NEW YORK (
) -- Permabear David Tice believes the
will sink to 400 while
will skyrocket to $2,500 an ounce.
chief portfolio strategist for bear markets, launched the
Prudent Bear Fund
in 1995 to serve as a "net-short" hedge to the U.S. stock market. Tice has given up some short-term gains in favor of his bearish long-term strategy.
S&P 400, Gold $2,500
In 2008, the Prudent Bear Fund was up 20% in a year in which the
plummeted 33%. But in 2009, the fund lost 18% shorting stocks as broader equities rallied. Currently, the fund is down 18.54% year to date, but Tice, no longer portfolio manager but still a bear champion after 20 years, believes his pessimistic and patient strategy will pay off.
Tice says that the S&P will decline to 400, which is a shocking number, but Tice has been right before. Back in 2007 after the Dow topped 13,000, Tice predicted that the index would plummet at least 50% from the current levels. In March 2009, the Dow fell to an intraday low of 6,469.95.
I sat down with David Tice recently. Here is some of what he had to say.
: When will the S&P hit 400?
: Probably 18 months or so. I think it's always hard to put a time and a price together, obviously. We've always been too early in our projections. We think that this is a massive secular bear market. We've had a nice rally since March. However, we think investors' expectations will be dashed.
Will this be a straight-down decline
Tice: No, they never go straight down. We'll have a decline. We'll have a rally. Then we think we'll probably have a big decline sometime in the summer. Then there will be another rally. Then there will be another decline. What happened in the 1930s
is we wound up having a first decline, a 50% rally,
which was followed by seven waterfall declines. In the midst of all those declines, we would have a rally and then everybody would get positive. Everybody would say "OK, the worst is over. You have to buy stocks now" and then boom you would have another big decline ... that's what I think the model is.
What are we going to see in the markets before the S&P goes to 400?
Tice: Well, I do think that we are going to have
another credit crisis. We think that there could likely be a funding crisis in terms of Treasuries. Right now quantitative easing has provided a lot of support for the Treasury market. The
talking about backing away there. We think that the Chinese and Japanese are going to be reluctant to continue to buy these Treasuries. Right now they have been selling agencies and buying treasuries, and therefore they've supported the market. We don't think that will last forever.
How long do we stay at 400
Tice: It's difficult to say. There's going to be a lot of money printing, there's going to be more bailouts,
and there's likely to be a dollar crisis. We could tip over into hyperinflation and therefore that is going to help levitate the market. It's a really uncertain future, obviously. We wish we had a crystal ball; we ordered it a few years ago but it has never come. But we think it's going to be painful for investors. Just getting the direction right is the most important thing. We're not out to convince all investors to be bears; we're just saying be cautious and think about being hedged.
How do you hedge
Tice: Well, we do think investors ought to be less heavily invested in stocks. They ought to consider puts or negative ETFs or Prudent Bear Fund, or Comstock Partners' fund, you know, negatively correlated funds. We think they should also own bullion
and gold stocks. Even though gold and gold stocks are likely to go down in the first part of this decline, we think longer term they're going to do very well.
Tice: We do like
. I really shouldn't talk about individual names. I'm not exactly sure what's in the Federated Prudent Bear portfolio. GoldCorp has been a long-term hold of ours, but we like some of the bigger ones and some of the smaller ones.
Tell me about the other way you make money
Tice: Yes, well we run a diversified portfolio of short names. We also are short S&P and Russell futures. We take small positions. A big position for us is 1%. We have a team of analysts that tear apart financial statements and analyze companies and try to determine companies that will underperform the market. Lately we've been more defensive in terms of being short lower-beta stocks because it's been a cyclical bull
run for the past nine months.
How do you make money as the markets keep going up
Tice: Well, we've lost money in '09. We made a lot of money in '08. We lost a lot of money in '09, but we frankly did outperform most of the other bearish funds.
But being a permabear, aren't you right just every five years for about 18 months
Tice: Well, you can look at it that way.
When we started our fund
it was was way too early. But that was the time when
made his famous irrational exuberance speech. We've been up 7% a year for the last 10 years in the last decade so we've done very well when the market was roughly flat. We essentially have been calling for this bear market because this has been a credit bubble that has been inflated through Keynesian stimulus every time we have had a decline. We would have been far better off if we would have let the excesses and the balances be worked off.
Tice: We recovered from '03 to '07
even though the market went up every year. We made money three out of the five years because of our precious metal holdings and our judicious short holdings. That was a period though when we should have declined further, but instead Greenspan resurrected the housing market and we pumped $1.4 trillion of mortgage finance into the system on an annual basis. It created a bigger housing bubble. Stocks went up, but it made the economy far worse off.
What's your outlook for the next six months
Tice: It's down. It's possible we rally another three to four months, maybe this decline starts five months, maybe six months, seven months from now. We wish we had that crystal ball. But I'd say we are very overbought; we are at very positive sentiment levels. We think we've run a long way, and the market
is acting tired right now, and I think it's very close to the first leg down.
What about gold? A lot of big investors are coming into the gold market, so can't you argue that sentiment is too positive
Tice: Well, there is a lot of positive sentiment there for sure. Gold stocks were down a lot in '08 when the overall market went down, but bullion actually was slightly up for the year. Really
it was the only commodity that held up, and really gold isn't only an inflation hedge, but it's also a deflation hedge. Now if we have a big decline, gold stocks are likely to decline again. If we have this decline from a currency crisis, gold's likely to do really well. We'd much rather be in gold than in stocks.
So then why are you long gold stocks
Tice: Well, we still like the operating leverage of gold stocks and we still like our security selection in the gold stock area. We think gold stocks are a reasonablerisk-reward.
How high do you think gold will go
Tice: I think that the
-to-gold ratio will return to one. In other words, gold will equal the Dow. So if the Dow falls to 3,000, then gold could be at $3,000. I'm putting
a $2,500 nominal target on gold ... it
also could be that we have so much credit creation and money printing ... that the Dow doesn't fall that far but gold skyrockets.
What's your outlook for the U.S. dollar
Tice: Longer term, it's negative. There's certainly very negative sentiment on the dollar. It's the subject of this massive "carry trade" and therefore as that's unwound, the dollar could certainly rally. However, over the next three years we think the dollar will be lower.
Do you advocate a return to the gold standard
Tice: I think that is the one wise way out of this. I think that eventually currency strategists and politicians will see that
it's what we have to get back to. Now there is a lot of resistance. A lot of monetary experts don't think that's the way we go. I'd say it's probably a 50/50 bet.
What currencies do you like
Tice: We really like the Norwegian krone. We like the Canadian dollar. We still like the euro relative to the dollar. It's going to be volatile. It's going to be wild. Gold, I would say, is a quasi-currency that is going to do the best.
So what's next
Tice: It depends on what politicians do. Stocks don't typically quit going down until most people have sold. In 1932, the Dow sold for about 60% of book value. The Dow was yielding over 10%. It went up fivefold over five years once all the sellers were gone. Therefore, once stocks do get washed out, they're going to go up again. We look forward to that day, but unfortunately we've got to work through the excesses first.
Written by Alix Steel in New York
Alix joined TheStreet.com TV in February 2007. Previously, she held positions in film and theater production, management, and legal administration. Alix has a degree in communications and theater from Northwestern University.