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Published July 2010

JUNE CLIENT INVESTMENT REVIEW: Gold Outshines Bond Yields As Deflation Looms

Question: How prepared are most investors and regulators for deflation? Answer: Barely. Bloated balance sheets have left governments with little flexibility - and 10-year government bond yields in Japan (1.07%), Germany (2.57%), Switzerland (1.46%), and Sweden (2.66%) show that US bond yields have plenty of room to decline.

Historically, while the bull market in bonds started in late 1981, it was only a year ago that deleveraging entered the cycle. According to McKinsey Global Institute, deleveraging has followed all financial crises, lasting 4-7 years on average. This time, though, the crisis's global nature will prolong US instability, postponing the cycle as governments continue to adopt liquidity-driven policies prescribing more debt. The problems are strictly structural: solvency, with misleading accounting masking conditions that will force the politics of austerity. Governments - so lacking in decision-making up until now - will be forced into fiscal-belt tightening, higher taxes, and consumer retrenchment. Read Full Version >

Published June 2010

MAY CLIENT INVESTMENT REVIEW: Global Sovereign Debt Crisis

The month ended with a downgrade of Spanish sovereign debt - another outward sign that the largest-ever private sector financial crisis is spreading to sovereign debt worldwide. The resignation of Japanese Prime Minister Yukio Hatoyama, along with the secretary general of the ruling Democratic Party, Ichiro Ozawa, because of scandals and rampant deflation in the second largest global economy, is another sign of the growing crisis. Foreign-policy conflicts, natural extensions of domestic internal tensions, are erupting in North Korea, the Middle East, Japan, and Germany, with the resignation of German President Horst Kohler. Globally, there is a breakdown of international cooperation and a rise in nationalism among the G-20 countries as unilateral financial regulation and fiscal policy discipline are demanded as the price for assistance. In every instance, the economic solution is common: huge amounts of new debt placed upon already excessive debt to solve immediate liquidity problems, while solvency issues (capital insufficiencies) are left unresolved. The loss of global liquidity in every market sector is evidenced by the tremendous increase in volatility, most notably in the equity market's 'flash crash' on May 6, 2010. Read Full Version >