By: DEREK DeCLOET

 Globe and Mail Update

Crackpot. Crank. Scaremonger. Alarmist.

The Smartest Man We Know has heard the slurs. When you make your living on Wall Street, yet hold the opinion that Wall Street is populated by incompetent fools, you’re not going to win a lot of friends at dinner parties, are you?

And when you bet millions that the American financial system is going to fall apart, that its economy will be seized with fear – and when you were doing this and saying this before there was any hint of real trouble – well, you couldn’t really expect other people to welcome the message, could you?

The Smartest Man, when delivering his prophesies, did not sugar-coat them. “This could potentially make Long-Term Capital [the financial crisis of 1998] look like some kind of walk in the park,” he predicted. “The reckoning has started.” No soft landing this time: It could even be “like the Great Depression of this century.” He said these things not last week, not last month, but on July 26, 2007. That day, the Dow Jones industrial average closed at 13,473.

But The Smartest Man was just getting warmed up. Checking in with him again this January, he was every bit as gloomy. By that point, credit fires were burning all over the place; the Dow was at 12,500; the world’s biggest banks had been forced to turn, cap in hand, to Singapore, China, the Middle East and elsewhere for billions of dollars. It won’t be enough, he said. “There’s a whole bunch of companies that just have to hit the wall. They can’t survive.”

What kind of companies? U.S. financial institutions, mostly. Wachovia looks bad. The major investment banks are shaky. It’s about to get a lot uglier, warned The Smartest Man. “The implications of what’s going on for the U.S. economy, credit, for lending over all, are not that pleasant to think of.” Two months and two days later, Bear Stearns was gone.

So you can imagine our surprise when the Smartest Man – his real name is Krishnamurthy Narayanan, and he goes by Nandu – showed up in town this week and was bullish.

“I think we’re ending the financial crisis now,” he said. “There will be countries, like the U.S., that will go into recession. But this need not be a global recession. And there are some encouraging signs on that front.”

In a different era, The Smartest Man might have been a rocket scientist, or an engineer, or a medical researcher, or maybe a university professor. The academic résumé says: MBA, PhD in finance and economics from the Massachusetts Institute of Technology, studied under Paul Krugman, who just won the Nobel prize for economics. But this is – or at least was – the age of finance, and The Smartest Man became a hedge-fund manager, placing money on his views rather than just writing them.

Lately, that has worked out rather well. His CI Global Opportunities Fund has returned 57 per cent in the past year, 19 per cent (compounded) over the past five. Nice numbers, but once you’ve made your money calling the credit crisis and short selling Washington Mutual, what do you do then?

You buy Canada, says Mr. Narayanan, who can’t believe the way the loonie has been savaged. “The currency is ridiculously undervalued. I can’t think of any country in the world that has no fiscal deficit, no trade deficit and no inflation – except Canada. I think the Canadian dollar should go through parity.

“I like the whole Canadian market. I don’t particularly dig the banks because I just don’t know what’s in there [on the balance sheet]. But I’d say virtually everything else is fine.”

You buy some emerging markets, even though they, too, have collapsed in the meltdown. “You can’t play the emerging markets by listening to the market action. If the Indian market’s down 50 or 60 per cent from its peak, I can assure you nothing’s really changed in India. Nothing’s changed. The vast majority of people in India don’t believe in the stock market,” said Mr. Narayanan, who was born in Chennai, India.

You look to the currencies of Asian countries that are growing and still financially healthy. Singapore, Malaysia and Thailand all have trade surpluses and single-digit inflation. “Most of the Asian emerging markets and emerging currencies are ridiculously priced right now.”

You buy uranium stocks: “Ridiculously cheap.” Gold miners: “Ridiculously cheap.” Pipelines, too: “How bad a business is that? It’s a fantastic business. You’re just shipping gas. Why are people selling those?” Energy: “Unless there’s an absolute collapse in oil demand, you really can’t see oil plunge all that much [more].”

