We’re in uncharted territory

Synopsis of Michael Dow article in The Australian Dec 8-9, 2012 “We’re in uncharted territory, without a bond to guide us”

M. Dow, Head of global sovereign for UBS. His main thesis examines the global debt crisis which has destroyed asset pricing models & the credibility of the banking system.

Volatility of previously stable bond yields removed the safe haven that banks used to offset the risks of lending.. Results in credit contraction and deleveraging the banking system.

Added is the loss of historical perspective - e.g. Yields on 10 year Netherlands bonds are at 500 year low. US securities are in a 220 year low. Policy rates in Britain are the lowest in 317 years. Intervention by policy makers have reached an all-time high (20% in USA, 30&in Japan, UK & Germany in between).

3 ways to for the developed world to deleverage, restoring stability & the risk-free rate:
1. Growth - to repay the debts - if so, invest in riskier assets like shares and bonds.
2. Inflation - to erode the debt - (ie. print money which is happening) so invest in “infrastructure, real estate and commodities”.
3. Default - worst - Cash and “move to a cave by a pond of fresh water with wild game nearby”.