Cover Story June 10, 2010, 5:00PM EST

Time to Slip into Something Less Comfortable?

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David Rosenberg, chief economist at Gluskin Sheff, has been as consistently bearish as Whitney, though he's less certain of a double dip. His is the cool, calm, and collected voice of doom, cautioning restraint and a dispassionate assessment of the markets. In his former job as chief North American economist at Merrill Lynch, Rosenberg was persistently wary of the boom surrounding him. In 2006 he circulated a research note called "Reassessing Hard Landing Risks" in which he argued that "you can't blindly look at a 4.7% unemployment rate and draw the conclusion that the labor market is tight enough to generate accelerating wage growth when there are as many as three potential job seekers out there for every available position."

As the subprime mortgage market contagion spread into 2008, Rosenberg estimated that the economy would barely notch any real growth, pegging his estimate at 1.6 percent. By the end of January, he'd already cut his forecast in half. He has long been more negative than most. In a 2008 Bloomberg survey of 55 forecasters, he ended up in the bottom 10 for his predictions on GDP, inflation, unemployment and the federal interest rate for 2006 to the middle half of 2008. Rosenberg has spent most of the past year casting doubt on the market rally, which he saw as a product of government stimulus and false hope. "Still no sign of organic private sector growth," he wrote on Feb. 3, 2010.

For now, he says, investors should understand that a "corrective phase is completely normal." The movement of the markets so far, he says, is pointing toward some "visible growth moderation toward the end of the year, but not a double dip recession." Rosenberg, 49, hasn't yet settled on the magnitude of the contraction. For now he's focused on the stability of whatever growth we've seen. "Mortgage applications for new purchases are down to levels we haven't seen since 1997 and there is a downdraft of jobs, so the recoveries are extremely fragile." But he allows that economic data don't tell the whole story. "The problem, of course, is essentially one of human emotion," he says. "We are essentially somewhere between Armageddon and Nirvana."

That's called a hedge.

THE DOMESTICATED

Even the most sophisticated people have difficulty switching world views, especially after their views have been affirmed. "Outlooks tend to be fairly deeply ingrained," says Julie K. Norem, an associate professor of psychology at Wellesley College. "Pessimists will pay attention to information that is punishing, not rewarding, and that's their fundamental outlook."

Some bears understand that—and are trying hard to change. Take Jeremy Grantham, the erudite 71-year old head of Grantham Mayo Van Otterloo, who trotted out his negative predictions to much public ridicule at the 2006 meeting of the IMF in Davos. While he has been predominately down on the economy since 1997, he has to balance his negative view of the economy against the demands of his day job, which is about making money for clients. During a January speech to investment advisers, he reflected on the price of his past bearishness: "We lost business like it was going out of style."

While he's certainly not a bull this time around, Grantham has taken a gentler tone on the U.S. economy's future. He says it won't be disastrous and is advising his clients to pick up stocks of U.S. companies with little debt and stable returns, which will beat out other large-cap firms. His latest newsletter, called "Playing with Fire (A Possible Race to Old Highs)," expresses both hostility to what he sees as the Federal Reserve's careless monetary policy and a flirty acknowledgment of the investment opportunities out there. Fed Chairman Ben Bernanke, Grantham writes, "is begging us to speculate."

James Grant, the 63-year-old publisher of Grant's Interest Rate Observer, also refuses to stick to pessimism merely for consistency's sake. Grant's reputation also soared in the 1987 crash—and fell during the two major bull markets since. The Wall Street Journal lampooned him in 1996 for being "a foolish idiot who was way behind the times," he says. "That's what I remember most about the errors of my impetuous youth, having an unshakable conviction that the credit difficulties were never really resolved, therefore the stock market was on shaky ground. It makes me very humble about what one can know about the future, and makes me less dogmatic."

Where not so long ago he saw inflated prices everywhere, he is now enthusiastic about undervalued assets, recently advising his newsletter clients to buy the despised stock of Yellow Pages publishers and steering them away from bonds ("bundles of promises to repay debt with valueless currency," he called them). The bookish investor, in jaunty pinstripes and tortoiseshell glasses, is actually optimistic about the economy—or at least optimistic for him. "I am a skeptic who is trying to be less the prisoner of his own neurological makeup," he says, before citing historical precedent: "There is a well-documented tendency for steep and ugly recessions to give rise not to weak and profitless recoveries, but to strong ones."

Peering out his office at a picture-perfect view of 300-year-old Trinity Church, Grant continued: "We observed this in the recessions of 1991 and 2001, which were meek and mild, and so were the corresponding recoveries." The deep recession of the early 1980s, on the other hand, led to a spectacular recovery. Based on that, Grant believes the rebound from this recession will be job-rich and strong, a position he has stuck to for nine months now. His bear suit has been sent out to the cleaners, and he doesn't know when it's coming back.

Silver-Greenberg is a reporter for BusinessWeek.com.