The Rip Van Winkle Correction

excerpts from this week's report

"Ever so slowly but no less dramatically, investors are coming to appreciate what readers of this newsletter and blog have known for well over a year – risk has been grossly underestimated and correlations among assets are very high. And, in the process, a very healthy, and long overdue, correction is underway.

From an investment strategy perspectives, two issues appear to be worth noting:

• The magnitude of the correction
• The meaning of the correction

Here are a few thoughts on each..."

"The magnitude of the correction depends on your perspective on the driver of the correction – risk adjustment due to credit related problems. For this, an opinion needs to be rendered as to whether we are experiencing a financial crisis comparable to the Long Term Capital debacle of nearly ten years ago? Or is the crisis more like the one-off Amaranth blow up of last year? In other words, contagion or no contagion? That is the first question..."

Investment Strategy Implications

"The world’s financial markets are going through a grand transition from Greenspan’s bubblenomics to Bernanke's professorial sensibilities. If I am correct in this view, then the risks, opportunities, and implications are both more complex and more substantial than many investors appear to realize.

It is good that the discussion has finally moved to where I have been harping about for well over a year – risk. However, it is far more productive if a better understanding of the nature of change the world economy and financial markets have been undergoing these past few years took hold.

The correction underway is both healthy and long overdue. Rip Van Winkle would be proud."

also in this week's report

• Current Blue Marble Research Fed Valuation Model
• 2Q07 Earnings Update
• Model Growth Portfolio
• Key Economic Indicators

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