Reflections is a monthly publication written by John Gilbert, CIO, GR-NEAM (General Re – New England Asset Management Inc.). Each issue focuses on current capital markets and investment topics. Our clients find it somewhat unique from many investment publications typically received.
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Issue: May, 2012 Language: English
Author:
John Gilbert
Summary:
Government securities were traditionally the safest, and in certain cases beyond reproach in investment quality. The behavior of those issuers themselves, however, stands upon its head the central position of government debt in financial markets. The deterioration in the true credit quality of government obligations is one contributor to the secular increase in risk in financial markets, without commensurate compensation in return. |
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Issue: April, 2012 Language: English
Author:
John Gilbert
Summary:
When savers lose because their returns are low or negative in real terms, government wins. The Taylor Rule provides a way of testing central bank policy, the results of which contain some amount of truth telling. |
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Issue: March, 2012 Language: English
Author:
John Gilbert
Summary:
Recent apparent progress in the Eurozone have dominated the attention of markets. With risk taking yet again in vogue, investors should consider the next surprise. |
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Issue: February, 2012 Language: English
Author:
John Gilbert
Summary:
Rental economics in the American housing market are attractive, particularly relative to capital market returns available in general. Clearing the housing market would address the imbalance between rental and purchase values, but requires capital entry. Government policymakers attention may speed the process, and the bottoming of house prices. |
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Issue: January, 2012 Language: English
Author:
John Gilbert
Summary:
The euro as the primary remaining instrument of deflation will soon find its defining moment. Both logic and financial history offer a return to rising inflation as the outcome. |
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Issue: December, 2011 Language: English
Author:
John Gilbert
Summary:
The resilience of risk asset prices is admirable but tentative. The dollar suggests that markets have not yet capitulated. |
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Issue: November, 2011 Language: English
Author:
John Gilbert
Summary:
The declining ability of important governments to attenuate economic stress will affect the capital markets for years to come. Risky assets' valuations will be affected accordingly. |
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Issue: October, 2011 Language: English
Author:
John Gilbert
Summary:
The risk of higher than expected economic volatility has increased as governments have consumed their ability to expand spending to attenuate the downside as assumed by Keynes. Risk assets should be assigned higher margins for error in their valuations as a result. |
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Issue: September, 2011 Language: English
Author:
John Gilbert
Summary:
The Eurozone financial crisis is approaching a potential flashpoint. Yields on Spanish and Italian sovereigns are near, or at, the level at which their debt loads will eventually be unsustainable. The reaction of the German government will determine the outcome. |
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Issue: August, 2011 Language: English
Author:
John Gilbert
Summary:
The rapid transmission of Eurozone risk pricing to Italian government bonds is a symptom of growing acceptance that sovereign risk is not limited to emerging markets or the European periphery. This is a tap on the shoulder for governments in general, including the U.S. |
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Issue: July, 2011 Language: English
Author:
John Gilbert
Summary:
The second installment of the Fed's Treasury bond purchases is ending, with the full effects of it yet to be clear. Unintended consequences of government behavior seldom are. |
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Issue: June, 2011 Language: English
Author:
John Gilbert
Summary:
The contractionary undertow from household delevering and banking shrinkage continues, which the Federal Reserve is trying to offset by buying government bonds. As is often the case in government behavior, they are having an effect opposite that which they intend. Instead of reviving housing and jobs, they are implicitly funding financial speculation. |
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Issue: May, 2011 Language: English
Summary:
Commodity prices are eventually cyclical and are not the principal long run reason for inflation to rise. The removal of the distortion caused by chronic undervaluation of the Chinese yuan is the issue to consider. |
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Issue: April, 2011 Language: English
Author:
John Gilbert
Summary:
The devastation caused by the earthquake and tsunami in Japan have little or nothing in the way of precedent. Like other crises, however, the response of the monetary authorities is appropriate but is typical of a system with no anchor for the value of money. An example from history shows why todays monetary systems remain prone to a return of inflation. |
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Issue: March, 2011 Language: English
Author:
John Gilbert
Summary:
Financial markets have risen virtually without interruption for six months to February. But commodities and risky securities cannot rise together indefinitely. The price of oil continues to probe the worlds tolerance for rising prices. |
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Issue: February, 2011 Language: English
Author:
John Gilbert
Summary:
Economic recovery is a good thing, particularly for developing countries. The downside lies in upward pressure on oil prices, which history has shown to be a consistent source of unpleasant surprises. |
