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Who really makes money predicting the end of the world?

Posted by admin on February 25, 2010 in Investment Information

Nouriel Roubini, arguably next to Ben Bernanke, is the world’s foremost media darling economist (to the extent any economist is appealing to the masses). It was Roubini who predicted the end of the global real estate bubble in 2006 and continues to believe that the worst is yet to come.  In March 2009 he predicated that the Dow Jones Industrial Average would fall below 7,800. It ended 2009 at 10,300.

Harry Dent predicated Japan’s economic fall and America’s boom in the 1990′s. Since then, he has sold a lot of books making widely inaccurate predictions based on his research. In 2006, Dent predicted the Dow Jones Industrial Average would hit 40,000 by the end of 2009 (it hovers around 10,000). After the bubble burst, he changed his tune and called for a great depression ahead.

Roubini and Dent are but two of the industry predicting our imminent economic doom. Not to be outdone, the U.S. government warned in 2001 that if 5 nuclear reactors were not built every year for the rest of the decade, the country would experience rolling brown outs. Yet the U.S. Energy Information Administration of the U.S. Department of Energy reports electricity prices are falling which contradicts price movement of a supposedly scare resource (not to mention the small detail that it takes many years to build a plant).

The fact of the matter is that even a broken clock is right twice a day. This is not to downplay the fact there are serious economic issues which need to be faced and the immediate future does not look so rosy as the not so pre-2008 past. However, lest one forgot, people do not attract media attention because they are right per se but because they are outrageous in their claim.

Underlying all these claims meant to attract headlines and stoke our fears is a call to action to do something. Typically, that something has to with the self-interest of the person predicating doom. We will run out of energy! Build nuclear plants cries the politician in the nuclear power’s pocket. The world is ending! Buy gold (oh, by the way, this television show is sponsored by a gold producing company). The demographics say bad things will happen! Here’s a mutual fund sponsored by me which will make you rich.

And, therein, lies the problem. The dooms day predictors either give terrible financial advice or are peddling product which enriches them at the expense of the investor. Roubini has been quoted as saying he is 95% in cash and 5% equity. He gets paid in USD as a professor at NYU. Assuming his cash holdings are in USD, and one of thesis is the American economy is shrinking, it seems like a strange asset allocation to concentrate holdings in a depreciating currency. Even if he is not substantially all in USD, this is a strange allocation for a 50 year old man.

Dent has a very spotty record peddling products associated with his research. In 1999, the AIM Dent Demographic Trends mutual fund was launched to great fanfare. Its investment philosophy would be based on Dent’s demographic trending and analysis (Dent acted as sub-advisor to the fund). Five years later, the fund was merged out of existence, partially due to poor performance.

Since we have short memories, Dent has launched an actively managed ETF (a walking misnomer) with a total expense ratio of 1.65%- well above many ETFs; one can only conclude that Dent’s research found that investors are suckers. True to form as a inaccurate predictor, the sucker/investor did not bite.  Its trading volume is so small (3,882 shares traded yesterday) that, barring a major turn-around, the ETF will likely be closed.

Sprott Asset Management may be one of the exceptions to the rule. But, even then, some of its mutual funds are charging management fees of 2.5%.

If the fundamental thesis of the doomsday industry is the economic system will collapse upon itself, why exactly do they need to make all this money?

If money has no value upon collapse,  what exactly are they accumulating it for? If our economic world was to end tomorrow, I am not sure I would be listening to the person telling me to buy gold or their mutual fund. Instead, I would be listening to the person telling me to find my family and friends and to cherish and protect them now and in the future. But I guess no one ever made money giving that advice.