THE PROPHETS OF DOOM

THE PROPHETS OF DOOM - From Cassandra's doom-laden predictions to sceptical stock market watchers, the forecasters of gloom have long been treated with derision and cast out into the wilderness. Now that those who throughout the 1990s predicted a downturn

by SIMON NIXON
Last Updated: 31 Aug 2010

From Cassandra's doom-laden predictions to sceptical stock market watchers, the forecasters of gloom have long been treated with derision and cast out into the wilderness. Now that those who throughout the 1990s predicted a downturn have been proved right, how do they feel? Simon Nixon reports

When Apollo wanted to punish Cassandra for resisting his advances, he knew just what to do to a woman to whom he had already given the gift of prophecy: he ensured that no-one would believe her. It was a cruel curse. For the rest of her miserable life, Cassandra's doom-laden predictions were dismissed as the rantings of a madwoman. Her embarrassed father, King Priam, tried to lock her away. When she warned the Trojans not to accept the gift of a wooden horse from the Greeks, no-one paid any attention.

Apollo was quick to claim credit for Cassandra's fate, but people would probably not have believed her anyway. Those who predict doom and disaster have always struggled to be taken seriously. When the prophet Jeremiah warned the Judeans of the imminent destruction of Jerusalem, they did not thank him for the tip-off, but booted him out of town and threatened to kill him.

Our attitudes to prophets of doom have not changed much since. Take the case of the small band of economists and stock market watchers who warned throughout the 1990s that the US was in the grip of an unsustainable financial bubble. We may not have locked these doom-mongers away, but many were banished to the professional wilderness.

'It was pretty hard,' says David Tice, founder of the Prudent Bear fund, of the perils of being a bear during the longest bull market in history.

'Everyone was partying. We felt like the people telling them to go home when they were swinging from the chandeliers.'

But few bears had to endure the personal vilification suffered by Tony Dye, who lost his job as head of pension fund manager Phillips & Drew just as the market peaked in March 2000. The press were quick to dub him Dr Doom, and he was ridiculed for his bearish views. 'It was very unpleasant,' he says now. 'For a long time, I just tried not to read the papers.'

The treatment of Dye was hardly surprising. Bears have always occupied a special place in the demonology of the financial markets. When bubbles burst, the finger of blame is pointed at them for driving prices down with their short selling.

Given the forces ranged against them, it takes a particular type of person to challenge the popular consensus publicly. Indeed, according to Bill Bonner, editor of the Daily Reckoning, a bearish online newsletter, it mostly comes down to personality. 'People come to their opinions in an emotional way and then look around for some rationale to justify them. Some people are more sceptical; they feel uncomfortable when they find themselves in the middle of a big herd. They feel that something must be wrong.'

In most cases, this scepticism is not limited to the stock market. 'Put it this way,' says Tice, a self-confessed contrarian, 'I don't believe Lee Harvey Oswald was a lone gunman.'

But if these modern-day doomsters share a sceptical nature, they also share an unshakeable confidence in the analysis that underpins their stance. Some are more concerned with the economy than the stock market. For them, the biggest worry is the massive expansion of credit that underpinned the US boom. For example, Wynne Godley, an adviser to Kenneth Clarke during the last Tory government, is concerned by America's vast trade deficit. Without a dramatic change in government policy, he says, the US faces an economic implosion and the world faces a 'developing global recession more severe and more intractable than any other in the post-war period'.

Similarly, Kurt Richebacher argued in his monthly newsletter that the US reliance on borrowing and consumption rather than productive investment to fuel growth during the boom was reckless. America now faces 'a profits carnage of unprecedented vehemence'.

But other doom-mongers focus on the stock market. According to Andrew Smithers, former head of Mercury Asset Management and founder of investment consultants Smithers & Co, 'at its peak in 2000, the US stock market reached levels of overvaluation never seen before, even at the peak in 1929'. Even now, he says, 'the US market is 1.5 times where it should be, which means that it is substantially overvalued.'

According to his analysis, it would take a 50% fall in the Standard & Poor's 500 index to bring the market back to reasonable levels. Other bears go even further. Tice expects the market to break back to 1991 levels, a view that is shared by Bonner.