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Issue: January, 2011 Language: English
Author:
John Gilbert
Summary:
Recent events suggest a better U.S. economy in coming months than we previously expected. But that only postpones the debt reckoning. |
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Issue: December, 2010 Language: English
Author:
John Gilbert
Summary:
The sovereign debt problem is over, or is it? Irelands problems are larger than others, but similar in character. The Irish experience is an experiment that the markets are hoping is an anomaly. That remains to be seen. |
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Issue: November, 2010 Language: English
Author:
John Gilbert
Summary:
The substitution of federal debt for private debt is presumed to be the solution to the decline in credit demand. For governments who borrow in their own currency, however, this may over the next decade revive a problem now thought to be irrelevant. |
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Issue: October, 2010 Language: English
Author:
John Gilbert
Summary:
The excess housing supply in the U.S. numbers in the millions of units. The market will clear itself, but the time to do so is likely measured in years. |
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Issue: September, 2010 Language: English
Author:
John Gilbert
Summary:
Business profitability is exceptional at the moment. But the majority cannot be above average. Competition may nudge the results of many firms back to mediocrity, where they came from. |
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Issue: July, 2010 Language: English
Author:
John Gilbert
Summary:
The sovereign debt problem is just getting underway. Protecting oneself will prove for many to be a challenge. |
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Issue: June, 2010 Language: English
Author:
John Gilbert
Summary:
Greece and China have reacquainted the capital markets with caution after a period of relative ebullience. The euro zones issues are chronic, while Chinas are self inflicted and more susceptible to reversal in the intermediate term. |
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Issue: May, 2010 Language: English
Author:
John Gilbert
Summary:
Greece may be the canary in the coal mine, as Thailand was in the Asian financial crisis of 1997. The conclusion may be ironic -- that the eurozone contributes to a bubble elsewhere, this time in Asia. |
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Issue: April, 2010 Language: English
Author:
John Gilbert
Summary:
The capital markets are going through a nervous period at the prospects for emerging markets -- but this is likely a pause that refreshes. |
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Issue: March, 2010 Language: English
Author:
John Gilbert
Summary:
Sovereign debt quality has come into question, which is no surprise itself. The timing is, however. Before the issue is fully discounted in securities prices, prices will go lower. |
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Issue: February, 2010 Language: English
Author:
John Gilbert
Summary:
House price declines have reversed, for the time being. But they represent government intervention, not health. The governments struggle to offset the contractionary forces of deleveraging is titanic in its proportions but not the stuff of robust recoveries of the past. |
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Issue: January, 2010 Language: English
Author:
John Gilbert
Summary:
Placing todays financial market valuations in historical perspective makes clear that there are few or no bargains around. Interest rates are unsustainably low, and equities have recovered to fair value. From such levels it appears that unfortunately the best returns over the typical horizons of one to five years are likely to come from manic market behavior rather than patience. |
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Issue: December, 2009 Language: English
Author:
John Gilbert
Summary:
Regulation of the banking system is about to change, but the central problem is rooted in banking as a business, and in the nature of regulatory behavior. In the long run, the outcome of the current reregulation will only be to modify the shape of future financial crises. |
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Issue: October, 2009 Language: English
Author:
John Gilbert
Summary:
The U.S. governments fiscal year ended in September, and the borrowing requirement that accompanied a $1.6 trillion deficit was in fact financed without noticeable upward pressure on interest rates. The reason, however, was that households made a large shift away from risky financial assets toward Treasury bonds as the markets deteriorated. Financing the expected $1.4 trillion deficit is another issue, however, without the stock market falling again. |
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Issue: September, 2009 Language: English
Author:
John Gilbert
Summary:
Government intervention in the financial system was necessary and appropriate to prevent disaster. Continued intervention in the economy, however, distorts behavior and eventually stands to raise the governments borrowing requirement and accomplish little over time. |
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Issue: August, 2009 Language: English
Author:
John Gilbert
Summary:
If inflation is to accelerate it is not immediate, but more likely to appear over three or four years time. Insurance against it, however, is today generally attractively priced and should be purchased. |
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Issue: July, 2009 Language: English
Author:
John Gilbert
Summary:
The shock to households perception of their financial safety will make for higher savings ratesthe only question is how high. They could go surprisingly highafter all, everything else in this business cycle has come as a surprise. |
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Issue: June, 2009 Language: English
Author:
John Gilbert
Summary:
