The Bear Truth

As U.S. market averages have drifted higher over the last two years, despite any serious conviction that the U.S. economy is on a sustainable road to recovery, there can be no doubt that an overall sense of invincibility has settled in among investors. (Much of that confidence stems from the Federal Reserve’s now explicit commitment to backstop falling markets with unending monetary stimulus.) As a result, those like me who are perceived as “bearish” are characterized as money-losing mattress-stuffers who refuse to wake up and smell the coffee.

Not surprisingly then, in early April I was asked by CNBC to participate on a segment that they entitled “When will the bears throw in the towel?” But the truth is that “bears” like me, who have shunned U.S. stocks and bonds in favor of gold, commodities, foreign currencies and foreign equities, have typically done better over the past decade than the “bulls” who are leading the parade on Wall Street. Why should those who have outpointed their opponents in nearly every round consider “throwing in the towel?” It should be the bulls that finally cry uncle.

In the more than 20 years that I have been providing investment advice, I have never had a simpler roadmap to follow than the one currently being provided to me by Ben Bernanke and his colleagues at the Federal Reserve. By refusing to acknowledge a growing inflation problem, even as the evidence becomes inescapable, and openly committing itself to a policy of asset price support and quantitative easing, the Fed has made it an easy decision to abandon dollar-based assets. The urge is becoming infectious. Even Bill Gross, the largest private bond buyer in the world, recently announced that he has reduced his holdings of U.S. Treasuries to zero.

But unlike most economists, I do not believe that the Fed’s policy of quantitative easing, combined with the Federal government’s policy of deficit spending, will restore health to the U.S. economy. In fact, I feel the opposite is true. The Fed is preventing market forces from doing the hard work of rebuilding our economy from the ground up. I believe these policies will simply bankrupt our country, destroy business, and crash the currency. But I do not believe that a tanking U.S. dollar or a faltering American economy will pull the rest of the world into recession. As a result, despite my “bearish” reputation I have long recommended significant exposure to commodities, non-dollar equities and precious metals. This formula is very different from the traditionally conservative “bearish” prescription of CDs, Treasuries and muni bonds. In fact, those are the types of assets that I avoid at all costs.