borrow a security, sell it and hope to buy it back at a lower price). Finally, Prudent Bear invests in precious-metals stocks, a traditional hedge against political instability, rising inflation and a weak dollar.

We caught up with Tice, whom we profiled in May, to get his take on the ongoing turmoil in financial markets. Tice's viewpoint is unchanged from four months ago -- which is to say it's still extreme, though it seems less extreme now. Edited excerpts of the interview, conducted on September 18, the day of a stunning stock-market rally, follow:

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Kiplinger's: Your credit-crash scenario seems to be playing out. Where do you see the next problems?

Tice: More problems at financial institutions and banks, but I don't want to name names. The dollar will fall apart more and gold will continue to skyrocket.

Aside from funds such as yours, where do you think the safe havens are now? What should investors be doing?

They should sell stocks, buy gold, save money and cut expenses.

Is there a gold mutual fund or exchange-traded fund that you'd recommend?

I think buying gold coins would be a good move.

Have any of the government's moves to shore up financial companies been a surprise?

Although we're definitely a believer of letting the system cure itself, I'd say letting Lehman Brothers go down was a bit of a surprise.

But isn't letting some financial institutions fail going to prompt others to get their houses in order?

I'm not sure you can play tough love now. You should have played tough love before.

What more do you think regulators can do to resolve this crisis?

I'm not keen on solutions going forward. But I think back to the symposium we had in 1999, when Henry Kaufman (an influential, bearish economist who earned the nickname Dr. Doom) was asked, "What do you do now?" He thought it was too late even then. In other words, we screwed up before, by letting credit grow out of control. So I don't think there's a great prescription now.

How bad will this get?

That's an unknowable.

You've said in the past that we'll have to go through a long, painful period of deleveraging to get rid of all the bad debt. Assuming that's true, what are the best- and worst-case scenarios of that process?

I'd say the worst case is a depression with massive unemployment and potential civil unrest. The best case is a bad recession, with less than 10% unemployment and no civil unrest.

Will the global credit crunch compound our current problems?

We've already seen credit bubbles develop in Ireland, the United Kingdom, Spain and in some emerging markets. Look at European banks that have had these massive losses. They're ticked off at Americans because they feel like they took our lead.

Critics have poked fun at your views over the years. Do you feel some sense of vindication?

We just do our job in a workman-like manner and try to invest our money as best we can for shareholders. There's not one of us that's gleeful about this; we're all nervous.