Beyond No Standards — Volatile Markets Now Re- establishing Standards

Currently, market behavior appears indicative of a process of re-establishing standards when looking to 2010 and beyond. Our assessment applies broadly from currency in dollar recovery to fixed income in debt assessments like Greece to mixed equity markets to other asset classes like commodity volatility as well as to government and corporate behavior. It would be a significant development, likely still to include volatility. The no standards approaches of 2008/9 and arguably earlier seem neither realistic nor sustainable. The transmission mechanism from credit duress to bank duress to sovereign rescue and risk has a long history in finance. Still, as long ago as 2006, progressive de-regulation by governments and concomitant splicing away in risk premiums by market participants was laying the ground work favoring broad based momentum over relative valuation assessment. The breadth of duress transmission has been clearly wide. However and despite spectacular failures, the late 2008/early 2009 rush for quantitative ease may have, perhaps not unintendedly, reinforced the tilt for momentum albeit into the upside. Now from late Q4/2009 continued into mid Q1/2010, the mixed equity market response to earnings momentum and the travails of government sponsored enterprise as well as deficit finance likely have as key takeaway the potential return of relative valuation assessment in cross section as well as across time. It has profound implications for portfolios but also for in the modus operandi of governments, central banks and corporations, all in favor of quality of delivery.

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