People with a lot of money listen to Barton M. Biggs, manager of a nearly $6 billion investment fund for Morgan Stanley & Co. Inc., an elite Wall Street investment house.
Two months ago Biggs and the market were nervous. Now with the signs increasingly clear about interest rates, "I feel a lot more comfortable than I did in August," Biggs said today.
"The combination of very high interest rates, a world in recession, and business operating at the lowest rates in 30 years meant that the system couldn't take all that indefinitely," he continued.
"There was an increasing danger of a cumulative collapse simply because things would get so bad the bankers wouldn't make any loans. The decline in interest rates has tremendous signficance."
Even when the stock market shot up in August, big investing institutions such as Morgan Stanley did not move quickly to securities, Biggs said. "Our measures show that institutions did not buy any stocks, on balance, at all during that period," he said, noting that institutional cash positions, after accounting for the appreciation of portfolios, did not change at all from early August to the end of September.
Just a week ago, U.S. commodity prices and The Economist's index of world commodity prices set a post-1931 low, another signal that made Wall Street anxious. Biggs maintains that only after the Federal Reserve Board pronouncements on dropping interest rates did investment managers began to believe not only that stocks are going up but that the economy may be beginning a recovery. Today the bulls are still running.
So far the stock market's performance -- particularly the 240-point gain in the Dow Jones Industrial Average since it hit 776.92 on Aug. 12--reflects Biggs' view of what's going to be hot for much of the coming decade.
"The biggest, dullest companies in the world that were hurt the most will be the biggest beneficiaries of this new environment," he said, citing IBM, GE, Eastman Kodak and Procter & Gamble. "These big, stupid names that are still selling below their highs are going to be the best place to be, and they are all going to new all-time highs."
Biggs, however, is a bit harder to pin down on the precise future of the Dow average. "We're probably due for a rest," he said of the industrial average. "It's close to the end of the second burst," he added, but there is "no reason at all why over the next year the market can't go up 25 to 50 percent."
Holding the market back is "huge institutional disbelief," he said. "People are fighting it, and there is still a lot of cash out there. The reaction of the typical money manager is to be conditioned by the past and to want to buy them when they're down, not when they're up.
"I think that's wrong. Whatever the investment tools were that worked in the 1970s, the opposite tools will work in the 1980s. The market will not give you a chance to buy them on pullbacks.
"In the '70s, the way to make money was to find positive earnings surprises. In the '80s, there won't be those surprises."
In fact, Biggs, chairman of Morgan Stanley Asset Management Inc. and a Wall Streeter who is known for an occasional willingness to buck conventional wisdom, thinks the recovery could be more than modest.
"The best economist I know is the stock market, and the stock market has traditionally led the recovery by six months," he said. "My guess would be that there will be a recovery in the middle of the first quarter. Since all the economists are saying it will be a slow, sluggish recovery, it will probably be a fairly strong one."
Biggs is not totally convinced that the prognosis for recovery is certain, citing a one in five chance that inflation could rear its head again. "The big risk is some kind of significant resumption of inflationary psychology," he said.
But, he said, referring to skeptical economists, "They always have a reason why the next recovery will be weak. This time they are misjudging the tremendous improvement in consumer liquidity. The consumer has got himself into a financial condition which we haven't seen since the '60s."
Though liquid, the American individual is not leading the charge toward the stock exchanges, and Biggs has an interesting perspective on who is.
Nor, in his view, is the market being pumped by U.S. institutions or by the traditional big foreign investors. Swiss banks and foreign trusts "have not been important buyers at all," he said.
"There is an entirely new class of buyer: wealthy individuals" from the Far East -- particularly Hong Kong -- from financially troubled South American countries such as Mexico and Venezuela, and from the Middle East.
"The thing that is different is that they want dollar-denominated assets and they don't want anything to do with a bank," said Biggs. One of his firm's Middle East clients recently told Biggs that, to him, a 15,000-share cerficiate of IBM stock in a Swiss deposit box is a "higher quality asset than anything from any bank in the world."