Newport Beachians...

...ready to stop the flow of QE2 singlehandedly...

The term “domino effect” has been used since the 1950s to describe the potential for political unrest to become contagious, resulting in a chain reaction. The phrase took on special significance during the Vietnam Era, when it was used to propagate the idea that a communist victory in Vietnam might embolden other communists in the region, prompting them to topple their own governments.

Today, we see the same phrase taking on special significance in the investment world resulting from political unrest in the Middle East and the ongoing Euro-zone debt crisis. For example, the domino effect can be seen in the political turmoil that has sparked a surge in oil prices, increasing inflation risk and leading to additional implications for sovereign risk.

The combined risk of the domino effect, however, is differentiated among regions and, as a result, the balance of duration allocation in a fixed income portfolio has become more delicate. The investment approach should therefore be more towards “safe spread,” i.e. investments that we believe are most likely to withstand a wide range of economic and geopolitical scenarios.