The Bears' Club, Part 3

What will kill off the current bull market? Barton Biggs, Jim Grant and Alan Abelson debate the possibilities.
Author:
Publish date:

Editor's Note: Part 1 of this conversation with the three bears was published on Wednesday; Part 2 on Thursday. The convocation includes Barton Biggs, Morgan Stanley Dean Witter's chief global strategist; James Grant, editor of Grant's Interest Rate Observer; and Alan Abelson, the editor of Barron's. They are joined by Henry Blodget, the Merrill Lynch Internet analyst known for his ebullient price targets. Nick Paumgarten is a senior editor at The New York Observer, where this article first appeared.

The End Is Where?

Biggs:

So, Alan, is the coming bear market going to be secular

i.e., very long or cyclical in duration?

Abelson:

No question, we've had a secular bull market, so we'll have a secular bear market. Of course. Symmetry is everything.

Biggs:

That is an important comment.

Abelson:

Just witness the interconnectedness of it all. We've never had so much exposure to the stock market. The 401(k) revolutionized an awful lot of things. We haven't been through a bear market with this particular phenomenon. It'll be interesting to see. We may not be having breakfast here. And, Henry, I doubt your office will still exist.

Biggs:

If Alan's right and the crash is secular rather than cyclical, the intellectual bears are gonna get crushed too.

Abelson:

They're the first to be crucified.

Biggs:

To look at Japan is instructive. The

Bank of Japan

people I talk to say that

Greenspan

six or eight months ago sent over a couple people and really did an intensive study on the Bank of Japan's actions. They looked at what happened in the late 80's and early 90's, and that poor old

Governor Mino

former governor of the Bank of Japan who finally pricked the bubble ended up being indicted as an economic criminal by the

Diet

.

Abelson:

And well he should have been.

Biggs:

But he was the hero, really.

Abelson:

And I remember you wrote that. Greenspan is conscious of this.

Biggs:

He is conscious of this.

Abelson:

And don't be surprised if he

Greenspan gets indicted.

Biggs:

He won't get indicted because he's never going to take the courageous stand.

Abelson:

He'll get indicted for

not

taking the courageous stand. I don't think it's even a possibility that he's gonna win in this thing.

Biggs:

Really? You don't think so?

Abelson:

No, I don't. I've thought from the start that the best he can hope for is a footnote as to why the crash took place. And Greenspan will deserve a footnote. I think he had a chance in 1996 to do something. But why he didn't raise margin requirements is beyond me. Just because it hadn't been done since 1974 is hardly a good reason.

The Observer:

How do you think the boom will end?

Abelson:

It won't end well. I hope I don't shock you.

Grant:

It's gonna end in 1986. That's my story and I'm sticking to it.

Abelson:

1986 was actually a very nice bear market.

Grant:

Hey, Barton, can you buy me another iced tea?

Biggs:

Absolutely. Press that little button right there.

Grant:

This is a bull market. Press the button and a guy comes in.

(I Can't Get No) Vindication

The Observer:

How would a crash affect your lives?

Abelson:

Not much. I would probably turn bullish too early, like I did in 1974.

Grant:

Nothing wrong with that.

Blodget:

Business would slow down quite a lot.

Abelson:

Henry would become a money manager.

Blodget:

After a few years' hiatus.

Abelson:

Or a consultant.

Grant:

I don't know whether it would be good or not for my business. It would certainly be good for the journalism.

The Observer:

Is a crash something you wish for?

Biggs:

Both of these guys should definitely wish for it. They'd be vindicated, and it's not gonna make a lot of difference to them financially. But for Henry and me it would be an incredibly painful and expensive disaster. We work for financial service companies.

Abelson:

Vindication would be nice. Everybody wants vindication in some sense. But it isn't going to change the fact that we're still going to be skeptical.

Grant:

For me, the point is not being personally vindicated. It is no longer being tormented by the sense that two and two don't make four but rather five, and tomorrow they'll make six. People tell me this new truth with all the certainty of accumulated wealth behind them. That's what's exasperating. It's the sense that not only valuation but the laws of nature and of compound interest have all changed, and nobody mentioned it. Everybody else found out, but nobody told me. No matter how sure you are of the ancient cycles of boom and bust, no matter how sure you are of the tendency of people in crowds to do the same things at roughly the same moment, no matter how sure you are of those truths, you can't help but wonder if things changed and nobody had the courtesy to say so.

Biggs:

The real truth, if it's a secular bear market, not cyclical, is that it's gonna take 10 years to get through it. It may even take longer than that.

Abelson:

It could be longer. What was it, 25 years for the market to come back after 1929?

Biggs:

The best that you can hope for is that we have a nice 20% to 25% decline, then the market goes dead for three or four years. That's the best outcome.

Abelson:

The best of the worst.

Grant:

I always say that we'll know when the bottom is here when

CNBC

starts showing test patterns. As it is, the world has come to accept that they have to know about the market at every minute. Well, they don't have to know. And, furthermore, when the time comes when one actually has to be interested again, they won't want to hear it.

A.J. Liebling

, who is the greatest of all, wrote about the

Daily News'

Inquiring Photographer in 1933 who went around asking people in the streets whether they'd read the stock quotes, and they gave the Inquiring Photographer a piece of their minds. They didn't want to hear about it. The market is now ubiquitous.

Blodget:

And that is the reason why valuations are where they are. It's supply and demand. There's just a greater percentage of global assets in the stock market. And the question is, if we do get a 25% correction or a two-year bear market, does that asset allocation shift back? Because if it does, then your scenario of a seven-to-10-year bear market seems totally plausible.

Biggs:

We also have to consider the possibility that we really are having a deflationary boom.

Abelson:

That sounds like joyless sex to me.

Biggs:

Just the opposite. It's perpetual sex.

Nick Paumgarten writes for the New York Observer. He welcomes your feedback at

npaumgarten@observer.com.