When everyone is telling you that this credit crisis could not have been predicted, you can point to one man who boldly -- and incredibly accurately -- told you exactly what was going to happen. His name is Bert Dohmen, for the past 30 years the publisher of the Wellington Letter, one of my all-time favorite newsletters.I interviewed Dohmen in March following the publication of his book, Prelude to Meltdown. His predictions, below, were frightening. But his forecast today is even more shocking.
"When the Dow Jones Industrial Average made its first close above 14,000, Dohmen sent out a warning. "'The world has seen the greatest credit bubble ever seen by man. ... The enormity of this problem is beyond anything we have ever seen in financial history. "'The size of the leverage and the financial instruments that are outstanding, and now defaulting, are beyond the ability of any central bank, or all of the central banks combined, to bail out. We've never had a situation where the central banks were not big enough to bail out a situation -- but we have it now." "He warns about further problems in the banking industry:'My forecast is that the next big crisis will be the credit default swaps -- a 45 trillion-dollar, highly leveraged market. These are basically insurance policies that buyers of mortgage securities (CDOs) bought against a mortgage default. Banks and hedge funds 'wrote' this insurance. ... Now that the mortgages are defaulting, the sellers are saying they don't have the capital to make good on the insurance. 'The key word over the next year is counter-party risk, because these were unregulated side deals. ... The regulators were totally asleep.'"Dohmen's not worried about inflation. Instead he sees a deflationary collapse and recommends U.S. Treasury securities."
What Bert Dohmen Says NowSeven months later, and it's clear that Dohmen absolutely nailed it with his predictions. I spoke with Dohmen over the weekend to find out what he's forecasting for the market now. I started by asking him about Warren Buffett's very public decision -- in a New York Times op-ed piece -- to support the markets by buying stocks. Dohmen says it is a "patriotic" move on Buffett's part to advocate buying stocks now but it's not necessarily a smart move, based on history, he says. Dohmen points out that markets are mathematical, and 50% bounces in a bear market are typical. But often that's not the end of the big decline:
"Most bear markets, after a major bubble has burst, decline 80%-90%, going back to where the bubble started. In the United States, that's what happened after the 1929 Crash. During the 1973-74 bear market, the broad ValueLine Index was down over 80%. In 2000-02, the Nasdaq Composite was down over 80%. So until a major index is down over 80%, I will not even start looking for a bottom!"Dohmen notes that since this latest crisis was caused by the bursting of a financial bubble, the most significant decline is likely to occur in an index of financial-sector stocks, such as the Financial Select Sector SPDR ( XLF), an exchange-traded fund that tracks many of these companies. "So far it is down from around $38 in 2007 to $13 now