As “Rebels”, we take pride on” thinking differently”.  That does not mean shutting your eyes to the rest of the world or the perspectives of professional investors.

Hence, here are two interesting perspectives from investment advisors, one from the firm RCM (it warns profusely retail investors not to base investment decisions on their work and is mostly geared to professionals), and another very interesting study of Deutsche Bank on the possible glut in liquidity going forward. Both studies are below and I provided the links where you may download them. The goal: informing you and giving you a glimpse at how professionals advise their clients on the markets and the economy.

Some interesting passages I picked from the RCM study:

The sell-off in equities was one of the sharpest in the last 100 years. A rebound over the coming one- to three-year period is likely if past experience is a guide for future developments. Until May, many investors were still underweight on equities and did not believe in the longevity of the market rebound. Since June, though, investors have started to overweight equities again. The easy call in favour of equities, even if only for tactical reasons, is over. In addition, seasonality is also a negative factor for equities at this juncture: equities tend to perform well between October and April. Empirical work shows that the old market adage ’sell in May and go away’ is valid.

(…)

Household debt can be reduced by three basic actions: households can default on debt, and the debt is then written off by the lender; households can sell assets to another sector and use the proceeds to pay off debt; or households can save money by spending less than their income flow and use the savings to retire debt. The rise in household saving suggests the third method is playing a key role in household debt de-leveraging. We believe this has important implications for the profile of any prospective consumer spending recovery, even one backed by massive fiscal stimulus.

(…)

We also suspect the old global growth model, dependent in no small part on the willingness of US consumers – and other consumers in the developed world – to deepen their deficit spending will not be easily revived. We would merely suggest with the level of household net worth to disposable income back to a level last seen in 1995 (that is, before household deficit spending began), and with households extinguishing debt for the first time in more than half a century, a recovery of US economic momentum will be more dependent upon fiscal stimulus – especially public investment – than is typically the case.

(…)

Unfortunately, the accounting reality is that without some other sector increasing its deficit spending or reducing its net saving, attempts by some domestic firms and households to save out of their income flows will simply show up as income shortfalls – and hence unexpected dis-saving – for other private sector firms and households. Call it the tyranny of double-entry bookkeeping: any attempt, for example, to increase household saving that is not matched by an equal increase in business investment expenditures will simply be thwarted.

And for me this passage seems interesting for the US debt (my stress):

We believe the dramatic shortening of the maturity of privately held marketable federal government debt is very significant for two reasons: since the short end of the treasury curve has been suppressed by the near zero interest rate policy (ZIRP) of the Fed, the net interest expense outlays on public debt have also been suppressed. Since this is a line item on the expenditure side of the federal fiscal balance, Fed policy is also reducing the fiscal deficit from what it would otherwise be if the short end of the treasury yield curve was closer to historically normal levels.

So, basically, by selling so much short-term debt, the US treasury is simply getting money for almost nothing. Hence the move of the Chinese to longer-term maturities.

On the other hand, the positive aspect of seeing the US consumer starting to save, which I already stressed is showing up as a positive:

Looking at the unique aspects of this recession, we find the sharp reversal of household financial balances from a deep deficit position to a net saving position quite encouraging. Households are reducing debt loads, in large part with higher saving out of income flows, and this has implications for prospective bank loan volumes and sales revenue growth at consumer discretionary firms.

Then, of course, the conclusion is optimistic:

Nominal GDP has fallen for two quarters in a row – an event unheard of since 1957 – and certainly, delinquency and default rates on private debt are still climbing. Nevertheless, real GDP should begin to show a mild recovery path from Q4 2009 onward as the pace of household net saving stabilises and public infrastructure spending ramps up. These remain uniquely challenging times, but we believe the challenges are indeed being met.

You may disagree with the author, but it is worth reading the whole study and seeing their perspectives or their arguments to make up your mind.

I will only quote for the sake of completeness, a Deutsche Bank study which is mentioned in an article by a Belgian newspaper, but which I could not find as yet. Apparently DB predicts a return to the March lows on the markets… Within two to four years from now. The main cause, according to the newspaper, would be the inflation and the hike in interest rates.

Now for the other study, with a high degree of technicity: it is a study on how the liquidity excess could affect the markets and the economy in the wake of the enormous stimulus efforts pumped into the markets.

The Global Strategic Outlook of RCM for Q3 2009:

And the study of DB on the possible Liquidity glut, with its all important conclusion:

As regards asset prices, it may only be a matter of time until investors become increasingly unwilling to hold liquidity at the current low level of return, especially when the economic outlook improves significantly. Hence, once investors start to reduce their large liquidity holdings again, asset prices may receive some support from a reflux of money into financial asset markets. However, this time policymakers are unlikely to remain inactive should they suspect the formation of another asset price bubble.

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