Dinosauros rex post the brave new world

In the world of natural history and political history, too big to fail has been a misnomer. The reality has been more like too big to succeed, true also in the business of banking. Even in the survivor bias world of equity indices, only one company has been sustained in the Dow Jones Industrial Averages since inception in 1896. Markets have to further not adjust to a world of linkages, different from pre-2006. Dinosauros rex, post the brave new world is our title to reflect advantages that favor restructuring, even four years post failed assumptions that wholesale application of technology to diversification in finance would obliterate the older world of emotion and linkages. Europe and sovereign debt are in the cross-hairs. Even as the Euro pushed over $1.50 and now back to $1.30, we have maintained that political, economic and business conditions made the stable zone around $1.20, closer to its inception. Politicians need to rise above crisis. European elections, Germany for May 9, Sweden on September 19 and especially the U.K. May 6 need watching.

We have assessed as benchmark with risk premiums in a free market, neutrality for U.S. 10 year Treasury note yields is closer 5%, versus the 2.08% low of December 18, 2008 and present 3.69%. Asia has been tightening policy, most recently in Australia and China but we expect still higher yields there and elsewhere. Over the last 12-18 months there has been recovery of equity markets driven by lower quality and spectacular decline in junk bond spreads. It is a jarring mix when juxtaposed against rising risk premiums in sovereign debt as all depend on economic health. At the asset mix level, we favor gold bullion and precious metals as hedge to change. In fixed income, Greek yields now may represent the reality of risk premiums with corporate yields likely to follow with, not against sovereign yields. In equities, we see better quality doing better to incorporate a post brave new world including not just healthcare for restructuring but also the more cyclical information technology and industrials as well as strong energy, Gulf of Mexico debacles notwithstanding. Finally in the key financials, we favor those having undergone wrenching re-adjustment over those that at the margin appear to have stuck with prior models.

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