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

The Truth Will Set You Free but Chardonnay Isn’t Bad Either

November 14, 2011

At this point I am not ready to pile on more risk because the European credit markets and even foreign exchange spreads are signaling distress, even extreme distress. Europe could be on the brink of a funding crisis, and in an interconnected world banking system the contagion would affect everyone. Thus the disconnect between credit and equities is very disconcerting. One or the other has to give. We all know the violence of the volatility that would unleash.

It’s all very confusing because meanwhile I am feeling better and better about risk markets in general and equities in particular for a number of reasons. My reasons are as follows in no particular order. All of these events don’t have to happen for markets to work higher—only one of two would be enough to frighten the bears. I think there is a reasonable chance that will happen.

First, sentiment remains incredibly bearish, both anecdotally and on the basis of our indicators. According to the ISI survey, hedge funds cut their net long positions again last week. The doom and gloom chorus is louder and more strident than ever. Between now and year-end the pain trade is up.

Second, the U.S. economy is continuing to do surprisingly well in the face of a deluge of disconcerting bad news at home and abroad. Last week unemployment claims, railcar loadings, bank loans, retail surveys, and earnings for the S&P 500 all had modest up-ticks consistent with 2.0–2.5% ...