Bears, bulls and the hazards of gurudom

Elaine Garzarelli was just another low-profile Wall Street analyst when she made the call that made her famous. In an article in USA Today, barely 350 words in length, she said her mathematical model of the stock market had turned negative, and she was advising clients to get out. The story appeared Oct. 13, 1987. Six days later, Black Monday, she looked like a genius.

Then 36, Ms. Garzarelli became an instant financial celebrity - the woman who called the crash. For a long time, the label, and the fame, stuck, even after she made some blunders. She left Lehman Brothers with a loyal following and started her own firm. In 1996, on CNBC, she again urged investors to sell. Stocks were overvalued, she said. They were dangerous.

The Dow doubled over the next four years ( then it crashed). After that, she got bullish, which worked for a long time. Her advice going into last year? "More of the same, a great 2008," she told one newspaper. Among her top picks were Home Depot and Lehman.

Hey, no one ever said gurudom is an easy business. A lot of people get one big, memorable prediction right, make a name for themselves, and get placed on a pedestal by the media. It's replicating the feat that's so difficult. Keep that in mind as you listen to the superbears who now occupy the stage.

Four of them took the spotlight at Toronto's Elgin Theatre on Tuesday, and the place was as packed as an Internet conference in 1999. Back then, the hot topics were fibre optics and "e-tailing"; now, they're Eastern Europe and toxic commercial mortgages. After an evening of gloom - lowlighted by Ian Gordon's prediction the Dow will fall to 1,000 - they gave chocolates to the departing crowd. Why chocolates? Why not razor blades, or maps to local bridges?

Like Ms. Garzarelli, two of the four have been sprung from relative obscurity by the crash. Meredith Whitney knew that Citigroup was toast before the people who ran Citigroup did (or, at least, while they were still in denial about it). Another of the bears' night panelists, economist Nouriel Roubini, said a few months ago that regulators might have to close the world's major stock markets for a week or two, to calm everyone down. It hasn't happened yet, but many of his other predictions have. As for the fourth panelist, Eric Sprott, whose firm organized the event, his investment record speaks for itself. Over the long run, he has beaten the market soundly.

They're all smart people, obviously. So what reason is there to doubt them in their bearishness? It has to do with the hazards of gurudom.

Becoming famous for your deeply held view that gold will rise, or stocks will fall, or banks will collapse, means you will be asked, over and over, to talk about why. And the more you talk, the easier it is for your listeners to confuse brains with investment infallibility. Take Mr. Sprott. He has held the view for years that the United States would endure some kind of financial cataclysm. But when it happened, the Sprott Canadian Equity Fund still lost 43.7 per cent. Why? Because he hadn't thought that a Wall Street meltdown would translate into a crash in mining and energy shares, which he owned in abundance.

When the bears' message was new, there was big money to be made from it. But it's not so new any more. When Ms. Whitney says credit cards are the next bomb to detonate in the U.S. financial system, well, she would probably know. But the KBW bank index, which tracks two dozen of the largest U.S. banks, had fallen 85 per cent from its peak in 2007 before its recent bounce, which is about as much as the Dow fell from 1929's peak to the bottom in 1932.

That's right: U.S. bank stocks have already been through something like the Great Depression - which isn't to say they couldn't go lower still. But if we had to guess, we'd say the value of the U.S. financial system is not zero.

As for Mr. Gordon's prediction of a Dow at 1,000, let's put that to closer scrutiny. Suppose you woke up tomorrow and learned that Coca-Cola, Microsoft, American Express, Bank of America, Home Depot, Citigroup, Pfizer, Exxon Mobil and General Motors were bankrupt, and every other stock in the Dow fell by 50 per cent. You know where it would be? Still above 3,000.

So by all means, listen to what the bears have to say. But also consider the possibility that they might miss it when the economy turns, and that their worst-case scenarios - their bet against the resilience of capitalism - might be wrong.