CALMING THE BEAR.(International Edition)(bear market)

Byline: Barton Biggs

A legendary Wall Street bull makes the case for how aggressive government rescue efforts and super-cheap stocks could revive markets, fast.

I recently laid out in NEWSWEEK the bearish argument for why we should be very gloomy about the global economy, bearish about stock markets and deeply depressed about the world in general. I told readers it was my belief that there was a 50 percent chance that the world was facing a long cycle of recession, depression and wealth destruction. I maintained that the bears believe that the best-case economic scenario is Japan's agony since the 1990s, and the worst is a replay of the 1930s.

Since I wrote that piece, two things have happened. The first is that the global economic outlook has deteriorated--the market consensus now is that the angle of descent of the U.S. economy, as well as that of Europe and the major emerging markets, has steepened. Second, and even more disconcertingly, President Obama has announced what many investors consider to be a populist redistributionist tax agenda, which increases the tax rate on capital gains and dividends and gives tax reductions and distributions to the middle class and the poor. Neither event has buoyed investor mood.

Despite this, I still believe that there is a 50 percent probability of a happier outcome. The world is having the most severe recession of the postwar era, andathe recovery will be sluggish and plagued by inflation. Nevertheless, the doomsday scenario of depression and deflation, with 5000 on the Dow Jones industrial average and 500 on the S&P 500, is farfetched. Markets could be on the brink of a major rally, and the U.S. economy may begin to recover later this year.aHere are the reasons, in no particular order.

First, the financial panic and the collapse of the world economy caught the so-called Authorities (i.e., the central banks and the governments of the world) by surprise. They reacted slowly, but nevertheless far faster than the Authorities in the U.S. in the 1930s or Japan in the 1990s. In both those cases, the Authorities were not only tardy, but they also made serious policy errors, such as raising tax rates, imposing tariffs and not curing the banking systems. These mistakes are now well understood--the current Fed chairman has written a book on the subject.

This time around--and this is very important--the Authorities have unleashed powerful fiscal and monetary stimuli that are totally unprecedented in size and scope. Interest rates have been dramatically cut everywhere, and every week more countries announce new fiscal-stimulus programs. It takes time for these actions to affect economic activity. Rate cuts and expansion of the money supply are powerful medicine, but won't make a difference for at least a year. Fiscal programs are quicker, but also take time to implement. The actions of the Authorities should begin to boost activity by the late spring, and their uplifting effect will grow as the year progresses. In the United States, the fiscal-stimulus program is expected to add 4 percentage points to real GDP growth in both the second and third quarters of this year. In other words, the world economy should begin to level out and improve as time goes on. We are not in a hopeless death spiral, as the bears say.