Dining with forecasters

Former Bank of Canada Governor David Dodge is pessimistic about the outlook for equity markets over the next three years, Kevin O'Leary writes

Globe Investor Magazine Online, Feb. 4, 2009 Kevin O'Leary is the chairman of O'Leary Funds, the manager of the O'Leary Global Infrastructure Fund and the O'Leary Global Equity Fund.

"Check, check" my words echo though the cavernous Telus Convention Centre in Calgary. It's 3 p.m. and I am working with the audio visual staff doing a sound check in preparation for this year's annual Chartered Financial Analyst Society Forecast Dinner where I will be this evening's master of ceremonies. If you have never heard of this event you are in for a surprise. There are more than 1,500 attendees. The room is so large that I cannot see the back wall from the podium. Candles glowing on the hundreds of round tables in front of me make it look like New York City at night. Soon the room will be jam packed; I had no idea that so many analysts still had jobs in North America.

This event is more than 30 years old. Each January like birds preparing for a migration, financial analysts gather into a giant swarm to perform a strange and cruel ritual. They choose three top forecasters to make their predictions for the upcoming year. These presentations are recorded on video and the tapes are stored in a vault. Twelve months later they are dusted off, and in front of hundreds of their peers, they are played again and the original forecasters must defend their predictions in the harsh light of 20/20 hindsight. This year my job as MC is to add a little levity to what could be a sobering event given what a disaster 2008 was for financial markets.

First up is David Dodge, the former Governor of the Bank of Canada. Mr. Dodge no longer works for the government and as a free man can now say what he likes. I introduce him to the podium, he does not hold back.

Basically he thinks North American equity markets are in the tank for the next three years, maybe longer. Worse, ignoring the fact that he is in Calgary, the epicentre of North American oil and gas investment, he forecasts that commodities will do nothing until maybe 2012. Just what the crowd wanted to hear. I was planning not to drink until my official duties as MC were over but as Mr. Dodge detailed his analysis I felt compelled to polish off at least half of the bottle of Zinfandel wine sitting in front of me. I was thinking next time he gives this speech maybe he should hand out some razor blades, it was that depressing.

Hoping that our next forecaster would provide a more positive message, I introduce Ed Devlin from Pimco, the Newport Beach bond king. Ed goes right to work explaining that if we were planning to witness a stock market rally during our lifetimes we had better all be vampires, they can live to be 700 years old.

He explained that long before the stock market would rally, the bond market would move up first and that before this cycle was over we would all be singing the merits of debt before equity, just like investors did in the 1950s. His presentation was powerful and compelling in light of the U.S. Government's commitment to spend whatever it takes to keep the balance sheets of America's largest employers solvent and at least 90 per cent of their work force employed. Even if that means keeping crappy companies like Chrysler afloat just so they won't lay off the employees that make cars that no one will buy. These analysts were really sobering. Whoever coined the expression "don't shoot the messenger" was a kind soul.

Last but not least I introduced Randy Ollenberger from BMO Nesbitt Burns. A major oil and gas forecaster, Randy gave a very rational presentation, backed with solid numbers that supported a December 2009 oil price north of $50 (U.S.). The crowd liked that.

Finally, I asked all three to come to the stage together so that I could have them answer a very basic question in front of the audience. The task was to allocate $1-million between four asset classes for the remainder of 2009: gold, stocks, corporate bonds and cash. The winner? Debt.

Maybe debt is the new equity.

Special to The Globe and Mail