Beware the Pessimists!

About Those Fedcoins My wife's friend was frantic. According to a video posted by The New Yorker, cash as we know it may be scrapped, replaced by electronic "Fedcoins" that would become the global currency. This, suggested the video, might lead to the Federal Reserve's failure, which would have cataclysmic effects on global stock and bond prices. What did I think?

What I thought was that it was remarkable that such a huge event had escaped my attention. Google searches revealed: The concept of Fedcoins has been advanced by bitcoin enthusiasts. There is no New Yorker link. Smaller, more-exotic websites (for example, theeconomiccollapseblog, which also wonders "Why is NASA Using the Discovery of 7 New Earth-Sized Planets to Promote the Idea that Alien Life May Exist?") have expanded those musings into likelihoods. And gloomsayers have made their prediction.

Here a Crisis, There a Crisis The gloomsayer who caught my acquaintance's eye was one Doug Casey, whose books' titles reveal his themes. "Crisis Investing: Opportunities and Profits in the Coming Great Depression" (1979); "Crisis Investing for the Rest of the 90s" (1993); "Totally Incorrect" (2012); and "Right on the Money" (2013). Totally incorrect, yes; right on the money, not so much. Although it's true that a deep recession followed his 1979 book, any advice other than to buy mainstream stocks and bonds was wrong for the upcoming decade. As for that impending 1990s crisis… was 15 years too early?

The bogeyman needn't have been Casey. There's no shortage of those who have made their livings by forecasting woes that never arrived. Bob Prechter expected the Dow Jones Industrial Average to hit 400 in the late 1980s; 30 years later, he continues to stand by that very same prediction (you would think he would adjust for inflation, but no), only the date has been bumped to 2021. In 2011, ex-mutual-fund manager Harry Dent foresaw the Dow dropping to 5,000 (better than 400, I suppose). Then there was the Reverend David Wilkerson. Gulp.

The track record of betting against America, to use Warren Buffett’s phrase, has been abysmal. It floundered in the 1950s. It misfired in the 1960s. It succeeded frequently in the 1970s. It flopped in the 1980s. It bombed in the 1990s. It was hit-and-miss during the Oughts. It has sputtered in the 2010s. For the seven decades, the score reads as one clear victory, one mixed result, and five failures.

That is a whole lot of wrong. While no single Cassandra moves a great deal of money, the breed as a whole has caused hundreds of billions of dollars of damage. True, one investor’s loss is another investor’s gain; effectively, retirees who cripple their personal finances by selling low and watching the markets go high enrich those who take the other side of those trades. The overall economy is untouched. But much misery is created.

Running Scared The question arises: Why do people still listen? Why does my wife's friend listen to variations of arguments—the collapse of the U.S. dollar, a crisis at the Federal Reserve, rampant inflation—that have fizzled, year after year, decade after decade? Why would an intelligent, highly educated, and well-informed person believe sweeping arguments that rely on a mountain of speculation and a molehill of data?

Three reasons, two of which relate to age.

One, the pessimists were largely correct in the 1970s. Terrible bond returns, the 1973-74 stock-market crash, and surging inflation ensured that, during the middle of the decade, just about every U.S. investor lost purchasing power. The rare exceptions were those who fled the mainstream, finding sanctuary in hard assets and cash. Those who are old enough to have invested during the 1970s have difficulty shaking that memory. They fear a new war—and, as with all former combatants, that vision tends to resemble the last war.

Second, fear plays to the elderly. The young respond to hope and greed—day trading, pyramid schemes, double-your-money offers. (Those were my father’s idea of “investing.”) The way to separate them from their money is to convince them that life is surprisingly easy. There are shortcuts that others just haven’t figured out. It’s the opposite with the old. They are all too willing to believe that the world is degrading. Tell them that their fears are correct. The cataclysm really is coming.

The third is politics. I’ve written before how right-wing talk radio hosts impoverished their listeners by persuading them to sell stocks during Barack Obama's presidency, because the Democrats would bring financial ruin. Uh-huh. My acquaintance has the opposite problem: She dreads the “Trumpocalypse.” Different party, same diagnosis.

Most of you, I realize, need no prompts to ignore the prophets. After all, you are reading this article, not that one. For such readers, treat this column as a friendly reminder to stay on the straight and narrow path. And consider the possibility of sending it to friends of a certain age who are feeling insecure about the financial markets, and might be prone to being sold a scare package. If this article helps to prevent such an action, it will be among my more useful deeds.

(Note: Yes, I myself sounded a cautionary note in January's column, "Is the Contrarian Bell Clanging for Stocks?" But there's a world of difference between ruminating that perhaps—or perhaps not—stocks are due for a temporary loss, and claiming with apparent certainty when and how the market will suffer a catastrophe.)

Knowns and Unknowns Two sources, one of which was Morningstar's alternatives-funds research team, informed me that yes, an expert skilled at deciphering derivatives-laden portfolios could have known that Catalyst Hedged Futures Strategy Fund HFXIX was capable of falling off a ledge. I wondered in Tuesday's column how much could be known about that fund, which follows a complex strategy and which has operated in the shadows through most of its history, as a hedge fund.

Morningstar hasn’t yet picked up that fund for coverage, because it hasn’t been a registered mutual fund for long, but had Morningstar done so, it could have offered some clues about the fund’s vulnerability. Well, that’s good news.

The bad news, however, is that column’s primary theme: The track records of hedge funds are impossible to decode. Catalyst Hedged Futures had suffered a steep decline 10 years back, when it operated as a hedge fund. Was that decline related to the current losses? Could those results be regarded as predictive? No, agree my sources. It’s just very difficult to extract anything useful from hedge fund histories.

John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for Morningstar.com and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.