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

This Business Is Getting More Complicated

Could oil save us? Everyone is gloomy here as May fades into June. Europe is a mess and it is not apparent how the Old Continent extricates itself without triggering another financial panic. The European banking system can’t live with the losses and disruption of Greece going out of the euro, but the resources and political will are not there to keep it in the euro. At the same time European economic data are getting weaker with Germany’s manufacturing PMI plunging to 45.

Meanwhile the U.S. economy meanders along without much conviction, and China depending on whom you believe and your point of view remains the hope of the world or a disaster. As I point out in the following essay, “nobody knows nuthin’.” What we do know is that investor sentiment everywhere is very bearish but not yet at the levels of February and March 2009. In America equity mutual funds outflows in the first four months of 2012 were a record and twice the same periods in 2008 and 2009. However, in the first two weeks of this May they were triple the average of the first four months!Aggressive long only managers and hedge funds continue to raise cash and reduce risk. My net long is down to about 50%. I recall with trepidation the old adage that the likelihood of a market decline is inversely proportional to the size of your cash position.

What follows is the general transcript of a real conversation modified as to his identity. What makes the present situation so excruciating ...