Shocked Not Awed

We see as accurate that unlike 2009, markets currently are shocked but not awed by actions by a wide range of authorities. Markets at the tail-end of 2010 are likely already undergoing a significant and eventually healthier evolution towards vigilance. In the immediacy of credit crisis, there was relief in 2009 on substance from political and central bank authorities. There followed elements of euphoria over seamless recovery. Our current reading of developments is that at the political and central bank level, there is considerable fluidity on form instead of the required substance of vision such as seen with GATT and Breton Woods. Such fluidity has emerged with different but discernable forms.

The rise in yields in peripheral Europe and US Treasuries is likely indicative of reflexive market vigilance. Uncurbed, the mix of trade, currencies and employment that engulf both United States and China in differing but symbiotic form pose capital flow and trade threats to the rest of the world. With real life experience, we link managed trade proposals with the shoddy goods of Soviet attempts of globalization versus quality goods from Germany and Switzerland , despite ingrained currency strength. Expectations of valuation expansion in equities are likely to be a red herring. Earnings recovery is underway but that substantive gains beyond the prior peak are likely to be pushed into 2012, not the consensus 2011. Instead, changes should be considered reflective of need to focus on quality and of the still strong potential for volatility (1230-1030 for the MSCI World index and 1220-1020 for the S&P500 with valuation neutrality as 5% long Treasury yields).

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