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October 2011 archive

October 2011

As we enter into a second week of extreme equity market volatility and the fourth consecutive week of market declines I wanted to write to you to put forward my views on the situation.

First, in terms of the recent downgrade of the US credit rating by the S&P, I believe that markets have vastly over reacted. In my view none of the credit rating agencies have much credibility, though it is worth notingthat two out of the three major rating services have not lowered the rating of the US. These, after all, are the folks that kept banks' credit ratings positive in 2008 as they drove straight off the cliff. Furthermore,if the past is any guide to the future, and it may not be, over the past 25 years the bulk of the countries which have been down graded have actually seen substantial increases in their stock prices over the next 12 months. Perhaps the most interesting aspect of the U.S. downgrade, and other European ones which may follow, is the symbolic recognition that the balance of global power is continuing to shift East, away from the traditional Western powers, and that the corporate sector today is in considerably better shape than the public sector, particularly in terms of creditworthiness.

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