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By Pat Dorsey, CFA | 12-06-2010 12:00 PM

Dorsey to Panelists: What Keeps You Up at Night?

Leuthold's Doug Ramsey, Ariel's Charlie Bobrinskoy, and Tom Forester of Forester Value point to dollar weakness, too much debt, and municipal fundamentals as big worry factors today.

Dorsey: If you had to pick one big picture issue that's kind of keeping you up at night, what is it?

Ramsey: At this point dollar weakness. It's pretty clear that we have authorities that are not very focused on the exchange value of the dollar, that the desire to avoid deflation at all costs is really what's driving Ben Bernanke. In fact, last night on 60 Minutes, he estimated that he has a 100% chance or the 100% ability to avoid deflation, which I think is, to me that's a difficult one to buy into.

So, we've actually protected ourselves, and by the way, I think in periods of moderate inflation, equities can actually be a decent hedge against the loss of purchasing power. Now, not when you get above 7% or 8% or 9% inflation, but I think at moderate levels of inflation, equities can be a reasonable hedge. We've also got a small position in physical gold in our global fund and, in fact, all of our TAA funds, as a hedge against further U.S. dollar debasement.

So, we think this cyclical bull market is intact and that it pushes higher. We've actually got a target of 1410 for the S&P for 2011. But the question becomes down the road, even if those equity prices do go up, will they retain the same purchasing power that they have had in the past. So, that would be the one big late-at-night issue for me.

Dorsey: So, in your view in the inflation/deflation punchout, inflation is the knockout one?

Ramsey: Longer term, yes. I think the thing to watch is monetary velocity. Watch the money supply. I mean at this point, all of the Fed is pumped in. It's not yet showing up in the system in terms of lending and money supply. So, I don't think there is an imminent threat, but I think looking out to 2012-2013, it is a real threat.

Dorsey: What keeps you up in night, Tom?

Forester: Several things, but I'll just pick one. I think one is really, it gets back to too much debt. The way that that plays out, you see that it's the reason that Bernanke is trying to keep things going at all costs. Because he knows that at the end of the day, whether it's real estate, whether it's mortgages going bad, whether it's banks taking write-offs on that, whether it's an overlevered consumer, he needs to keep the ball going so that the debt can be serviced. Because the debt stops being serviced, the banks are really in trouble and you go back into a late '08 early '09 scenario. So it kind of forces his hand.

You're also seeing that getting played around the globe, because basically Europe is in the same issue. The reason that the Greece got in trouble was too much debt. The reason Ireland got in trouble was too much debt. The reason that we're having trouble in Portugal and Spain is too much debt. So that's really what keeps me up because that's what's driving all the decisions.

We asked this in the office the other day: These must be normal times because the market's back up, right? Oh, yeah, yeah, yeah. Oh, okay, when was the last time that the Fed was talking about printing money? Well, jeez, I don't remember the last time. When was the last time they were talking about printing $600 billion? Well, never. So, these probably aren't exactly normal times, are they? So, that keeps me up at night.

Dorsey: Charlie?

Bobrinskoy: Combination of the fixed-income bubble and the municipal bond crash that I think is coming. I think we've got state municipalities that really, at this point, have no chance of meeting their obligations. The State of Illinois cannot meet its pension obligations, [and] California, a couple of other states. And yet the bonds trade as if they are solid credit. So, I am very worried.

My one recommendation for people watching is if you own any 10-year municipal bonds, you should think about selling them, because they're being priced as if they are AAA credits and there is just lot of risk. I think they are being priced as if people assume that the federal government is going to come in and backstop them, and that might happen, but it's not absolutely certain that it will. It's not clear the people of Texas and Nebraska are going to feel okay about bailing out the taxpayers of California and Illinois.

So, I worry a lot about what's going to happen when the musical chairs game stops, because the State of Illinois just cannot meet its current obligations.

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