What the Market Doomsayers are Doing

Wallace Witkowski MarketWatch March 26, 2012

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March 23, 2012, 2:55 p.m. EDT

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By Wallace Witkowski, MarketWatch

SAN FRANCISCO (MarketWatch) "” They are sentries at the stock market's wall of worry, warning investors to prepare for another epic crash for debt-laden economies.

Yet with U.S. equity markets on a tear since early October, hitting levels not touched in several years, most of Wall Street isn't seeing much cause for alarm.

But investors should be very afraid, the doomsayers caution.

"Hold cash, and keep it safe," said Robert Prechter, head of market forecasting firm Elliott Wave International. "There will be another buying opportunity, probably about four years from now."

Markets have been preoccupied with Portugal, but the real linchpin to the success of the euro project in the short term is Spain. Vincent Cignarella explains why on Markets Hub. (AP Photo/Manu Fernandez)

Instead, increasingly optimistic buyers have pushed the Dow Jones Industrial Average /quotes/zigman/627449 DJIA +0.27% above 13,000; the Nasdaq Composite Index /quotes/zigman/123127 COMP +0.15% over 3,000, and the Standard & Poor's 500 Index /quotes/zigman/3870025 SPX +0.31% past 1,400.

The gains extend beyond stocks. Gold /quotes/zigman/660065 GCJ2 -0.10% may be off its September 2011 high of $1,907 an ounce, but is still in the respectable mid $1,600s, and oil /quotes/zigman/2203141 CLK2 -0.32% remains above $100 a barrel. Meanwhile, yields on both the 10-year Treasury note /quotes/zigman/4868283/delayed 10_YEAR +0.89% and the 30-year bond /quotes/zigman/4868063/delayed 30_YEAR +0.60% are around a percentage point lower from a year ago, boosting bond values.

Also, the greenback is rising. The U.S. Dollar Index /quotes/zigman/1652083 DXY +0.33% , a measure of the dollar against six other major currencies, is up sharply over the past 12 months.

It's enough to make a confirmed pessimist downright gloomy.

After all, what's a doomsayer to do when it seems everything "” even Europe "” is rallying? Do you stand your ground in cash, or join the crowd and closely eye the exit?

Of the five prominent market skeptics interviewed for this article, four are reluctantly going along for the ride.

/quotes/zigman/627449 DJIA 13,080.73, +34.59, +0.27% /quotes/zigman/3870025 SPX 1,397.11, +4.33, +0.31% /quotes/zigman/123127 COMP 3,067.92, +4.60, +0.15% Climbing the wall of worry

The consensus among this group is that the rally is not sustainable "” just another big party before an even bigger hangover. They see stock prices as being artificially inflated by Federal Reserve policies of quantitative easing and low interest rates, and that to put out the fires in Europe, the European Central Bank has gotten in on the act.

But, these strategists say, while these monetary drugs are palliative to markets, they require bigger doses for progressively dwindling results and will eventually fail.

Also, they believe the market's valuation is stretched beyond what the fundamentals justify. Government policies are encouraging leveraged institutional investors and hedge funds to go long on stocks, they maintain, while cash-flush companies buy back outstanding shares from cash-strapped individual investors.

Individual investors, not incidentally, are engulfed by debt, the doomsayers point out. As they see it, consumers struggling to unwind debt are getting squeezed by higher food and energy costs. Accordingly, they'll have even less disposable income to sustain corporate profits, the pessimists say. And one outcome these forecasters can all agree on is that the stage is being set for a big, ugly global stock-market crash.

Five shades of gray 1. Peter Schiff

Peter Schiff, chief executive of Euro Pacific Capital, said the worst investment now is bonds, because it's the one asset that hasn't been crushed. The second-worst option is cash, because the Fed insists that inflation is not a threat, he said.

Peter Schiff

Schiff is known for having called the 2007 financial crisis, and has been a vocal critic of artificially low interest rates set by the Fed.

Among stocks, Schiff said he's focusing on multinationals and exporters, areas that have some insulation to a U.S. economy that he believes is heading for a crisis.

Earlier in the month, Euro Pacific's asset management arm launched its EP Strategic U.S. Equity Fund /quotes/zigman/9020258 EPUSX +0.10% , which focuses on U.S. businesses that stand to benefit from increasing sales in overseas markets.

Schiff said the Fed can be in denial about inflation for only so long, and eventually will have to raise interest rates.

"They'll keep [rates] low until the market forces them," Schiff said. "It's like trying to hide it when you're pregnant, you can only do it for so long."

He added: "If we get to 2014 and we don't have a crisis, the Fed will keep rates low but at some point it won't matter because we won't have any money because we'll be paying $30 for a carton of milk."

