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'Gloom' experts offer their words on investments

NEW YORK — New York -- They are the gloomiest of the gloomsters, and they have been that way long enough not only to write books on the subject, but also to get them on the shelves, thus predating the current crunch.

The titles speak for themselves: "Blood on the Streets," "The Economic Time Bomb," "Crash . . . Will it Strike Again?" "Recession or Depression?" and "Surviving the Great Depression of 1990." Though their arguments differ, they all believe the reservations expressed in their books hold true today.

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With their own money -- a test as relevant as any other -- they suggested in interviews last week that they are either highly cautious, parking it mostly in cash, or aggressively pessimistic, with investment strategies premised on further declines in the value of U.S. banks and real estate, as well as overseas markets.

Happily, none mentioned stocking up on canned food, an investment that is not only liquid but edible, and therefore the ultimate deflationary hedge. And as one, "Economic Time Bomb" author Harry Browne, asserted, "My feeling is the situation is a great deal more grave than people are talking about . . . [but] nobody can predict the future. No one can forecast with any regularity that can be profitable. I've been in the business for 25 years; I have seen a lot of things come and go, including my own hot streaks."

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Indeed, pessimism has been rife, and wrong, before. Queen Elizabeth I inherited a government undermined by debt, corruption and errant military ventures, but a worldwide empire would follow, and the monarchy, along with a stable government, continues four centuries later. In the United States at the end of World War II, retailing was weak, computers almost unknown, and meat scarce. But the retailers that were most cautious undermined their own franchises, the popularity of computers grew almost as fast as their ability to solve problems, and meat became so abundant and economical that it serves as the filling for fast food outlets spread throughout the world. Muddling through intractable problems has precedent, though the legacy of ill-timed forecasts of despair may be equaled by contrasting assertions of ongoing prosperity.

And because the economic outlook today is at best uncertain, those who loudly proclaimed skepticism during the infectiously optimistic days of the last decade have the cachet that comes with prescience.

The most publicized of this school has been Dr. Ravi Batra, whose 1988 book "Surviving the Great Depression of 1990" followed "The Great Depression of 1990." Unusual for such fare, both ended up on best-seller lists but were highly controversial not only because of their conclusions but also because of their statistical methodology.

Mr. Batra said his money is mostly parked in money market funds, with a little used recently for the purchase of gold. "Anything is risky at this time," he said.

"In nine months," he said, "a recession will become a depression." Instead of paper money, which he believes will become worthless, he said it is "time to buy gold coins." Some type of gold standard, he added, will return.

Perhaps the best gauge of an author's sentiment is the direction of his next publication. "Now that communism has fallen," said Mr. Batra, "I think capitalism will fall in this decade. I'm going to write a book on what will replace them."

An unusually eloquent book in the crisis school is James Dale Davidson and William Rees-Mogg's "Blood in the Streets," published in 1987. It predicted a collapse in communism and real estate and was widely derided, when reviewed at all, in the press. An investment fund the authors hoped to set up based on the ideas in their book foundered, Mr. Davidson said, based on lack of support in the brokerage industry.

Now, he's set to launch another to be named Carpathian Capital, after the ship that picked up the survivors of the Titanic. "I've been doing close readings of past depressions, and I think a lot of money will be made," he said.

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At the moment, his own investment portfolio is based more around not owning assets than owning them. No. 1 on the list is real estate, of which he is devoid except for a sentimental stake in a family ranch. Shares are second. "Any rebound [in the stock market] is a time to sell short," Mr. Davidson said, referring to the technique of selling stocks one doesn't own with the intention of borrowing the shares at the time of the transaction and repaying the obligation later when they can be repurchased at a lower price.

He holds short positions on a number of bank stocks, many of which he believes will be insolvent. Selling short means betting that a stock will decline in value. He is also betting on the downside in Sears, Roebuck & Co., the giant retailer. He says that Sears suffers not only from weakness in its core business but also finance and real estate risk through subsidiaries. He is optimistic about yen-dominated bonds, believing that the Japanese currency will replace the dollar as the reserve currency of the world.

Meanwhile, as well as continuing to run a Washington lobby for balancing the budget, he is writing a book titled "When the

Music Stops" about the pending collapse of the welfare state and the consequences of the end of the Cold War. "We are going to be unable to run down the balance sheet of the country further," he said. The tab for the thrift crisis will ultimately exceed the cost of World War II, he contends, and it's unclear whether the government will be able to finance this and all its other obligations. But ultimately, he says, it will change, not collapse, and for those who can pick up the pieces, opportunities will emerge.

A. Gary Shilling has distinguished himself on Wall Street as being unrepentantly bearish. His reputation has moved along with the economic trend. "After the Crash: Recession or Depression," published in March 1988, was initially a source of widespread consternation, then ridicule.

He has structured his own investment portfolio, he says, along the lines of his New York-based money management business. "It's a bet on a continuing deep and global recession." He has options that rise with a fall of the Japanese stock market, is short "a whole ton of banks" and recently began shorting insurance companies. "I think the fun has not yet begun there," he said.

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He's also speculating on declines in consumer finance companies and retailers. And he thinks some of the more vulnerable companies have outstanding stocks that could go right down to zero which, because of a nuance in the tax code, means any gain will never be taxed. In that case, though, he says there's some non-economic risk. "You hope no one buys the shell and uses it for something else, for instance a consumer finance company being used to open a pizza parlor," Mr. Shilling said. "It could happen."

Other promising investments include two-year government bonds because the Fed is likely to respond to the weak economy by driving down short-term rates. However, the rally in bonds may not extend to longer-term issues because, Mr. Shilling contends, the massive federal deficit, which is growing, may drive rates the other way.

Given his long-standing concerns, he said he's now getting a lot more business, which means at least he is doing well. But unlike many of the Wall Street houses, his doesn't offer shares to outsiders. "Sorry," he said. "It's private."

Straddling the economic fence is Avner Arbel, a Cornell University professor of finance. A book published in 1989 by Mr. Arbel and Albert E. Kaff suggested that weaknesses exist in the securities markets that have yet to be addressed. But though the 1987 crash was a warning and the financial markets are now "ticking like a time bomb," a collapse is not inevitable. "I keep my money in a money market fund because I think the level of uncertainty is huge; I think it has never been this high," said Mr. Arbel. "Things can turn out to be extremely good, with a boom, or a disaster."

Although the market's fragility is self-induced, the decisive event will be the outcome of the crisis in the Middle East, he said.

"Given there is no way to predict the outcome, I would rather stay in cash," he added. "I want to stay close to home, basically in a bomb shelter."

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The concern he feels, Mr. Arbel said, is evidently shared elsewhere. His book was published in Japan last week, the country with the most roaring economy and until recently, the most roaring securities market. The initial printing was almost 100,000 copies -- far larger than the printing in the United States. "They have not yet sold" the book, Mr. Avner said, "but they believe this topic is very hot, very sexy."


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