There are, however, some things The Smartest Man wouldn’t touch. They happen to be the assets the investing masses have flocked to in this crisis: U.S. Treasuries and the greenback. “I don’t think it can hold for that much longer.” Once the world has to absorb trillions of dollars in new U.S. debt – watch out. In fact, he thinks the odds of the U.S. having its own currency crisis are “at least 30 per cent.”

Would you want to bet against him?

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30 years of Time Magazine Covers &  The Stock Market

By WARREN E. BUFFETT

 THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So … I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

SHIRLEY WON

Canadian investors, rattled by plunging stock markets and worried about the safety of their money market funds, yanked a record $4.6-billion from mutual funds in September.

It was the largest month for net outflows since the Investment Funds Institute of Canada (IFIC) began collecting data in 1990. The second highest month was April, 2003, when investors pulled $1.7-billion.

“Given what has happened in the markets, people are terrified,” said independent fund analyst Peter Loach. “People who are approaching retirement have seen a significant amount of their retirement savings disappear.”

Stock markets have tanked in the wake of a severe U.S. financial crisis that has led to venerable institutions like Lehman Brothers failing, while a credit squeeze has led to fears of slowing global growth.

The S&P/TSX composite index plummeted 15 per cent in September, for a year-to-date loss of 17 per cent to the end of the month. (It fell a further 7 per cent yesterday.) In the United States, the S&P 500 index has a year-to-Sept. 30 loss of 21 per cent. The index dropped 4 per cent yesterday.

September was the first time the industry has seen net outflows since August, 2007, when investors withdrew $1.5-billion on fears about money market funds holding troubled asset-back commercial paper (ABCP). The outflows stopped after fund companies bought back the tainted paper.

The net redemptions for last month are estimated to be between $4.4-billion and $4.9-billion, according to preliminary figures released yesterday by IFIC. Half of the outflows are in money market funds.

Some Canadian investors have become spooked about holding money market funds after seeing a wave of U.S. investors withdrawing cash from these investments south of the border last month.

Some U.S. money market funds were hit with losses and redemptions because they held commercial paper of troubled financial firms like Lehman Brothers.

Investors fleeing money market funds in Canada stems from the fact they may not be aware that the bulk of them are invested in Canadian securities, said Dennis Yanchus, IFIC’s manager of statistics.

While the U.S. government announced measures to backstop U.S. money market funds, Canadian securities regulators may be fuelling some anxiety by launching a review of domestic money market funds to see whether they are exposed to bad debt.

“There is no indication that there is any problem [in Canada],” Mr. Yanchus said. “It sounds to me like it’s all fact finding. They are sending questionnaires to the fund companies.”

RBC Asset Management, Canada’s largest fund company, which also owns Phillips Hager & North Investment Management, suffered from nearly $1.3-billion in net outflows last month, including $1-billion in money market funds.

RBC spokesman Chris Dobson said that the firm’s money market funds “are not holding any U.S. paper or an U.S. short-term securities at all.”

It’s not surprising that RBC had a lot of redemptions in its money market funds given that it has attracted “the lion’s share” of these parking vehicles for cash in recent times, he said.

Some of that money is going into other long-term RBC funds, but some of it is going to guaranteed investment certificates (GICs) or high-interesting savings deposits with attractive rates, he added.

With a 50-to 100-basis point increase in GIC rates over the past couple of months, investors can get 4.25 per cent for a two-year term and 4.5 per cent for a four-year term, he noted.

Among the other banks, TD Asset Management had net outflows of nearly $1.2-billion, while CIBC Asset Management posted net redemptions of $536-million.

Among independent fund companies, Invesco Trimark Ltd., formerly AIM Funds Management Inc., suffered from $510-million in net redemptions; Franklin Templeton Investments Corp., $346-million; IGM Financial Inc., which owns Investors Group and Mackenzie Financial, $182-million and AGF Management Inc., $167-million.

Despite the market volatility, some fund companies still managed to attract net sales. CI Financial Income Fund took in $152-million; Fidelity Investments Canada ULC, $134-million; and Dynamic Mutual Funds Ltd., $70-million.