But what if these predictions of doom and gloom fail to come true? After all, most commentators argue that the combination of tax cuts, a lower oil price and the cumulative effects of 10 interest rate cuts in the past year should lead to a strong recovery later this year. If the economy recovers quickly, will the prophets of doom change their view? Not likely. The bears have been careful not to put a precise timescale on their predictions. But all agree that even if the Fed succeeds in reviving the boom for now, it will only have postponed the inevitable day of reckoning.

They may well be right, but like so many prophets of doom before them, they will find it hard to persuade anyone to believe them.

KURT RICHEBACHER

A former chief economist of Dresdner Bank, Dr Kurt Richebacher is hailed as a genius by fans of his monthly newsletter. An economist of the old school who believes that savings and investment are the key to economic growth, he insists the US boom was based on borrowing and consumption. The root of the problem was 'fraudulent statistics, which helped fuel the boom by creating the myth of the productivity miracle'. Money poured into unproductive sectors - hence falling corporate profits after 1997. It was 'the worst bubble in history - worse in my opinion than the 1920s and worse than Japan in the 1980s'. There is little the US can do to escape a long stagnation: 'This downturn happened despite the biggest credit deluge of all time.'

DAVID TICE

The founder of the Prudent Bear fund, which runs the Prudentbear.com web site, has been a bear since 1996, when Fed chairman Alan Greenspan made his 'irrational exuberance' speech. A native of Missouri, the 'Show Me' state, David Tice regards himself as a natural sceptic. Throughout the bull market years, he stuck to his guns, arguing that the US was in the grip of a dangerous bubble. 'It was like a train wreck happening in front of our eyes ... It was a very trying period.' But he draws no satisfaction from the downturn in the markets and the economy over the past year. 'So many people are hurt. They didn't understand it. You can't take satisfaction from that. But I still have a job to do, which is to warn people that this isn't over yet.'

WYNNE GODLEY

Wynne Godley's career has taken him from the Treasury to a fellowship at Cambridge, an appointment as one of the original panel of Wise Men who advised former chancellor Kenneth Clarke on interest rate policy, to his present position as a fellow of the ultra-bearish Levy Institute in New York. For him, the US economy in the 1990s came to resemble a bridge built on insecure foundations. 'You could not say when it would come down, but you knew that it would. Last year, I became more and more confident that this is it - we are now in the implosion phase.' The US economic downturn has led to a revival of interest in his work. During the boom, he rarely got more than 400 hits a month on his web site. Recently he had nearly 16,000 hits in two weeks.

BILL BONNER

Besides editing the Daily Reckoning, an online newsletter, Bill Bonner chairs Agora Publishing, which issues more than 30 investment newssheets in the US and UK. An American in Paris, his approach is simple: 'I don't know which way the market is going, and I don't believe anyone else does. It's just that when you're buying shares, you want to buy them cheap. Right now, stocks aren't cheap.' Yet he is clear where the market is going long-term. 'So far, the US economy has tracked the Japanese model, and I don't see why that won't continue, with stocks going down and down. I keep remembering what happened at the start of the last century, when everything was going fine. Then some guy shot the Archduke and things just spiralled out of control.'

ANDREW SMITHERS

Ask any bear when it will be safe to get into the market again, and they might well refer you to Andrew Smithers, ex-head of Mercury Asset Management and founder of investment advisers Smithers & Co. His Valuing Wall Street (McGraw Hill) is hailed as an investment classic. He bases his assessment of the overvaluation of Wall Street on an analysis of 'q', the ratio between stock market prices and underlying capital value. Armed with more than 100 years' worth of stock market data, Smithers shows that whenever the market reaches extremes of overvaluation, a sharp fall in share prices follows. In the 1990s, US shares reached unprecedented extremes. 'We are almost certainly in a major bear market, one that could take years to unfold.'

TONY DYE

Tony Dye became Britain's most high-profile bear when he lost his job as head of Phillips & Drew fund management just before the market peaked in 2000. Phillips & Drew funds were languishing at the bottom of the performance tables and Dye acquired the sobriquet Dr Doom. Dye now runs his own hedge fund and is 'grateful to be regarded as a serious person once again'. Like all bears, he blames the bubble on Greenspan. 'Instead of talking about 'irrational exuberance', he could have jacked interest rates up. Every time the market looked like it was about to fall, he bailed it out ... Financial deregulation has left a weak financial structure with over dollars 100 trillion of derivatives outstanding. Now they're trying every trick in the book. The systemic risk is vast.'

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