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Financial Post
Saturday November 18, 2000
William Hanley – Lunch
Money
Market in an awful stew?
At
the Teahouse, Bob Hoye sees red for danger Vancouver – Bob
Hoye orders
a glass of California merlot with his brunch at the famous Teahouse
Restaurant in Stanley Park last Sunday, opting for a full bodied red even
though he's having a shrimp cocktail appetizer and smoked salmon with
poached eggs and dill hollandaise for his main course.
The unconventional pairing of red wine and seafood neatly illustrates
the contrarian nature of this financial markets historian and original
thinker who has fashioned a very comfortable living by making
unfashionable calls that can make some people very uncomfortable.
At a fireside table amid the genteel ambiance of the Teahouse,
Hoye warms to his theme
that the markets are in a transition from a financial bubble to a
deflationary environment, a transition that began in 1997 with the blowout
in Asia and will end with even more distress because the bottom of the
stock market has not been reached. While not exactly a doomster, the
genial, erudite Vancouverite says the end is nigh for this particular
boom.
Hoye
runs his research
outfit, Institutional Advisors, out of his home in Vancouver, working with
two like-minded associates, Tom Peterson and Ross Clark. Their clients
range from large pension fund managers and an "extremely" large
U.S. mutual fund to a well-known and long-term hedge fund manager. The
Institutional Advisors service goes out electronically to subscribers
across Canada, the United States, Britain and Australia.
The three take their own advice. For instance,
Peterson's equities
market model has given him clear signals to produce a 107% return this
year to Oct. 31. Meantime, 52 of 60 stocks that came up as short sales on
Aug. 25 have fallen, giving a 28% trading gain.
"All three of us have the same approach – what makes
money." Hoye says, "If it
can't be seen to make money, it's discarded. We want to make sure it works
on a buy and a sell. It makes us as impartial as you can get."
In the meantime,
Lunch
Money is about as
partial as you can get to our appetizer, piping hot Teahouse mushrooms
filled with crab, shrimp, scallions and Emmenthal cheese. Hoye makes short
work of his shrimp cocktail while unable to resist occasional forays into
the bread basket.
Yes, taking a contrary
position to just about everyone else and criticizing no less a financial
figure than U.S. Federal Reserve chairman Alan Greenspan sure works up an
appetite. Hoye tucks into his smoked salmon while we, sticking with the
local theme, enjoy our Ferguson Point omelette, which contains back bacon,
mushrooms, cheese and green onions and comes with seasonal vegetables.
Hoye could be forgiven for wishing he had answered his usual Sunday
calling and was solo white water canoeing in the mountains, a demanding
sport he didn't take up until a dozen years ago, even though he was B.C.
born and bred.
He got into the investment business after taking a geophysics degree
and working briefly in mining exploration. After stints as a mining
analyst and a broker with Wood Gundy and Pemberton Securities, he founded
the Quantum
Research newsletter
in 1982, which allowed him to pursue his passion for financial history.
Quantum became Institutional Advisors in 1998.
In April, 1998,
Hoye made the cheeky –
and absolutely bang-on – observation that the mighty bank stocks were
heading for such a fall that they could safely be considered as
short-selling candidates for the risk-averse portfolio of widows and
orphans. The Toronto stock Exchange 300 composite index's financial
services subindex began melting down that month and although the sector is
up more than 40% this year, the subindex has still not reclaimed its
record high more than 30 months later.
Meantime,
Bob Hoye's
universe is unfolding as it should and that's bad news for all the raging
bulls who feel the stock market is at or near a bottom. The Institutional
Advisors financial model forecast the market would rally till the first
week in September as it did in the falls of 1998 and 1999. This time, he
says ironically, "it is different".
That was the final rally
and the air is whooshing out of the financial bubble, just as Hoye says it
whooshed out in five previous periods with nasty consequences.
"You know, it's not
just my opinion," he explains. "It's how financial history works
in a bubble."
If history does repeat
itself, as 1929's Crash basically repeated the 1873 market meltdown, and
distressed investors find themselves not as rich as they thought they
were, Hoye knows who you should blame. Central bankers and specifically
"reckless" Alan Greenspan have been far too loose with credit,
expanding money supply against soaring paper assets. "Central bankers
are the bespoke tailors for the emperor – you know, the one who was
discovered to have no clothes. Central bankers must have assets go up.
Otherwise, they can't expand credit no matter how hard they
try."
"Look at Japan. It's been in deflation since 1990. In the late
'80s, there was no finer set of policy-makers in the world than the
Japanese policy-makers."
It's been a satisfying meal, the food and service fine, the setting on
Ferguson Point matchless. We come away thinking the financial markets have
an awful lot on their plate, much to digest, if Bob Hoye is any guide,
with some unpleasant heartburn in the offing.
And as the week wore on, it appeared his forecast of more financial
pain was turning out to be most uncomfortably correct.
Hoye will
continue to bet against the market until his financial model indicates a
bottom has been made. Meantime, he's expecting gold – which he concedes
he held too long – to rally strongly at some point because it has done
so in the deflations that have followed the end of every financial bubble.
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