It turns out that not all bears are created equal. That became strikingly apparent as I listened to the four speakers on Tuesday night at Sprott Asset Management's highly-publicized and well-attended (1,500 people) "A Night With the Bears" at Toronto's elegant Elgin Theatre.
All four of the high-profile participants agreed that there are tough times ahead and that things will probably get worse before they get better. But they parted company on how long the economic downturn will last and how deep it will get.
Prior to the start of the formal proceedings, the capacity audience was treated to some spectacular filmed footage of bears in the wild, doing typical bearish things. As I thought back on some of those images later, I found they matched the personalities and comments of the speakers in some remarkable ways. Here's what I mean.
The angry grizzly bear.
Financial historian and newsletter editor Ian Gordon couldn't have been more frightening if he had bared his teeth and roared. By the time he had finished his remarks, half the audience may have been looking for a ledge to leap from while the other half were hiding under their seats. Mr. Gordon is a devout believer in the Kondratieff Cycle (also called the Long Wave Cycle), a theory developed by Russian Nikolai Kondratieff in the 1920s that postulates that economic cycles repeat themselves about every 50 years.
The theory is controversial, to say the least, and many economists give it short shrift. But to hear Mr. Gordon tell it, the Kondratieff Cycle is real, it's in its "winter" phase, and the outlook for the next several years as a grim as it gets. "We are in a 15-year deflationary depression that will be worse than 1929-32," he warned. There will be a collapse in real estate prices - as much as two-thirds in the U.S. World trade will collapse. Government revenues will dry up and they will be unable to provide needed services. Pension plans will fail. The Dow will bottom out at around 1,000. Feel depressed yet?
The only answer, the ex-military officer intoned, is to buy gold, just as people did in a massive way during the Great Depression. Don't say you weren't warned!
The hungry black bear.
That's the image I associate with money manager and chartered accountant Eric Sprott, whose company sponsored the event. He warned of the coming financial meltdown years before it happened and his predictions, for the most part, have turned out to be right. Now he's saying there's more terrible news coming. The $780 trillion in derivatives that are floating around the world will destroy what remains of the global financial system, he says. Commercial real estate will become a disaster zone. "This is not a recession, it is not a depression, it is an outright collapse," he told the audience.
Like Ian Gordon, Mr. Sprott is a big fan of gold. But he sees two other ways to make money in these rough times: shorting the stock market and investing in agriculture ("People always have to eat."). It was the first time I had heard him mention agriculture as an investment area and he was vague on the details even when asked a direct question by a farmer in the audience. There were no agriculture stocks in the portfolio of the Sprott Canadian Equity Fund as of the year-end 2008 report and no mention of agriculture in Mr. Sprott's recent monthly commentaries, published on the company website. We'll have to wait and see where he moves on this one. At the moment, this hungry bear seems to be content to keep devouring gold.
The mother polar bear.
Meredith Whitney established herself as one of the most influential women in American finance when she told investors to dump their shares in Citigroup in the fall of 2007, shortly before the once-powerful banking giant began its slide into near-oblivion. She followed that up with warnings of the impending implosion in the mortgage sector.
The soft-spoken Ms. Whitney is deeply concerned that there are huge problems still to come but she came across as more academic than apocalyptic in her comments - rather like the mother bear in the film who could be seen leading her two cubs across treacherous Arctic ice floes.
Her current focus is on what she expects to be the next great shock: massive defaults on credit card debt. "Ninety per cent of Americans revolve their credit card lines," she said. "They use it as a piggy bank." As debt gets wrung out of the system, more people will be unable to handle the payments, credit card companies and financial institutions will face huge write-off, and the availability of credit will dry up. "Before it's over, every person in this room will have their credit card limits reduced and that will have a profound psychological effect," she predicted.
