Monday, July 2, 2007

Welcome to The New Era of Complexity

excerpts from this week's report

"Entering the year, the three components of valuation – earnings/cash flows, growth rates, and discount factors – were fully supportive of higher prices. Moreover, the lifeblood of higher values - liquidity – was abundant. Therefore, the potential for a closing of the valuation gap was very good. The primary caveat expressed on these pages stemmed from a concern re the high degree of complacency among the majority of professional investors. As I conducted my early 2007 Market Forecast events, I was surprised by the degree of the sanguine certainty of so many in a world rife with uncertainty.

The primary concern I expressed at the start of the year was centered not on traditional economic issues..."

"Risk in a complex, interdependent world is different from risk in the traditional sense. It is comparable to the difference between a closed economic system and one that more globalized. More moving parts mean more potential for both reward and risk. Thus far, all that has been seen is the good stuff. The Great Moderation, as it is called, is cited as..."

"I became aware of issues like fat tails thanks their constant references in speeches by Ben Bernanke and NY Fed President Timothy Geithner, among others. Naturally, whenever a phrase that key Fed officials and other learned thinkers appears with a fair degree of frequency, I want to..."

"Fat tails are high volatility occurrences that are several standard deviations away from the norm. Such low probability events using Gaussian distribution principles are so rare as to render them irrelevant. But using a distribution rule such as Power Laws, the probability of such occurrences increases exponentially..."

"According various research reports, the more networked the world becomes, the more interdependent it becomes. And a more interdependent world adheres more to Power Law distributions than Bell Curve ones..."

"The implications for valuation under a Power Law versus a Bell Curve are significant..."

also in this week's report

* Current Blue Marble Research Fed Model
* Model Growth Portfolio
* Key Economic Indicators

Note: To view this week's report, please click on the Blue Marble Research services link to your left.

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