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The New Economy

Wall Street's prescient bears are still wary

By / April 20, 2009

The four horsemen of economic doom (from left): Mark Kiesel, Peter Schiff, David Tice, and Nouriel Roubini.

Jake Turcotte

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America's mood about the economy has shifted from gloom to what President Obama calls "glimmers of hope."

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But have things really changed for the better? Here's advice from four analysts who correctly forecast the subprime and housing collapse:

1. Get into select high-quality bonds (Mark Kiesel, a managing director of Pimco in Newport Beach, Calif.).

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."

2. Stay on the sidelines (Nouriel Roubini, economist at New York University and chairman of RGE Monitor).

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.

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