Top manager O'Higgins predicts a depression
Three years ago, when Michael O'Higgins was entirely out of stocks and into zero-coupon Treasury bonds, when he was predicting that stocks would lose half their worth, I didn't believe him.
If you listen to O'Higgins now, you won't want to believe him
either: he's predicting another depression.
However, I think you should pay close attention, because 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 of 2000, zero-coupon treasuries are up 43.5 percent. The S&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 of 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.
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.
ECONOMIC COLLAPSE
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 just under 7,900, to sink by another 24 percent to 6,000. And that's his best-case scenario.
It could go as low as 3,100, 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 2 ½ times higher than today's roughly $350 an ounce. Global supplies of gold, too, are dwindling.
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