Commentary: Do The Bears Have Something To Growl About?

For once, David W. Tice's timing was immaculate. The fire-and-brimstone Jeremiah of Wall Street held a conclave of fellow bears in New York on Sept. 21, the very day the Dow Jones industrial average fell 225 points, the beleaguered dollar sank again against the yen, and Washington reported a bigger-than-expected increase in the U.S. trade deficit.

Plus, it rained. All in all, the ideal atmosphere for propounding the theory that the U.S. economy is headed straight to hell. Tice and his compatriots argue that Americans are clinging to the skin of a giant asset bubble that's sure to pop and cause a shock wave of bankruptcies and unemployment. They fault Federal Reserve Board Chairman Alan Greenspan for letting the stock and real estate markets inflate perilously by keeping interest rates too low. The inevitable bursting of the bubble "is a risk to freedoms of individuals and our entire nation, and most important, to free markets," said Tice, president of Dallas-based David W. Tice & Associates Inc., which runs the Prudent Bear Fund. "This is a tragedy down the road."

Sitting among 200 dour investors and brokers absorbing the negative vibes at "The Credit Bubble and Its Aftermath," I half expected the Waldorf-Astoria's giant crystal chandelier to crash to the floor on cue, like a scene from Phantom of the Opera.

Alas, it held fast. With markets, as with falling chandeliers, timing is everything. That's why being a bear is such a frustrating stance these days. If the financial and real estate markets really are overvalued, a day of reckoning is sureto come. But bears have been saying that for years. Over the past 12 months, Tice's fund, which short-sells stocks based on analysis of underlying corporate problems, was the fifth-worst of 3,195 funds in Morningstar Inc.'s database.

Greenspan is well aware that the Fed needs to take away the punch bowl when the party starts getting too fun. He has already started siphoning off some of the joy juice. It's just that he's more circumspect than the bears about when the right time to do that is. Unlike the doomsayers, he is not willing to say for sure that asset prices now--right now--are overinflated. Doing so, he said at a Fed conference in Jackson Hole, Wyo., on Aug. 27, would mean controverting the "judgments of millions of investors, many of whom are highly knowledgeable about the prospects for the specific companies that make up our broad stock price indexes."

That said, the bears' message is worth at least a listen. They argue that Americans are spending beyond their means. To fund investment, the U.S. is importing huge sums of capital from abroad--and consequently running record trade deficits. "Like Blanche DuBois, the U.S. economy is dependent on the kindness of strangers," says Marshall A. Auerback, a consultant for Tice. Stuart Feldstein, founder of SMR Research Corp., says lower-income Americans are taking on enormous debts that they will be unable to repay if the economy turns down. From 1992 to 1998, Feldstein says, credit-card issuers raised the ceiling of potential borrowings from $770 billion to $2.5 trillion. And less than 20% of available credit has been tapped, which means strapped consumers can get far deeper into debt without filling out a single loan application.

"DR. DOOM." It's a measure of the pessimism of the conference that economist Henry Kaufman, who was known as "Dr. Doom" at Salomon Brothers in the '70s, came across as middle-of-the-road. While faulting Greenspan for letting a bubble form, he declined to say that rates should be raised now. "When you miss your timing," he noted, "it's very, very difficult and complex to throttle back."

As Kaufman knows, it's one thing to warn about excesses and another to risk choking off healthy growth. Burly former Fed governor Lawrence D. Lindsey, a ray of sunshine compared with his fellow speakers, says he thinks Greenspan has gotten things just about right. Lindsey--speaking on his own and not, he stresses, in his capacity as economic adviser to GOP Presidential hopeful George W. Bush--thinks a certain amount of speculation is necessary in financing risky new ventures: "It's vitally important to let capital flow into new businesses. As long as [markets] don't get too far out of hand, it's an experiment worth running." So far, the results favor the bulls.

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