Monday, March 17, 2003
There are signs that his forecast is starting to come true.
KNIGHT RIDDER NEWSPAPERS
Three years ago, Michael O'Higgins was entirely out of stocks and into zero-coupon Treasury bonds, predicting that stocks would lose half their worth.
Today, he's predicting another depression.
It's possible he's on target. Again.
O'Higgins, for whom the term contrarian is much too mild, has a record of being right when most of us are headed in the wrong direction. And a record of making money while we're losing it.
Since our last conversation in March 2000, zero-coupon treasuries are up 43.5 percent. The S & amp;P 500 Index is down 41 percent. He said long-term Treasury bond yields would drop from 6.15 percent then to 4.6 percent. They are now paying about 4.7 percent.
O'Higgins manages $200 million at his boutique investment firm in Miami Beach that caters to clients with assets of at least $1 million. He's been a top money manager for more than 20 years and has written best-selling investment books, "Beating the Dow" and "Beating the Dow with Bonds." He's best known for his Dogs of the Dow theory, which worked well for quite a while when the market was still going up.
Today, O'Higgins won't touch a Dow stock or almost any other stock at current prices.
Because he is looking for a depression to begin soon or to be already in progress. "Perhaps the greatest deflation and depression of all time," he says, "Following the greatest speculative boom in stocks of all time."
It'll begin as the baby boomers wake up and realize that the stock market's downturn over the last three years has wiped out almost half their nest eggs.
"When you say it can't be like 1929 through 1931 when stocks lost 89 percent of their value, you're right. It could be worse," he says.
Boomers and consumers will begin to save more money when they realize that the bull market is firmly over. Stock gains in the future will not bail out an investor if he has put too little money away.
The role of debt
People today have higher levels of debt -- for consumers, government and corporations as a percent of gross domestic product -- now than at any time since 1929, he notes.
The depression will not end until that debt is liquidated, he says.
When consumers decide to save more, they'll stop spending. And the economy's main support will collapse.
After that, you can wait and watch for the Dow Jones Industrial Average, currently 7740, to sink by another 22.4 percent to 6000. And that's his best-case scenario.
It could go as low as 3100, if the stock market goes back to its normal range throughout the last century for the dividend yield, which is the figure you get if you divide a stock's dividend by its price.
Right now, O'Higgins is only interested in gold, which he sees as undervalued and heading up because of deflation. "Because it's real money, because it has held its value for thousands of years, because it's not subject to the manipulations of government or central banks or dishonest corporate executives," he says.
What's more, gold goes up when stocks go down. In 1929-1932, he notes that gold rose 69 percent. And indeed, in the last 12 months, it is up 20 percent. Yet its price is still far below what it traded for in 1980: $850, or roughly 21/2 times higher than today's roughly $350 an ounce. Global supplies of gold, too, are dwindling.
A gold stock, Newmont Mining, is the only stock he owns today and he's betting against the rest of the market. His strategy is risky, not diversified and, well, daring.
"He's made some great calls over the years," said Joseph McGraw, a hedge-fund manager who is president of Yankee Advisors in Waltham, Mass. "Mike likes to be emphatic, but I'm pretty negative, too. I'm concerned about deflation coming out of China. I'm concerned about the U.S. consumer totally retrenching and freezing."
"Fundamentally I think he's correct," said money manager John N. McVeigh of Upland Capital management in Ridgefield, Conn. "I think we're in a secular bear market. Those typically run 10 years or more. That takes us out, from the spring of 2000, to 2010."
For the record, this isn't the mainstream view. According to Bloomberg News, the average Wall Street market strategist thinks you should put 68 percent of your portfolio in stocks.
Certainly, O'Higgins has not always been on target. He moved out of stocks too early and missed the great 86 percent gain on the Nasdaq in 1999, when his fund rose only 48 percent.
As he admitted, "I'm only dealing with probabilities. I don't have any illusions that I have a crystal ball. I just know financial history."