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Money Moves 5 Doomsayers Are Making Now

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.”

Spain is the worry, not Portugal

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 DJIA -0.03%  above 13,000; the Nasdaq Composite Index COMP +0.28% over 3,000, and the Standard & Poor’s 500 Index SPX +0.01%  past 1,400.

The gains extend beyond stocks. GoldGCJ2 -0.04% may be off its September 2011 high of $1,907 an ounce, but is still in the respectable mid $1,600s, and oilCLK2 +0.03%  remains above $100 a barrel. Meanwhile, yields on both the 10-year Treasury note 10_YEAR -2.58% and the 30-year bond 30_YEAR -1.08%  are around a percentage point lower from a year ago, boosting bond values.

Also, the greenback is rising. The U.S. Dollar Index DXY +0.13% , 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?

Party like it’s 2007

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

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 EPUSX +1.00% , 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.”

2. Harry Dent Jr.

Harry Dent Jr., who heads research and forecasting firm HS Dent, said the recovery in the economy and markets is “artificial” in that it’s being fueled by quantitative easing measures in the U.S. and Europe.

Dent notes that asset classes are rising in tandem, when normally stocks and bonds have an inverse relationship. If the economy is indeed recovering, then it shouldn’t require the Fed’s help, he said.

In fact, Dent contended, the Fed isn’t about to take the economy off life-support because that would put some $42 trillion in private U.S. debt at risk.

Dent uses demographics to inform his economic and market forecasts. He’s known for a prediction in the 1980s that Japan’s economic slowdown would last more than a decade, based on population trends, and cautions that the U.S. is setting itself up for a similar economic malaise.

Aging baby boomers are no longer fueling U.S. economic growth, he said, and younger generations can’t keep the momentum going.

“The government and most economists are in denial when the largest generation is spending less and paying down their debt,” Dent said.

If you have to be in the stock market, Dent suggests hedging stocks with the CBOE Volatility Index VIX +7.08% . The best way to play a bubble is to realize it’s a bubble and be ready to get out quickly, he said.

For the U.S. market, Dent said he expects a near-term selloff followed by a summertime rally due to another round of quantitative easing that could last until the presidential election. After that, Dent sees a market peak in 2013 or 2014 and then another crash.

3. A. Gary Shilling

Economic consultant A. Gary Shilling said stocks are vulnerable because the U.S. consumer is worn out, and that puts businesses, and the broader economy, on a weak footing.Shilling has long predicted that Fed measures to stimulate the economy will fall short and believes that the global economy is in a long period of deleveraging marked by anemic growth.

“If the consumer pulls back, there’s nothing else in the economy that can sustain growth, and if the consumer retrenches we have a recession,” Shilling said.

Corporate profits are not driving earnings and stocks, Shilling said — corporate cutbacks are. Indeed, he added, U.S. businesses are in a tricky spot where they can no longer rely on cost cutting to boost the bottom line.

“U.S. businesses have been doing this since 2000 and you’ve had consumers willing to borrow to support it, but that’s not the case anymore,” he said. “We no longer have a cushion of people willing to borrow to support corporate profits.”

Now, businesses need to hire more people to increase productivity, he said. The only problem with that is that hiring slices into profits.

For stock investors, Shilling recommends a focus on companies that pay a high dividend, particularly in utilities and consumer staples. He also favors North American energy stocks with natural-gas pipeline assets.

Outside of equities, Shilling likes long-term Treasurys for their potential appreciation rather than yield, and the U.S. dollar against the euro and the yen.

4. Charles Biderman

Charles Biderman, who heads TrimTabs Investment Research, said he’s bullish on stocks given that the Fed’s cheap money is levitating prices. But, he added, at some point stocks are going to drop.

Biderman, who approaches stock prices as a function of liquidity instead of fundamental value, expects the U.S. market to slow considerably in the second half of the year, and that the Fed will try to stimulate investment with QE3.

A day will come, Biderman said, when the Fed will pull the plug on cheap money. Then he sees the Dow tumbling to financial crisis lows in the 6,000 range. For clues, watch what companies are doing with their cash, he said.

“If buybacks slow,” he said, “that would be the time to start getting out.”

Biderman manages the AdvisorShares TrimTabs Float Shrink ETF TTFS +0.92% . The top five holdings in the $8.3 million fund include mattress maker Tempur-Pedic International Inc. TPX -0.40% , industrial adhesive and coating maker Nordson Corp. NDSN +0.80% , motor home and bus manufacturer Thor Industries Inc. THO +2.75% , Home Depot Inc. HD +0.14% , and hotel chain Wyndham Worldwide Corp. WYN +0.86% . By sector, the ETF is overweight on consumer cyclical, health-care and technology stocks.

5. Robert Prechter

Elliot Wave’s Prechter is the most bearish of the five strategists. He said investors should shun every asset class that’s popular now, including stocks, commodities, precious metals and bonds.

Prechter maintains there are parallels between today’s U.S. economy and the Great Depression. This time, a deflationary spiral threatens the nation’s health.

As for stocks, Prechter said individual investors are tapped out and that most of the market activity is driven by institutional investors. The market’s rebound since 2009, he said, is a classic bear market rally.

He added: “When investors are afraid again, and when stocks are cheap again, that will be the time to buy.”