Friday, August 24, 2007

The Bear' View

It is always interesting to be familiar with the views that are different from your own. What is the guarantee that you are correct? Excerpts from an interview with David Tice (Prudent Bear) from the

It's been more than 10 years since Dallas-based investment manager David Tice launched this mutual fund to hoard gold, short the market and prepare ordinary investors for the coming economic Armageddon (BEARX).

"That's really irrelevant," Tice says of the landmark. "It's just a number." Does the market's seemingly inexorable rise shake his conviction that it's going to collapse? "It's been quite a rally," he acknowledged. "But it doesn't dissuade us in our opinion. We've never been more confident."

The Dow, he predicts, will fall "at least 50%" from these levels, and he says the market is only months away from beginning a sharp decline. "I think this is a topping pattern," he says. (my emphasis)

"We think it's probably three to six months away from a significant decline." He calls the latest rally "a crack-up boom. At the tail end of credit excess it just gets crazier and crazier. It sucks people in, and it's an extremely dangerous scenario."

In all, Tice argues that the rally of the past four years is masking a long-term bear market that began in 2000 and won't end for at least another five years.

The reason? In short, Tice argues that the bull market is simply massive asset inflation caused by reckless lending and easy money. Sooner or later, he says, it will have to be worked out of the system. (my emphasis)

"Our philosophy is that this has been asset inflation, created by rampant, excess credit." He argues the global money supply has grown by 18% a year for the past four years (no wonder asset prices are booming).

"We believe in the Austrian school of economics," says Tice, referring to the late-19th-century economic theory developed by Austrian economists who emphasized usefulness to the consumer in determining the value of a product.

"If you create credit faster than GDP, you will get inflation. This has to be wrung out of the system. It's only a matter of time."

Crazy? Maybe. But anyone who looks at long-term charts must realize how utterly extraordinary, and unprecedented, the past dozen years have been. Stock market valuations, house prices, household debt, U.S. trade deficits -- they're all tied together, and they've all gone berserk.

It took the Dow Jones Industrial Average nearly 100 years to put on its first 5,000 points --- and just three to put on the second. Yes, there is plenty to make you nervous, and there are a lot of really good fund managers out there who are watching the latest boom with white knuckles and a large bottle of antacid. Tice is not alone.

He believes the canary in the coal mine will probably be the dollar. He expects the greenback to tank as international investors start to lose faith in the U.S. credit bubble. He also predicts the Federal Reserve will respond by jacking up interest rates to protect the dollar from complete collapse. That, of course, would bring the credit market to a grinding halt. We'll see.

The reason? Tice isn't just betting against the stock market overall. He's also short individual stocks, including selected homebuilders, financials and consumer discretionary stocks. Some bets, particularly in the homebuilding sector, have obviously done well recently.

Prudent Bear has also invested about 18% of its portfolio in companies mining precious metals, including gold, silver and uranium. And the prices for those have been skyrocketing. "Gold is the one asset that is not someone else's liability," Tice argues. "Gold is an asset that you can carry around in your pocket, and it's of value."

Bears of all stripes believe gold will prove a "safe haven" if and when the economic reckoning arrives. The reality is that it has proven an exceptional investment over the past five years even while they wait. Part of Tice's analysis, after all, has already proven correct. Easy money has driven up the price of all assets, including precious metals. Meanwhile, America's crazy trade deficit has been slowly undermining confidence in the dollar as the world's reserve currency.

And as the greenback has slid, alternatives, including gold, have risen.

None of this has led to a dramatic market collapse yet. Tice notes that everyone in has a vested interest in keeping the game going as long as possible. "There are no enemies of asset inflation," he says. "Washington likes it. Wall Street likes it. Consumers like it." But as the sun shines on the markets around the world, he still believes storm clouds are on their way. "I am as confident as ever that we are going to be right," Tice says, though he concedes: "Things are playing out more slowly than we thought."

No comments:

Post a Comment