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

A Tough Call

“Prosperity ends in a crisis. The era of optimism dies in the crisis, but in dying it gives birth to an era of pessimism. This new era is born, not an infant, but a giant.”

—A.C. Pigou

January 9, 2012

The high-frequency data from the U.S. continue to improve and to be above expectations. It’s obviously very important that positive feedback loops are developing as consumer spending is reasonably healthy, employment is gradually rising, and as house prices seem to be stabilizing. Our contacts with corporate executives indicate volume and new orders are decent. Economists are saying the expansion is becoming self-sustaining, but I’m still concerned about the consumer’s propensity to spend at these levels since it is not yet justified by growth in real incomes, and the savings rate is falling again.

It is also somewhat disconcerting that consumer debt to net worth ratios are still at 2008 levels because although debt has fallen, net worth has declined equally. That’s not deleveraging. There could be a second half dip in the economy, but it looks as though 2012 will be a 2% real GDP year with corporate profits up slightly and the S&P 500 earnings per share around $105. The Bloomberg consensus is more optimistic and says the S&P is at 12 times this year’s earnings and 8 times cash flow.

Meanwhile Europe including Germany is slipping and sliding into a deepening recession ...