I'm Building an Ark

Hang around with a teenager for even a few minutes and you'll see that, despite all the innovation of the past few decades, few things have really changed in this great land of ours. Sure, porno magazines have been replaced by Web pages, and high-school kids who once passed notes now beam text. But the human experience has remained relatively constant. We are born, we live and we die. Setting aside the sandals and frocks, we have more in common with Bible stories than we think. Which has me thinking about Noah lately.

I don't know whether it's because they're in black and white, or because they're just plain old, but images from the Great Depression, a major part of our nation's not too distant history, never seem real. Yet the Depression, clearly, was real. And as much as we hate to admit it, so is the frightening prospect of a continuing and prolonged downturn in the U.S. economy in this decade.

I'll readily admit that when it comes to my life and portfolio, I tend to be something of a pessimist. It sounds a bit macabre, but if you always expect and plan for the worst, you tend to be pleasantly surprised with the way things turn out. As difficult as it may be to do, permit yourself, just for a minute, to assume that the widely anticipated recovery isn't on track. Instead of hoping for the best, let's imagine the worst and work up from there.

Could you imagine if banks failed? How about if stock prices fell another 50%? What if unemployment, currently near 5.9%, quadrupled to 24%? Although it sounds far-fetched, this precise scenario occurred less than 75 years ago. The market crashed in 1929, but the economy didn't really recover until after the war — some 15 years later. And as we pointed out last week, although the bear market of 1973-74 was relatively short, the major market indexes (and the economy) didn't really recover until 1982, nearly a decade later.

What makes this whole question of a potential "double dip" recession so troubling is that, by the time the pundits, politicians and economists finally declare that times are tough, it will likely be too late to do much about it. After all, it took a 60% fall in the Nasdaq Composite for the geniuses at the National Bureau of Economic Research to have the courage to confirm the U.S. was in recession. I applaud the NBER's commitment to accuracy, but the truth is that their conclusions came too late for those interested in actually doing something to save their, well, assets.

Despite the insistence by some that the market and the economy are disconnected, I'm from the school that says the stock market isn't an indicator of the economy, it is the economy. You don't need a Harvard M.B.A. to know that, despite some encouraging statistics, things aren't looking so hot.

Here are the hard facts: Trillions of dollars have been lost over the past few years — mortgage and prescription-drug payments, college-tuition remittances and new furniture outlays. It represented millions of hours of hard work. And it hasn't "gone" anywhere. Not into bonds, or gold or hedge funds or even savings. It has simply disappeared. This alone should be enough to lower your expectations of the future by more than a few notches.

While my recent interest in bonds and gold might seem a bit paranoid, the fact is that before you can invest, you've got to save.

Let the long-haul crowd call the bottom in stocks. Me? I'm cutting my spending, reducing my expectations and patiently sitting on my hands. In short, I'm building an ark for the future...and charging mad admission prices the minute it starts to rain.

Jonathan Hoenig is portfolio manager at Capitalistpig Asset Management, a Chicago-based hedge fund.