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

“If You’re Going through Hell, Keep Going!”

September 13, 2011

Winston S. Churchill said, “If You’re Going through Hell, Keep Going!” During the dark days of World War II when England stood alone, Churchill always preached perseverance and as a congenital optimist that there were always “broad sunlit uplands” on the other side. Well, we, tortured by volatility, certainly are going through an economic and market hell, and what makes it so difficult is that on one side of this hell looms the apocalypse, and on the other, a bull move in stocks. It will be a career-threatening event to get it wrong. Nevertheless, we have to keep going, but nothing has happened in the last two weeks to engender confidence. Europe is that tail that is wagging the U.S. market.

The apocalypse case is a double-dip recession and a decline in equities from here of 20% or so back towards the lows of 2009. Neither the Authorities in Europe nor the U.S. can get their acts together, and both continents are discontentedly drifting into unhappy versions of the last 20 years in Japan. In other words, decades of ineffective leadership, mild deflation, economic stagnation, and a prolonged, perhaps 10-year, secular, not cyclical, bear market. As the stagnation unfolds, the emerging markets will also languish, and China will probably unravel as its debt bubble explodes. If you want to get really bearish on China, read Red Capitalism (John Wiley & Sons, 2011) by Carl E. Walter and Fraser J.T. Howie.

The more restrained ...