Jan 31, 2012  - In the current environment, it is difficult to assess fair value for financial assets, due to several extraordinary factors. The macro environment is unsettled and the risk of a severe financial shock due to a disorderly eurozone breakup is quite real, as discussed below. Massive government intervention in bond markets has distorted yields. Despite losing AAA status, U.S. bonds still remain the world’s benchmark for bonds and for the assessment of earnings yield on stocks. Normalization of bond yields keep getting delayed due to the slow process of private sector deleveraging, the weak economies of rich countries and the constant threat of debt deflation. The Fed’s most recent position is that exceptionally low yields will remain in place through 2014. The durability of corporate earnings is also questionable, as U.S. profit margins are at an extreme level and could soon begin to decelerate (Chart 1).

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Jan 16, 2012 - The 1945-2007 period was wonderful in almost every way, particularly for investors and it was common to assume that this was “normal”. However, it was anything but in historical terms for many reasons. One of the most important reasons is that over most of those 62 years, there was a debt-fuelled artificial growth in incomes and particularly wealth in the form of housing and equity asset inflation (Chart 1). 

There was the appearance, but not the reality, of stability. The debt bubble was driven by a combination of factors and high on the list would be government policy, the rise of an entitlement mentality, the decline of personal responsibility and the discipline and progressive weakening of banking governance, as regulation was dismantled.

As debt rose relative to GDP after 1980, the financial system and the economy became increasingly vulnerable to a shock. The crash of 2008-2009 marked the end of that era. The subsequent great reflation aborted a downward spiral and gave us a two year artificial recovery.  In the process, it turned a private debt and banking crisis into a public debt and, in Europe, a second banking crisis.  

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Forbes - These Books will make you Rich - Dec 2010

Financial Times - The Best Books for Bulls and Bears -  Nov 2010

London Evening Standard - The Books We Loved in 2010 - Nov 2010

Wall Street Journal (FINS) - Six Best Investing Books for 2010 - Sep 2010

Sample Recent Commentaries (click to view)

Money, Credit & the Economy - Jun 2, 2011

U.S Sovereign Debt crisis:  Not if, but When - Apr 26, 2011

Fading Tailwinds - Apr 8, 2011

Why the Secular Bears are Wrong - Jan 17, 2011

U.S. Government Debt:  The Upward Spiral Continues - Sept. 1, 2010

Asset Allocation:  Volatility, Correlation & Returns - Aug. 12, 2010

Enough Blood in the Streets? - June 1, 2010

The Great Reflation - May 4, 2010

 
 
 
 
 
 
 
 
  
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Severe macro risks persist on three fronts:  the eurozone, stagnant developed-nation economies, and China.  It is difficult to say how any of these issues will play out, and so continued caution remains appropriate.