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

Earthquakes and Equities

April 12, 2011

There are many complexities in the present predicament of the markets. It’s a very difficult conundrum to unravel, and there is no point in recounting the various deadly and benign crosscurrents, headwinds, tailwinds, and black swans. It does seem that the fog and clouds over financial markets have darkened in the last week or so, and what Ed Hyman calls “a negative feedback loop” has developed. The Middle East smolders, the price of oil goes up, gasoline prices climb, headline inflation rises, central banks (notably the ECB) tighten, the dollar falls, so oil goes up again, and the vicious circle continues. This combination of expensive oil and central bank tightening is negative for the global economy and the recovery, and some, but certainly not all, of the most recent high frequency data suggest a softening. If oil continues to work higher, stocks aren’t going to like this mixture, and the charade in Washington on Friday certainly doesn’t help.

However, I suspect that the elevated oil price is mostly about the Middle East in general and Bahrain and Saudi in particular and not about excessive global demand growth. There is plenty of supply and large inventories. My bet is that the next move in oil prices is down $10 to $20 a barrel and not up, so I’m not selling stocks. I’m also not brimming with conviction and I’m, as they say, light in my loafers.

On another more ethereal subject, I continue to be intrigued by Japan and the Japanese stock ...