That said, while she wasn't exactly a fount of joy, she did not seem to be quite as pessimistic as Messrs. Sprott and Gordon in terms of the future. Yes, the economic damage so far has been worse than originally predicted and there's more to come. But her strongest words of advice to the audience were to stay away from U.S. financial stocks. Then a couple of days later Wells Fargo said it made a profit of about US$3 billion in the first quarter. Who can you believe?
The panda bear.
NYU professor Nouriel Roubini was tagged with the nickname "Dr. Doom" after he warned of a looming financial crisis at an International Monetary Fund meeting in September 2006. The New York Times later reported that the audience of economists appeared to be "skeptical, even dismissive". Well, we all know how that turned out.
Dr. Doom, who now advises governments around the world, was the star attraction at "A Night With the Bears". But anyone who expected him to live up to his nickname must have been disappointed. Compared with Eric Sprott and Ian Gordon, Prof. Roubini seemed almost optimistic. Note that I said "almost".
As a bear, I saw him as a panda - outgoing and engaging, the centre of attention at all times, but not someone you want to mess with. His message contained the usual large dollops of bad news: the worst is still to come for the world's banks, lousy corporate earnings in the coming quarters will drive stocks lower, many hedge funds will go broke, unemployment will top 10%, etc.
But, unlike the others, he also offered a few glimmers of hope, describing himself as "more a realistic than a pessimist". We will avoid a depression, he said. Yes, the recession will be deep and severe and those who saw the March rally in stocks as the start of a new bull market are "premature optimists". But we could begin to come out of this downturn in 2010, although initial growth will be very weak. "There's light at the end of the tunnel," he said, "but we'll reach it later rather than sooner."
Hey, I'll take weak growth in 2010 over Ian Gordon's 15-year depression any time!
Despite the glimmer of hope from Dr. Doom, it was a depressing evening overall. But then what would you expect from a carefully chosen panel of confirmed bears? After it was all over, the presumably dispirited guests were invited to a gala reception complete with an oyster bar, savoury hors d'oeuvres (goat cheese wrapped in smoked salmon, mini burgers, coconut shrimp, beef wrapped in bacon), and all the wine, beer, and liquor anyone wanted. Recession? What recession?
All four of the high-profile participants agreed that there are tough times ahead and that things will probably get worse before they get better. But they parted company on how long the economic downturn will last and how deep it will get.
Prior to the start of the formal proceedings, the capacity audience was treated to some spectacular filmed footage of bears in the wild, doing typical bearish things. As I thought back on some of those images later, I found they matched the personalities and comments of the speakers in some remarkable ways. Here's what I mean.
The angry grizzly bear.
Financial historian and newsletter editor Ian Gordon couldn't have been more frightening if he had bared his teeth and roared. By the time he had finished his remarks, half the audience may have been looking for a ledge to leap from while the other half were hiding under their seats. Mr. Gordon is a devout believer in the Kondratieff Cycle (also called the Long Wave Cycle), a theory developed by Russian Nikolai Kondratieff in the 1920s that postulates that economic cycles repeat themselves about every 50 years.
The theory is controversial, to say the least, and many economists give it short shrift. But to hear Mr. Gordon tell it, the Kondratieff Cycle is real, it's in its "winter" phase, and the outlook for the next several years as a grim as it gets. "We are in a 15-year deflationary depression that will be worse than 1929-32," he warned. There will be a collapse in real estate prices - as much as two-thirds in the U.S. World trade will collapse. Government revenues will dry up and they will be unable to provide needed services. Pension plans will fail. The Dow will bottom out at around 1,000. Feel depressed yet?
The only answer, the ex-military officer intoned, is to buy gold, just as people did in a massive way during the Great Depression. Don't say you weren't warned!
The hungry black bear.
That's the image I associate with money manager and chartered accountant Eric Sprott, whose company sponsored the event. He warned of the coming financial meltdown years before it happened and his predictions, for the most part, have turned out to be right. Now he's saying there's more terrible news coming. The $780 trillion in derivatives that are floating around the world will destroy what remains of the global financial system, he says. Commercial real estate will become a disaster zone. "This is not a recession, it is not a depression, it is an outright collapse," he told the audience.
