Diary of a Hedgehog: Biggs' Final Words on the Markets

This Is No Time to Get Wobbly, George!

As the old saying goes, the trouble with the stock market is not that it is controlled by mathematical factors, or that it is controlled by non-mathematical factors, but that it is controlled by both. This is what I was writing in mid-August.

August 16, 2010

After an episode of generally uplifting economic reports, the most recent round of high-frequency data from the U.S. have been soft. In addition, equity investors have been disconcerted and high-grade bond buyers emboldened by the Fed’s token quantitative easing (which shows the Fed is worried), new problems in the Irish banking system, and some widening of credit spreads. Industrial commodities are selling off, and even the wise Doctor Copper is looking queasy. Not all was bleak, however, as Germany and Hong Kong reported real GDP growth for the second quarter at annual rates of 9% and 7.1%, respectively, and consumer confidence and fiscal revenues rose in China. Nevertheless, the consensus estimate of real GDP growth for America has been downgraded to 2% for the next four quarters. It is evident that the economies of the world and the U.S. are in a soft patch, and that pricing power is slowly evaporating, which means that inflation is drifting towards zero.

I would argue that with ten-year U.S. Treasury bonds at 3.5%, the German Treasury bonds (known as Bunds) yielding even less, and ...