Wall Street's prescient bears are still wary
But have things really changed for the better? Here's advice from four analysts who correctly forecast the subprime and housing collapse:
The reason? The yield spread between investment-grade corporate bonds and US Treasuries are "at or near their widest levels in decades, and in some sectors they are approaching the widest since the Great Depression," he wrote in a report to investors last week.
Mr. Kiesel made a name for himself because he warned early on about the housing bubble. He was so worried that he sold his house in May 2006 and began to rent, instead.
Despite today's upturn in optimism, he said, it's too early to get into stocks.
"Typically, when you come out of a recession and you get this recovery, the trade actually to do is to go into equities," he said in an interview. "But what we think is different this time is that the economy is deleveraging and we're also going through reregulation as well as deglobalization. So there's secular change going on in the marketplace that makes it, in our opinion, more risky."
So he's dipping a "toe – and a leg" in high-quality bonds in selected areas, such as "national champion" banks (receiving cheap government money to restart lending), regulated pipeline and utility companies, and noncyclical industries like telecom and healthcare.
By the way, he's still renting, because home prices have another 10 percent to fall, he said. "By next year, you should really be in a position to want to start to make some offers."
Today's rally should be viewed skeptically because earnings will remain weak as the economy keeps contracting this year and enters a weak recovery in 2010 (annual growth under 1 percent).
Mr. Roubini's position illustrates how easy it is to get typecast. He has been gloomy about the US economy for so long (he predicted the coming of the recession in a prescient 2006 speech to the International Monetary Fund) that he's become known as Dr. Doom. So when he was interviewed on CNBC last month, saying that there was light at the end of the tunnel, some took it as a big sign of change.
It wasn't. Mr. Roubini had argued for months the contraction would slow this year and that recovery would occur in 2010, although it would be so weak that it would still feel like recession.
"I am not a perma-bear and will be the first to call for a sustained economic recovery and recovery of the financial markets when I see one," he wrote in a post last Tuesday. It's just that while the economy is no longer in a free fall as it was at the end of 2008, "we are still in the middle of a severe U-shaped recession that will last much longer than what is expected by the current consensus."
By pumping in trillions of dollars to prop up the current economy, the Obama administration is creating an even bigger problem that will cause hyperinflation and drive down the value of the dollar, he said in an interview. "As a nation, we go deeper into debt. What we need to do is get out of debt. We need to let the phony economy contract."
Mr. Schiff is a YouTube hero. In 2006, while analysts were blithely saying that the economy was strong, he warned about the real estate bubble and the overleveraged state of the economy. (Watch the scorn and bemusement of his fellow analysts here and here.)
Having called it right once, he now foresees a period of intensifying inflation as the Chinese and other creditors begin to lose confidence in the dollar and sell their dollar reserves.
"They're not going to be the bankers for all this stuff," he said in the interview. "Four years from now we could end up owing them $3 trillion. So [from their perspective], better to take a loss on $1 trillion than to take $3 trillion. You can hear the rumblings."
He counsels investors to stay with hard assets, such as gold, or stick with safe Treasuries, which currently yield next to nothing. In this era, "we have to think of return of principal rather than return on principal," he said in an interview. But he also sees some good values in very safe, high-yield equities, such as natural gas trusts and utilities stocks with a big yield.
Mr. Tice warned of the housing bubble and rising debt in a March 2007 letter to investors. His view hasn't changed much since then.
"We are as profoundly negative as we ever have been," he said in an interview. "We have several more legs down in a secular bear market. Unfortunately, there's a lot more pain to go because this is the big kahuna that we have deferred for a long time. The excesses and the imbalances [in the economy] have not yet been wrung out."
Even if you find these forecasts too gloomy, these analysts serve as steady weather vanes. When the bulls swing their way, it's a sign to head for the exits. If and when they swing to the bulls' view, it's a strong signal that a prospective recovery is winning over the skeptics.