Biggs on Finance, Economics, and the Stock Market: Barton's Market Chronicles from the Morgan Stanley Years

Section 2E: Market Predictions

First Class on the Titanic

March 10, 1980

The world these days seems unusually confusing, and once again, as American financial markets fall, a shrill note of calamity and despair is heard. We think we recognize the dangers that range from a financial panic to an oil crisis and slump-flation, and we anticipate no miracle cures from policy announcements. The longer we blunder along, the greater the risk of a major financial or industrial calamity.

On the other hand, the price mechanism and the ebb and flow of the business cycle still eventually function despite a thick overlay of inflation. We expect the soaring cost of money to shortly tip our hyperextended economy into recession. Interest rates and inflation are cresting and will decline but only to levels that are historically still very high. We think the most likely case is for a stagnant, inflation-plagued economy that experiences several quarters of weakness later this year and then has a desultory recovery in 1981. Inflation and subdued growth are the two dominant characteristics of the economies of the United States and other developed nations, and it is difficult to predict when or exactly how stagflation will end. Like a person with a persistent, bad cold that has dragged on, you know eventually he will get better either because the cold gradually disappears or he is hospitalized with pneumonia. ...