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

My Bet Is that the Rally Is Still a Work in Process

October 31, 2011

Risk markets have now rallied for four weeks in a row, and last week global equities soared 4.5%. Copper, high yield, and spreads correlated. Now the commentary from the wise men is that the program that eventually emerged from last week’s European summit is another lame effort. Most of the advice seems to be that risk markets have overreacted and are overbought, and that exposure, particularly to equities, should be reduced. They may well be right. It’s a hard argument to refute after the incredible run the equity markets have had in October, which has only been matched on three other occasions in modern times.

However, I’m not so sure I want to cut back on risk yet. I wouldn’t give the new European program an A, but I think it does merit a B minus. Others think it deserves an F. The lead editorial this week in The Economist, the best, most thoughtful publication in the world, concludes: “For all the back slapping and brave words, Europe’s leaders have once again failed. There will be more crises, and further summits. By the time they settle on a solution that works, the costs will have risen still further.”

My guess is markets were expecting a C at best and probably another dud.

Without wading into all the fine print, my view is that nevertheless it is a definite step in the right direction, and I suspect the specifics will be worked out satisfactorily. My partner Amer Bisat, who spent 10 years at the IMF, tells ...