On Tuesday, some 1500 people attended an event titled “A night with the bears” to hear the views of Nouriel Roubini a.k.a. Dr. Doom, Meredith Whitney, Ian Gordon and Eric Sprott (whose company organized the event). These gurus are now enjoying widespread acclaim for their bearish views, the most extreme of which is probably Mr. Gordon, who is putting a target of 1,000 on the Dow and cheerfully forecasts that the gloomy economic situation will be with us until 2020.

I have no idea if these gurus have it right but the cautionary example of Elaine Garzarelli, who famously called the 1987 crash, should be kept in mind. Derek DeCloet points out how many of her subsequent calls turned out:

In 1996, on CNBC, she again urged investors to sell. Stocks were overvalued, she said. They were dangerous.

The Dow doubled over the next four years (then it crashed). After that, she got bullish, which worked for a long time. Her advice going into last year? “More of the same, a great 2008,” she told one newspaper. Among her top picks were Home Depot and Lehman.

and concludes…

So by all means, listen to what the bears have to say. But also consider the possibility that they might miss it when the economy turns, and that their worst-case scenarios – their bet against the resilience of capitalism – might be wrong.

This article has 25 comments

  1. I’m also bearish on the overall economy, but that doesn’t mean that all stocks will perform poorly. I personally like the agribusiness sector and a friend of mine really likes the utilities right now. The common theme for the both of us is that a lot of stocks in the so-called “consumer staples” of food and energy have been pulled down by the overall market malaise.

  2. DeCloet is one of my fave writers – that was a good article.

    Too bad they didn’t have “3 bears” scheduled – the headline writers would have had a field day with Goldilocks references. 🙂

  3. Canadian Capitalist

    Daniel: Thanks for the video. I’ll check it out.

    Mike: That’s funny. I like Derek DeCloet’s articles too. He is an excellent writer.

  4. I also have no idea whether the bears or the bulls will prevail, or for what period of time, but it is reasonable to hedge one’s bets in either case, ie. be equally prepared for the possibility of each.

    There’s also two different zoos in which these animals are caged – the financial markets, and the real economy. Each needs to be addressed.

    In the financial markets, we’ve remained fully invested in our equity-weighted portfolios, and are adding a total of about 10% of our gross incomes through company match programs. To hedge our bet here, we’re not making any additional lump sum contributions for the forseeable future.

    In the real economy, should a bull get loose in the china shop, then great news – jobs and raises for everyone! If the bear continues to maul the job and real estate markets, then it is prudent to actively prepare for that. Excess funds are going to build up cash on hand to a certain level, and funds above that amount directed to reducing mortgage principle.

    We all have different situations, and the “right” actions will vary for everyone. For us, the above actions suit us just fine.

  5. Dr. Phillip Tetlock has done extensive research on financial/economic and political forecasters. He has found that such “experts” are no better at forecasting than the rest of us mere mortals.

    I have started tracking the one year performance of the Top Picks that “experts” present on BNN. It will takes years to form an opinion of the values of these picks but the results I have seen so far aren’t encouraging.

  6. I would side with the bears. We had a huge market crash, and we’re in a deep world-wide recession (Iceland collapsed, Easter Europe and other emerging markets could follow), the financial sector is in shambles. In spite of the trillions in stimulus, we’re still in danger of deflation. Dr. Doom’s prediction of a recession lasting 24-36mo isn’t unreasonable given these facts.

  7. I hope there will a night with the bulls, to get some of their perspectives.

    • Canadian Capitalist

      @Ray: I suppose it will be time to turn cautious when we have a sold-out gathering of bulls.

  8. Any time I hear anyone – be it a guru or a mere mortal FORECASTING the future I know to shut my eyes and ears. No mortal can EVER forecast the future. It would be inetresting to see what these forecasters have done with their personal portfolios

  9. Fred: In 2001, I started tracking the experts on BNN with a focus on my “core” portfolio holdings of raising-dividend payers. At the end of each year, I review who has made the best calls for that year (concerning MY stocks only). There are some who are much more consistent with their common sense and reasonable comments-others just repeat the same old, same old over and over and others are way off the mark. While none are accurate 100% of the time, there are some who are consistent enough that I feel it’s worthwhile to pay attention to what they say.

  10. How does that joke about economists go?

    When people are getting laid off, that’s when you declare it to be a mild recession. When companies are failing, that’s when you declare it to be a major recession. When economists get laid off, that’s when you declare that it’s a depression!

  11. So in short: it can go up and also it can go down. What kind of advice that is?

    Nobody can predict what future brings short term (1-2 years outlook).

    Long term (5+ years) economy will do just fine.

  12. In hindsight Gazarelli was correct to issue a sell n 1996. If you bought bonds instead you would have missed some upside in stocks, but you would not have experienced either the dot com bust and the mortgage bust as well..

    Now that’s what I call long-term investing 🙂

  13. I would side with the bears. We had a huge market crash, and we’re in a deep world-wide recession (Iceland collapsed, Easter Europe and other emerging markets could follow), the financial sector is in shambles. In spite of the trillions in stimulus, we’re still in danger of deflation. Dr. Doom’s prediction of a recession lasting 24-36mo isn’t unreasonable given these facts.

    I tend to agree with Roubini, just because I don’t seen any reason for a turnaround at this point. However, when you say you “side with the bears” that includes the guy predicting the Dow at 1000. I really don’t see it going that low. In fact, the bottom may have already been hit. I think we can have a long, L-shaped recession without an economic apocalypse.

  14. Even a wrong clock is right twice a day…

    If I am a forecaster and keep saying things are going to be great or bad consistently, at some point in the economic cycle, I will be right. Then I can declare myself an “expert.”

    Wouldn’t a better gathering be to have 2 bears and 2 bulls battling it out rather than gather people who think exactly like you do? That’s not a forum, that is a back-patting session.

    I am not remotely going to forecast anything. I don’t pretend to know the fates and anyone who says they do is a fool.

  15. Nobody ever became famous by predicting an average year and being right.

  16. A key question is, to coin a phrase, “where are the bears yachts?” and if they have yachts, how did they get them – by selling their advice and/or books, or by investing their own money?

  17. How about Jeremy Grantham? Is he just a guru of the day or someone who has been really good at analyzing and forecasting the market?

    His timing isn’t exactly the most precise. He called the Nikkei Bubble 3 years early, Nasdaq bubble 2 years early, and Financial Crisis of 2008 2 years early, but he made the right calls. He told people to invest in emerging markets and oil in the year 2000. What do you guys think?

    • Canadian Capitalist

      Jeremy Grantham is a genuine guru in my book. He publishes expected returns for various asset classes regularly and explains why he is bullish or bearish based on expected returns (and admits it is somewhat of a guesswork because of potential changes in valuation, which is inherently unpredictable). I always found his essays interesting and well reasoned.

  18. As for me I predicted 9 out of the 5 bear markets 🙂

  19. For anyone who doubts Nouriel Roubini’s predictions, read his Feb 5, 2008 article on the 12 steps to financial disaster. For context, the Dow was at 12,700 at that point, so these predictions were laughed off as fantasy. Of course i don’t have to tell you they all came true.

    http://media.rgemonitor.com/papers/0/12_steps_NR

  20. aloha e: A very nice link. I think Roubini really knows what he is talking about. I don’t think Roubini deserves the title of Dr Doom at this point. Roubini says the recession will end in 2 or 3 years. That doesn’t sound like a depression at all. Deflation with inflation afterwards sounds very reasonable too due to excess production capabilities as explained by Roubini. Roubini’s sound understanding and combining both Neo-Classical and Neo-Keynesian economics is very impressive.

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