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Armageddon Sells: Permabears Now Becoming Cool

Landon Thomas Jr. |The New York Times
Tuesday, 10 Aug 2010 | 4:48 AM ET

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.

New York Stock Exchange trader
Getty Images
New York Stock Exchange trader

But Albert Edwards, an investment strategist in London for the French bank Société Générale, 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.

Mr. Edwards’s sandals and chuckling demeanor belie his reputation as perhaps the City of 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 Roubinihaving achieved pop culture status, even longstanding pessimists like Mr. 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.”

Mr. Jabre said that most of the research that came his way had a distinctly negative biasand that finding actionable ideas with a positive spin was becoming far more difficult.

“These guys are reinforcing a conviction among many who invest in hedge funds that they should remain scared,” he said.

Mr. Edwards’s newfound popularity reflects the trend. Once frequently shown the door by disbelieving clients, Mr. 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 Mr. Edwards — “even I get depressed reading his stuff,” Mr. Edwards remarked — 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. (He starts officially in October.)

“Clients are more receptive to hearing polar ends of an investment view,” said Mr. Janjuah, who expects economic growth for the top developed economies to average little better than 1 percent a yearover the next five years.

Waiting List for the Research Note

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.

Mr. Pal writes The Global Macro Investor from a holiday village in Valencia, a province in Spain. He said that demand was so great now that he has the luxury of doling out his high-price annual subscriptions only to clients he considers sophisticated enough to pass muster or who come recommended by people he trusts. Others must join a waiting list, Mr. Pal said, although he declined to say how large the group is.

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.”

According to TrimTabs, a funds researcher, hedge funds withdrew $3.5 billion in April and industry consultants say that many funds — positioned in July for a continuum of bad market news — were caught by surprise when the market rallied. “Where is the research telling me how good Intel’s earnings were going to be?” Mr. Jabre said. “I just have not seen it.”

In fact, if investors had been following the advice of Mr. Edwards or Mr. Pal over the last month as stocks have bounced back, they would have lost money, as both men readily acknowledge. Mr. Edwards has advised investors to be heavily underinvested in all equities, and Mr. Pal is betting against the United States stock market as well as shorting the euro.

Mr. 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, he says his model portfolio was up 700 percent.)

"(I)f you take into account that on average a recession increases unemployment by 3 to 5 percent, we could see 15 percent unemployment in the U.S." -Author, The Global Macro Investor, Raoul Pal

In the tradition of the great macro hedge fund investors like George Soros and Julian H. Robertson Jr., Mr. Pal, whose last job was as a portfolio manager at GLG, a hedge fund based in London, likes to pick a theme that may take years to pan out and run with it.

His big bet is that the United States economy is not just about to enter a double-dip recessionbut that it will be far worse than anything experienced in the lifetime of anyone younger than 70.

He points to a weak rebound in consumer and industrial spending from the 2008 plunge, suggesting that companies and people will remain reluctant to borrow and spend. “Never before have we entered a recession with 10 percent unemployment,” he wrote in his August report. “And if you take into account that on average a recession increases unemployment by 3 to 5 percent, we could see 15 percent unemployment in the U.S. — that is staggering.”

As for whether central banks can rescue their economies through a fresh round of money injection, both Mr. Pal and Mr. Edwards are skeptical.

They contend that there is no evidence that the huge injections of liquidity already engineered by the Federal Reserve, the European Central Bank and the Bank of England have led to a pickup in demand for loans.

That may be so. But Ed Yardeni, an independent strategist in the United States recognized for his consistently 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 at large companies “are being fed this same diet of pessimism, but instead of shutting down they are growing their profits and expanding their operations."

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