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

Nobody Can See His Own Backswing

September 27, 2010

Equity markets are finishing a strong September, and the question on investment minds now is whether this rally is just one more false dawn within the uncertainties of the trading range or the precursor of a more sustained move. I’m inclined to the latter view. I like the disdain and jaundiced “sell the rally” advice that is being dispensed from prop traders, the media, and technicians who were not there. “Buy the dips and trim the rips” is still the conventional wisdom, which is healthy from a contrary point of view.

While the economic data continue to be mixed, in general it has a somewhat more positive bias. The high-frequency data suggest that odds of the U.S. careening into the dread “double dip” have diminished, although the current soggy “soft patch” persists. Stronger data last week included ISI company surveys, leading indicators, and capital goods shipments. On the other hand, I’m worried about the crucial index of the price of existing single-family homes, where 60% of the average American’s wealth reposes. August sales and prices were soft.

The recent releases from China and (last week) Taiwan, as well as from some of the other large developing economies, suggest that a successful “soft landing” is underway. However, after having carried the ball for the last six months, Europe (even Germany) is suddenly looking a little sluggish. Japan, the third-largest economy in the world, continues to stumble along ineptly. Quantitative ...