In The Bear Cave

Barton Biggs is so bearish on the economy that he's growing fur. He doesn't walk, he lumbers, and the closest thing to a smile he'll offer is a small grin--a smirk, really. I got one for noticing the GRIZZLY BEAR crossing sign on his wall, near a swollen bookcase burdened with such cheery titles as Blown to Bits, Cleaning Up the Mess and Debt Shock. No question: Biggs, chief global strategist at Morgan Stanley Dean Witter, is Wall Street's ranking pessimist. As such, being right--as he has been lately--is a mixed blessing. It means things suck. So it would be unseemly to gloat. Yet Biggs could, even should, given that 16 months ago he was dismissed as, in his word, "antiquated." In November 1999, with the NASDAQ flying, he advised in a report that "rational investors should begin gradually to reduce their holdings in technology and telecommunications over the next three months."

But the NASDAQ soared 46%; Biggs lost credibility. He recalls a public debate with James Glassman, author of Dow 36,000, during which the audience let out incredulous guffaws when Biggs asserted that air conditioning was a more important invention than the Internet. A vote after the debate was "200 to 2 against me, and one of those votes was my wife," Biggs quips.

He'd still lose that vote. But he's no longer losing the confidence of investors. Yes, he turned bearish on stocks too early, but "he's ahead of benchmark," which is up 17% a year over six years, says Britt Harris, president of Verizon Investment Management, which has $1.5 billion with Biggs. "I know he struggled with his view," Harris adds. "To his credit, he stuck with it."

And still does. Biggs figures the bear market is 80% over, but that it will be three to five years before tech stocks dazzle again. Too many investors bought tech near the top, and they'll be selling into rallies for years, he says. Further, the tech-spending slowdown is gaining momentum. "A decline in IT spending by big companies like GE and Morgan Stanley hasn't even happened yet. It's going to," Biggs says.

If you're rooting for a quick, V-shaped economic rebound, don't visit the bear cave. "If we're lucky, we'll get a U-shaped recovery," Biggs says, referring to a drawn-out hard landing. And there's a real case for an L-shape, he adds. That's L as in hell, a recession that is just starting and would last 18 months. His main concern is $4 trillion of vaporized stock wealth, which is crushing consumers. Biggs says Fed chief Alan Greenspan blew it; he was too slow to cut rates to stimulate spending and put a floor under the market. Meanwhile, the layoffs you've heard about recently won't hit until the second quarter, accelerating the slowdown.

Then there's the worst-case scenario. Biggs expects real estate values to drop and banks to eat loan losses. The U.S., he says, has a 1-in-4 chance of lapsing into a deflation-ravaged economy similar to Tokyo's, though in his view it would last only two or three years--not a decade as in Japan.

Biggs has missed his share of calls over the years. He knows it and advises individuals to tune out Wall Street's noise and stick with diversified stock funds long term. But if you're looking for something more timely, he says, Treasury bonds and classic defensive stocks like food and health care are it.

E-mail Dan at kadlec@time.com . See him Tuesdays on cnnfn at 2:15 p.m. E.T.