Monday, June 07, 2010

El-Arian of Newport Beach...

From the tone of my previous posts regarding the dangers of "epoch change", it appears that I am not alone. Full article found here.

Finally, it welcomes agreement on “the World Bank’s voice reform to increase the voting power of developing and transition countries by 3.13%.” While this is a signal of ongoing efforts to address longstanding representation and legitimacy deficits in international institutions, it also confirms that the steps being taken are miniscule and slow. This is a further indication that, despite what they say, industrial countries continue to embrace and protect a global governance system that reflects the outmoded world of yesterday, rather than the world of today and tomorrow. This will further undermine hope for effective and durable global policy coordination.

So, what should we make of all this; and how will it play out in markets?

I come away with the strong feeling that today’s G-20 communiqué is a further confirmation that structural and balance sheet realities are imposing themselves on the global economy.

Compared to what the world has known for the last 40 years, this situation results in a highly unusual configuration of growth, debt and deficits; it raises legitimate questions about the prospects for self sustaining private sector recoveries in industrial countries (and the related ability to grow out of excessive indebtedness); and it loudly illustrates the limitations of cyclical policy responses and international coordination, and associated problems with unintended consequences and collateral damage.

I fear that all this may continue to catch off guard at least three dimensions that are still significant in today’s marketplace:

* Mindsets that have difficulties recognizing regime shifts, preferring instead the illusionary comfort of the more familiar cyclical frameworks;
* Approaches that focus excessively on rates of change and inadequately on levels; and
* Investment portfolios that are over-exposed to equity and credit risk, and that maintain insufficiently hard interest rate duration.

In concluding, I would repeat what I said early yesterday morning when asked by a reporter “what does the US jobs report mean for markets:” Investors should keep their seat belts on and tight.

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