Heed the advice of The Smartest Man

DEREK DeCLOET

Globe and Mail Update

• E-mail Derek DeCloet
• | Read Bio
• | Latest Columns

October 25, 2008 at 6:00 AM EDT

Crackpot. Crank. Scaremonger. Alarmist.

The Smartest Man We Know has heard the slurs. When you make your livingon Wall Street, yet hold the opinion that Wall Street is populated byincompetent fools, you're not going to win a lot of friends at dinnerparties, are you?

And when you bet millions that the American financial system is goingto fall apart, that its economy will be seized with fear – and when youwere doing this and saying this before there was any hint of realtrouble – well, you couldn't really expect other people to welcome themessage, could you?

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

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

What kind of companies? U.S. financial institutions, mostly. Wachovialooks bad. The major investment banks are shaky. It's about to get alot uglier, warned The Smartest Man. “The implications of what's goingon for the U.S. economy, credit, for lending over all, are not thatpleasant to think of.” Two months and two days later, Bear Stearns wasgone.

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

“I think we're ending the financial crisis now,” he said. “There willbe countries, like the U.S., that will go into recession. But this neednot be a global recession. And there are some encouraging signs on thatfront.”

In a different era, The Smartest Man might have been a rocketscientist, or an engineer, or a medical researcher, or maybe auniversity professor. The academic résumé says: MBA, PhD in finance andeconomics from the Massachusetts Institute of Technology, studied underPaul 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 ahedge-fund manager, placing money on his views rather than just writingthem.

Lately, that has worked out rather well. His CI Global OpportunitiesFund has returned 57 per cent in the past year, 19 per cent(compounded) over the past five. Nice numbers, but once you've madeyour money calling the credit crisis and short selling WashingtonMutual, what do you do then?

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

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

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

You look to the currencies of Asian countries that are growing andstill financially healthy. Singapore, Malaysia and Thailand all havetrade surpluses and single-digit inflation. “Most of the Asian emergingmarkets 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'sa fantastic business. You're just shipping gas. Why are people sellingthose?” Energy: “Unless there's an absolute collapse in oil demand, youreally can't see oil plunge all that much [more].”

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

Would you want to bet against him?