Betting on Bad Times, Market Pessimists Gain Cachet
Landon Thomas Jr.
London. The central question dividing economists these days is whether Western governments should spend more to ward off a potential second recession or retrench to hold down their ballooning debts to restore confidence among investors.
Albert Edwards, an investment strategist in London for the French bank Societe Generale, considers the debate a waste of time.
To be specific, he forecasts a “bloody, deep recession” that produces a stock market collapse of at least 60 percent, followed by years of inflation of 20 percent to 30 percent as the persistent printing of money by central banks desperate to improve the situation sends prices soaring.
Edwards’ leather sandals and chuckling demeanor belie his reputation as perhaps London’s best-known permabear — a species that has long flourished on the outer margins of the financial industry but rarely inside mainstream banks.
That is no longer true.
With the shocking financial crisis of 2008 still fresh in people’s minds, and gloom-spinning economists like Nouriel Roubini having achieved pop culture status, even longstanding pessimists like Edwards — who has been forecasting a Japanese-style stock market slump in the United States since 1997 — are being treated with newfound respect.
In many smart-money circles, listening to bears has become fashionable, especially now that doubts remain about the sustainability of the euro zone, concerns grow that the United States may slip back into recession and that even the Chinese growth engine may seize up.
But to some, the popularization of extremely dire forecasts suggests that the pendulum may have swung too far.
“Nothing is ridiculous anymore,” said Philippe Jabre, a hedge fund executive in Geneva. “There is no doubt that these days extremely negative research is being tolerated more.”
Edwards’ newfound popularity reflects the trend. Once frequently shown the door by disbelieving clients, Edwards recently drew 600 investors to a conference in London.
Similarly, Bob Janjuah, the one strategist in London whose prognostications are seen by some as even more dire than those of Edwards, said he was courted by half a dozen investment banks this summer before deciding to leave his post at Royal Bank of Scotland to join Nomura.
“Clients are more receptive to hearing polar ends of an investment view,” said Janjuah, who expects economic growth for the top developed economies to average little better than a percent a year over the next five years.
Further afield, Raoul Pal, a former Goldman Sachs derivatives expert and hedge fund manager, has attracted a growing following with his monthly research note that, most recently, predicted a depression in the United States similar to that of the 1930s and eventual bankruptcy for Britain.
Pal writes The Global Macro Investor from a holiday village in Spain.
He said that demand was so great now that he has the luxury of doling out his high-price subscriptions only to clients he considers sophisticated enough to pass muster or who come recommended by people he trusts.
He said that 30 percent of his clientele — which includes pension and hedge funds, governments and proprietary traders at banks — consisted of wealthy family offices with assets of more than $200 million.
“They are easily the most bearish of my subscribers because they invest in the longer term,” he said, “and in the longer run they see more uncertainty than ever before.”
If investors had been following the advice of Edwards or Pal over the past month as stocks have bounced back, they would have lost money, as both men readily acknowledge.
Pal’s bad run began when, after becoming bearish in 2007 and reaping the fruits in 2008, he was caught short by the powerful recovery that began in March 2009.
To date in his model portfolio, he has lost 96 percent on a short bet of the Indian stock exchange, 68 percent betting against the Chinese H share stock market and 68 percent on the American mutual fund company Franklin Templeton.
Until 2009, his model portfolio was up 700 percent.
His big bet is that the United States economy is not just about to enter a double-dip recession, but that it will be far worse than anything experienced in the lifetime of anyone younger than 70.
That may be so. But Ed Yardeni, an independent strategist in the United States known for his optimistic views, says it would be a mistake to bet against the evidence from strong corporate profits, which he thinks are already driving a global rebound.
“Despite all this negative spin, we have seen one of the best corporate recoveries ever,” he said. Executives “are being fed this same diet of pessimism, but instead of shutting down they are growing their profits and expanding their operations.”
The New York Times