What if the Bears are Right?

Let's say - just for the sake of argument - that the bears are right, and that we've finally come to the end of a long capital-markets boom. Global equity markets are going to fall dramatically, thanks to falling corporate profits, higher risk aversion, and lower p/e ratios. Global debt markets will fall too, as credit dries up and defaults rise. Securitized receivables will be devastated as America's subprime mortgage woes spill over first into alt-A and prime - not to mention credit cards and auto loans - and then into all the other countries with housing bubbles, such as the UK, Spain, and South Africa. Consumer spending will fall dramatically as cheap credit disappears, belts start being tightened, and food prices take up an increasing share of household expenditure. Central bankers in Europe and the US will find themselves as powerless as their Japanese counterparts to turn the situation around. And all this just as the fiscal disaster known as the baby boom starts retiring and demanding trillions of dollars from governments around the world.

How would you monetize that?

It's not easy. Think back to Japan, during its long bust: there were so few attractive investments that Mrs Watanabe was forced to become a currency speculator in a desperate attempt to find positive returns. One might try a play on higher food prices: some kind of agricultural-commodities fund, perhaps. Speculators could always go short stocks, long credit protection, short housing. Or just give their money to John Paulson to manage.

But the average schlub with a modest 401(k) is in a much more invidious position. For much of the US population, and the UK too, investing is the stock market. You can buy stocks or funds, you can buy value or growth, you can buy options or futures. But overall there is an absolutely enormous structural long position in US equities which hasn't even started to unwind yet and which has no idea where else it might go, beyond foreign equities which if anything are even more overvalued. If you're looking for a moderate-risk long-term investment, and if you buy the bearish position, I have to say I'm a bit short on bright ideas.