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EFTA01181460 | EFTA01181461 To infinIty....and beyond!! Central bank balance sheets, percent of GDP 45% .0 40% • • • 35% 30% 25% 20% 15% 10% 5% 2008 2009 2010 2011 2012 2013 ECB: + El trillion for Spainfttaly BoJ: announced program Fed: CIE@ Kocherlakota 5.5% unemployment threshold BoE: no announced change to current program Source: FRB. BEA, ECB.Eurostat BoE, UK Office for NationalStatistics, BoJ. Japan CabinetOffice. How does this kind of analysis affect our views on managing money? I did not expect a 15% rally in global equities this year, and thought that a high single digit return was in the cards. As a result, different kinds of public/private credit and hedge funds looked like attractive portfolio holdings for 2012. They generally delivered positive returns so far, although not as much as equities. This kind of research highlights the risks of straying too far from normalized risk levels when P/E multiples are already low, a concept we tried to build into allocations this year. A world in which the level of equity markets themselves become a central bank policy tool, rather than being the by-product of corporate profitability, household wealth, fiscal solvency, etc, is a world we will have to adjust to. It is not without its risks, which is what restrains us from positioning for a world that is truly "back to normal". While I can imagine the contours of the begetting cycle playing out in the US (particularly as housing continues to recover, a topic our Chief economist Michael Vaknin has recently written on), I cannot see how any amount of money-printing will solve the structural problems of the European Monetary Union, and in particular, Spain. The Euro's problems have re-surfaced secession debates in Catalan, another sign of the perverse outcomes of a currency union that does not fit its membership (see EoTM May 2nd, 2012). Something else to watch: the disturbing and steady rise in French unemployment, even as Germany improves. Another disconnect: impressive growth and lackluster equity markets in Asia, and how private equity can play a role As shown in the first chart, economic development in Asia has continued at a rapid clip since the Deng and Rao reforms in China and India. During the 1990's, when these developments began to impact growth and profits, investors in Asian public equity markets were rewarded. Then in 1998, the Asian balance of payments crisis hit, and it took the region a few years to recover (note to Europe: currency realignment played a large role in the recovery), with Asian equities underperforming the US through 2002. Then, in 2003, Asian equity markets boomed after the region established a more sustainable model (less reliance on foreign capital, and currency intervention to maintain export growth), and almost tripled the return on US equities. However, since 2008 and more notably since 2010, Asian equities underperformed despite better economic and profits growth. We can speculate as to the reasons why (the cyclicality of the global manufacturing cycle which now is centered in Asia, inflation and excessively easy monetary policy, the exhaustion of the benefits of currency intervention), but the bottom line is that Asian equity markets have not been a good way to benefit from higher Asian GDP or profits growth. Structural reforms and per capita growth Per Capita GDP. real constant dollars. thousands 9 East Asia Tigers 7 6 5 4 3 Deng reforms India 2 1 Rao reforms 0 1980 1984 1988 1992 1996 2000 2004 2008 Source: "Statistics on WorldPopulation, GDPandPer Capita GDP, 1-2008 AD", Angus Mad dison, Unlox* of Groningen. Annualized total return in USD 1988 - 1996 - 2003 1995 2002 2007 2008 2012 2010 2012 S&P 500 16% 7% 13% 2% 12% Asia ex-Japan 17% -9% 31% -1% 6% 14% 36% -14% -10% -10% 15% -5% 0% 2% 24% -5% 3% China Japan Europe 1% Source: Bloomberg. EFTA01181461
May 12, 2026 at 6:17 PM