Accurate doomsayer sees ever darker economic cloud
By HARRIET BRACKEY
March 23, 2003, 11:01PM
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, people 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, 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 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, if it isn't 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 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 -- 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 to sink by another 22 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 2 1/2 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."
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.
The Wall Street crowd has largely been wrong throughout this
bear market that began in March 2000. Mostly because of
O'Higgins' correct bet on the direction of interest rates and
bonds, the O'Higgins Fund of Funds in 2000 soared 71.32
percent when the Dow dropped more than 6 percent, and rose
4.76 percent in 2001 when the Dow was down more than 7
percent.
Last year, as he moved out of bonds and into gold, his fund
rose 19 percent, when the Dow dropped 17 percent.
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.
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