Biggs and his crystal ball
A YEAR ago the famed Wall Street strategist Barton Biggs sought to reassure investors by playing down the chances of the economy vanishing into an abyss.
In an article for Newsweek magazine he explained the best way to work out how 2008 would shape up.
Back then the markets had started reacting to the sub-prime crisis, the dollar was reaching new lows and the oil price was soaring. Recession was looming but the banking crisis, sparked by the collapse of Lehman Brothers, was still nine months away.
The economy was creaking but no one was quite sure what would happen next. A recession was expected but how deep would it be? Would it be a full scale depression? Biggs talked about how to avoid the much-feared abyss.
A managing partner with Traxis Partners hedge fund, he outlined a few key indicators to help readers try and predict the future. They were: retail sales; new unemployment claims; the manufacturing ISM – an indicator of US manufacturing activity; the purchasing managers index and the forecast for home building.
At the end of 2007 monthly unemployment claims were 344,000, the manufacturing ISM stood at 47.7% and the purchasing managers’ index was above 50. Biggs said an unemployment rise to 375,000 would signal recession. Last month new claims hit 500,000. He said if the ISM fell below 45% a recession would be likely. Last month it was 36.2%.
The purchasing managers index has dipped below 35 – anything under 50 marks a contraction. There’s still no sign of recovery for home builders and like-for-like retail spending dropped 7.8% in November.
The picture is bleak in the US and it’s easy to assemble an equally depressing view in the UK by looking at the same indicators. The unemployment figure is creeping to 2 million, at 1.86 million. In the three months to the end of October 238,000 more people signed on than in the same period last year.
The purchasing managers index fell to a new low of 34.4% in November and the housing market has ground to a halt. Inexplicably retail sales have held up and the like-for-like figure grew at 1.5% in November.
Everyone now knows the UK is in recession and that fact will be confirmed in January, when the latest economic growth figures show a second successive contraction. It’s clear where the economy is heading but there’s still a great deal of uncertainty over how bad the situation will get.
Stock market falls have left some investors licking their wounds, while others are spying stock bargains. So what was Biggs’ advice if the economy does go into recession and the banking system seizes up? Stick to government investments and cut your exposure, or as he put it: “Buy US Treasury notes, 10 and 20-year Treasury bonds or gold. And stay close to the shore.”