/quotes/zigman/627449 Add to portfolio DJIA Dow Jones Industrial Average 13,080.73 +34.59 +0.27% Volume: 129.93M March 23, 2012 4:30p var embeddedchart70394702Chart = new EmbeddedChart('#embeddedchart70394702', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:DJIA'); jQuery.data($('#embeddedchart70394702').get(0), 'embeddedchart', embeddedchart70394702Chart); /quotes/zigman/123127 Add to portfolio COMP NASDAQ Composite Index 3,067.92 +4.60 +0.15% Volume: 0.00 March 23, 2012 5:30p var embeddedchart1186512883Chart = new EmbeddedChart('#embeddedchart1186512883', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:COMP'); jQuery.data($('#embeddedchart1186512883').get(0), 'embeddedchart', embeddedchart1186512883Chart); /quotes/zigman/3870025 Add to portfolio SPX S&P 500 Index 1,397.11 +4.33 +0.31% Volume: 570.17M March 23, 2012 4:32p var embeddedchart124732823Chart = new EmbeddedChart('#embeddedchart124732823', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:SPX'); jQuery.data($('#embeddedchart124732823').get(0), 'embeddedchart', embeddedchart124732823Chart); /quotes/zigman/660065 Add to portfolio GCJ2 Gold - Electronic (COMEX) Apr 2012 $ 1,660.80 -1.60 -0.10% Volume: 40,702 March 26, 2012 5:52a var embeddedchart608566580Chart = new EmbeddedChart('#embeddedchart608566580', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:GCJ2'); jQuery.data($('#embeddedchart608566580').get(0), 'embeddedchart', embeddedchart608566580Chart); /quotes/zigman/2203141 Add to portfolio CLK2 Crude Oil - Electronic (NYMEX) May 2012 $ 106.53 -0.34 -0.32% Volume: 14,047 March 26, 2012 5:52a var embeddedchart1065553356Chart = new EmbeddedChart('#embeddedchart1065553356', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:CLK2'); jQuery.data($('#embeddedchart1065553356').get(0), 'embeddedchart', embeddedchart1065553356Chart); /quotes/zigman/4868283/delayed Add to portfolio 10_YEAR 10 Year Treasury Note 2.26 +0.02 +0.89% Volume: 0.00 March 26, 2012 5:47a var embeddedchart1455295549Chart = new EmbeddedChart('#embeddedchart1455295549', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:10_YEAR'); jQuery.data($('#embeddedchart1455295549').get(0), 'embeddedchart', embeddedchart1455295549Chart); /quotes/zigman/4868063/delayed Add to portfolio 30_YEAR 30 Year Treasury Bond 3.33 +0.02 +0.60% Volume: 0.00 March 26, 2012 5:47a var embeddedchart1455223551Chart = new EmbeddedChart('#embeddedchart1455223551', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:30_YEAR'); jQuery.data($('#embeddedchart1455223551').get(0), 'embeddedchart', embeddedchart1455223551Chart); /quotes/zigman/1652083 Add to portfolio DXY U.S. Dollar Index (DXY) 79.58 +0.26 +0.33% Volume: 0.00 March 26, 2012 5:52a var embeddedchart231498199Chart = new EmbeddedChart('#embeddedchart231498199', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:DXY'); jQuery.data($('#embeddedchart231498199').get(0), 'embeddedchart', embeddedchart231498199Chart); /quotes/zigman/9020258 Add to portfolio EPUSX EP Strategic U.S. Equity Fund $ 10.02 +0.01 +0.10% Volume: 0.00 March 26, 2012 var embeddedchart750109653Chart = new EmbeddedChart('#embeddedchart750109653', NormalChartStyleNoDecimals, 240, 80, '6mo', '1dy', null, null, null, 'US:EPUSX'); jQuery.data($('#embeddedchart750109653').get(0), 'embeddedchart', embeddedchart750109653Chart); //$(document).ready(function() { var storywidth = $('#mainstory').width(); var maxwidth = storywidth; $('#maincontent pre').each(function (index, value) { var thiswidth = $(value).width(); if (thiswidth > maxwidth) maxwidth = thiswidth; }); var offset = maxwidth - storywidth; if (offset > 0) { var margin = 13; var blanketwidth = $('#blanket').width(); var contentwidth = $('#maincontent').width(); $('#blanket').width(blanketwidth + offset + margin); $('#maincontent').width(contentwidth + offset + margin); $('#mainstory').width(storywidth + offset + margin); } //}); Page 1 Page 2 var OB_permalink= 'http://www.marketwatch.com/story/money-moves-5-doomsayers-are-making-now-2012-03-23'; var OB_Template="marketwatch"; var OB_widgetId= 'AR_1'; var OB_langJS ='http://widgets.outbrain.com/lang_en.js'; if ( typeof(OB_Script)!='undefined' ) OutbrainStart(); else { var OB_Script = true; var str = ""; document.write(str); } Comments on this story 234 Comments Most Popular Asia Markets

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But, these strategists say, while these monetary drugs are palliative to markets, they require bigger doses for progressively dwindling results and will eventually fail.

Schiff is known for having called the 2007 financial crisis, and has been a vocal critic of artificially low interest rates set by the Fed.

Among stocks, Schiff said he's focusing on multinationals and exporters, areas that have some insulation to a U.S. economy that he believes is heading for a crisis.

Schiff said the Fed can be in denial about inflation for only so long, and eventually will have to raise interest rates.

"They'll keep [rates] low until the market forces them," Schiff said. "It's like trying to hide it when you're pregnant, you can only do it for so long."

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What the Market Doomsayers are Doing

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