Like Ian Gordon, Mr. Sprott is a big fan of gold. But he sees two other ways to make money in these rough times: shorting the stock market and investing in agriculture ("People always have to eat."). It was the first time I had heard him mention agriculture as an investment area and he was vague on the details even when asked a direct question by a farmer in the audience. There were no agriculture stocks in the portfolio of the Sprott Canadian Equity Fund as of the year-end 2008 report and no mention of agriculture in Mr. Sprott's recent monthly commentaries, published on the company website. We'll have to wait and see where he moves on this one. At the moment, this hungry bear seems to be content to keep devouring gold.
The mother polar bear.
Meredith Whitney established herself as one of the most influential women in American finance when she told investors to dump their shares in Citigroup in the fall of 2007, shortly before the once-powerful banking giant began its slide into near-oblivion. She followed that up with warnings of the impending implosion in the mortgage sector.
The soft-spoken Ms. Whitney is deeply concerned that there are huge problems still to come but she came across as more academic than apocalyptic in her comments - rather like the mother bear in the film who could be seen leading her two cubs across treacherous Arctic ice floes.
Her current focus is on what she expects to be the next great shock: massive defaults on credit card debt. "Ninety per cent of Americans revolve their credit card lines," she said. "They use it as a piggy bank." As debt gets wrung out of the system, more people will be unable to handle the payments, credit card companies and financial institutions will face huge write-off, and the availability of credit will dry up. "Before it's over, every person in this room will have their credit card limits reduced and that will have a profound psychological effect," she predicted.
That said, while she wasn't exactly a fount of joy, she did not seem to be quite as pessimistic as Messrs. Sprott and Gordon in terms of the future. Yes, the economic damage so far has been worse than originally predicted and there's more to come. But her strongest words of advice to the audience were to stay away from U.S. financial stocks. Then a couple of days later Wells Fargo said it made a profit of about US$3 billion in the first quarter. Who can you believe?
The panda bear.
NYU professor Nouriel Roubini was tagged with the nickname "Dr. Doom" after he warned of a looming financial crisis at an International Monetary Fund meeting in September 2006. The New York Times later reported that the audience of economists appeared to be "skeptical, even dismissive". Well, we all know how that turned out.
Dr. Doom, who now advises governments around the world, was the star attraction at "A Night With the Bears". But anyone who expected him to live up to his nickname must have been disappointed. Compared with Eric Sprott and Ian Gordon, Prof. Roubini seemed almost optimistic. Note that I said "almost".
As a bear, I saw him as a panda - outgoing and engaging, the centre of attention at all times, but not someone you want to mess with. His message contained the usual large dollops of bad news: the worst is still to come for the world's banks, lousy corporate earnings in the coming quarters will drive stocks lower, many hedge funds will go broke, unemployment will top 10%, etc.
But, unlike the others, he also offered a few glimmers of hope, describing himself as "more a realistic than a pessimist". We will avoid a depression, he said. Yes, the recession will be deep and severe and those who saw the March rally in stocks as the start of a new bull market are "premature optimists". But we could begin to come out of this downturn in 2010, although initial growth will be very weak. "There's light at the end of the tunnel," he said, "but we'll reach it later rather than sooner."
Hey, I'll take weak growth in 2010 over Ian Gordon's 15-year depression any time!
Despite the glimmer of hope from Dr. Doom, it was a depressing evening overall. But then what would you expect from a carefully chosen panel of confirmed bears? After it was all over, the presumably dispirited guests were invited to a gala reception complete with an oyster bar, savoury hors d'oeuvres (goat cheese wrapped in smoked salmon, mini burgers, coconut shrimp, beef wrapped in bacon), and all the wine, beer, and liquor anyone wanted. Recession? What recession?