Residential real estate behaves as a discrete asset class, and we measure the central tendency of its value. House prices were overvalued materially by that measure, and after recent declines are around their equilibrium value. Both the current level of housing inventory and history, suggest we are headed for undervaluation before it is over. |
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Issue: May, 2009 Language: English
Author:
John Gilbert
Summary:
The capital markets have begun to take notice of Chinas emerging signs of success in restarting lending, unlike the U.S. If Asia emerges as the worlds growth venue and economies in the west cannot overcome the retarding effects of weak financial systems, securities valuations there could be revalued, perhaps significantly. |
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Issue: April, 2009 Language: English
Author:
John Gilbert
Summary:
Valuing the stock market has become more challenging as traditional measures have in some cases become unstable. A stable long term series, however, simple it may be, suggests that long term returns are likely to be considerably improved from current levelsbut it will take several years at a minimum. |
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Issue: March, 2009 Language: English
Author:
John Gilbert
Summary:
The scale and complexity of governments' responses to the financial crisis is very large. While it is early to tell, it may increase the role of policy anticipation in investment analysis. Participants in the Chinese stock market have behaved that way all along. |
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Issue: February, 2009 Language: English
Author:
John Gilbert
Summary:
Treasury bond yields are unsustainably low. But Treasury Inflation Protected Securities, now out of favor, are quite attractive. |
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Issue: January, 2009 Language: English
Summary:
The markets are making the bet that the historic government intervention in the financial system in the economy will fail. Markets are priced for persistent deflation even as the policy response is unprecedented in scale and innovation. The market consensus will likely be proved wrong over time. |
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Issue: December, 2008 Language: English
Author:
John Gilbert
Summary:
The position of the dollar as the reference currency in the world financial system is in its sunset years, but the current borrowing program of the U.S. government may be hastening its demise. |
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Issue: November, 2008 Language: English
Author:
John Gilbert
Summary:
The paroxysm in the capital markets is a worldwide margin call that drew in all risk assets. It puts an end to the simplistic idea of full economic decoupling that was popular until recently. The markets have been violent, but the margin call is about spent and in the near term markets are likely to recover. |
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Issue: October, 2008 Language: English
Summary:
The measures taken by the U.S. government will work to stem the financial crisis, because the U.S. can substitute its balance sheet and putatively infinite borrowing capacity for private balance sheets that are stressed. This remedy will not be available, at least on such attractive terms, forever. |
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Issue: September, 2008 Language: English
Author:
John Gilbert
Summary:
The idea that global economic growth had become less integrated is now pretty well discredited. However, that does not mean that significant differences in growth rates will not persist as some countries have recessions while others, particularly in Asia, will continue to grow. |
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Issue: August, 2008 Language: English
Author:
John Gilbert
Summary:
There is seldom gain without pain. In investing money, reverses create opportunity, but it is often far from obvious at the time. |
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Issue: July, 2008 Language: English
Author:
John Gilbert
Summary:
Financial stocks have been extraordinarily poor performers. Their weakness has been so severe that it cannot persist indefinitely. Stabilization is likely to accompany early signs of a bottoming process in the housing market. |
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Issue: June, 2008 Language: English
Author:
John Gilbert
Summary:
Oil prices may be going into a vertical ascent. The end of such episodes is always bad, but they can persist for longer than rationality would expect. |
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Issue: May, 2008 Language: English
Summary:
As the attention given the housing market has reached hysteria, one might conclude there is no bottom. In fact there is, and certain early signs have already emerged that suggest the shape of stabilization. |
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Issue: April, 2008 Language: English
Summary:
Forecasting the depth of house price decline is guesswork. We look at it in various ways and conclude that all we can say at this point is that prices will continue to decline in the short term to clear the market. Judging the longer run, equilibrium level will remain a matter of debate. |
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Issue: March, 2008 Language: English
Author:
John Gilbert
Summary:
It is well known that price controls distort economic behavior. It also makes the job of an investor more difficult, since they may lengthen the time it takes for trends to revert to normal. |
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Issue: February, 2008 Language: English
Summary:
As virtual unanimity has developed that economic deterioration in the U.S. will not spread to other economies; it is an excellent time to examine a differing view. |
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Issue: January, 2008 Language: English
Summary:
The New England Patriots are the best team in football. Therefore, I should bet on the Patriots...A costly error. |
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Issue: December, 2007 Language: English
Summary:
Valuation of a security requires a clear understanding of how it produces earnings and cash flows. In the mortgage securities that are at the center of the current credit contraction, complexity itself played a role in widespread valuation errors. |
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Issue: November, 2007 Language: English
Summary:
Equity markets' recoveries from the lows of August have demonstrated the appetite for risk is alive and well, fed most recently by the expansionary response of central banks. The next manic phase in capital markets is taking shape. |
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Issue: October, 2007 Language: English
Author:
John Gilbert
Summary:
The debate over central bankers appropriate attitude toward moral hazard has been decided, at least for now, in favor of maintaining liquidity in the capital markets. The likelihood of another asset inflation, or bubble, is thus rising. |
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Issue: September, 2007 Language: English
Author:
John Gilbert
Summary:
Just weeks ago it was supposed that liquidity in financial markets was infinite. Then liquidity evaporated and endangered even previously apparently sound borrowers. In the wreckage there will be opportunity someplace. |
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Issue: August, 2007 Language: English
Author:
John Gilbert
Summary:
Bond valuation is fairly straightforward. Valuing common stocks is more difficult, and while there are both good and fair ways of doing it, the usefulness of perhaps the most attractive method is constrained by the availability of data on individual firms. |
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Issue: July, 2007 Language: English
Author:
John Gilbert
Summary:
Bond yields rose sharply in the last two months, driven by higher real yieldsnot by inflation expectations. This is part of the continuing normalization of the returns on fixed income, which are too low, and returns to firms in general. |
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Issue: June, 2007 Language: English
Author:
John Gilbert
Summary:
Daimlers sale of Chrysler to a private equity buyer will certainly lead to financial engineering including cost reductions. Whether they can make sustainable improvement to a competitively disadvantaged business is another question. |
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Issue: May, 2007 Language: English
Author:
John Gilbert
Summary:
Each investment fashion breaks on the beach, only to be followed by another. Despite the attention rightfully devoted to it at the moment, the U.S. housing finance problem is only one such problem -- count on more. |
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Issue: April, 2007 Language: English
Author:
John Gilbert
Summary:
The tidal wave of money going to buyouts of public firms is unlikely to produce excellent returnsthere are too many people doing it. Venture capital is less fashionable, but whether or not that is creating investment opportunities for public markets opportunists is unclear. |
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Issue: March, 2007 Language: English
Author:
John Gilbert
Summary:
The share prices of housing and housing finance firms are going in opposite directions. The unusual characteristics of this cycle, and excess credit creation in particular, suggest which of the two is the better guess. |
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Issue: February, 2007 Language: English
Author:
John Gilbert
Summary:
Emerging markets and commodities have been wonderful investments in the last three years. In many such investments, however, risk premiums have been too low. That is starting to change. |
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Issue: January, 2007 Language: English
Author:
John Gilbert
Summary:
The globalization of just about everything, and financial markets in particular, mean that the sources of capital market surprises may originate anywhere. Assets from bonds to copper appreciated together last year, and while growth of Asian economies explains a great deal about such apparently unlikely traveling companions, it also implies the source of future surprises. |
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Issue: December, 2006 Language: English
Author:
John Gilbert
Summary:
The low marginal cost of debt explains a lot of the behavior of the capital markets at the moment, and some of what will prove to have been errors. |
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Issue: November, 2006 Language: English
Author:
John Gilbert
Summary:
An extended cycle of risk taking in everything from housing to emerging markets may be drawing to a close -- or not. It depends in part upon the behavior of financial regulators, which may affect how the Fed views the housing market. |
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Issue: October, 2006 Language: English
Author:
John Gilbert
Summary:
It is natural for people to act upon the events of the moment and on their perceptions of the moment. But events and perceptions are transitory. The result is that much of what happens in the financial markets is random in the short termbut not in the long run. |
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Issue: September, 2006 Language: English
Author:
John Gilbert
Summary:
Earnings of commodity firms are unsustainable but are not a large enough contributor to the earnings of publicly held firms to materially affect the outlook for the equity market. If inflation is controlled, the outlook for equities remains relatively favorable. |
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Issue: August, 2006 Language: English
Author:
John Gilbert
Summary:
The markets have suddenly come to the realization that interest rates did not fully consider the risk of upward price pressure. Interest rates may overshoot on the upside, but bonds are now in the range of fair value. |
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Issue: July, 2006 Language: English
Author:
John Gilbert
Summary:
Investing is both art and science. We discuss the art part -- in particular, why some firms earn higher profit margins than others, and why some are able to sustain high margins and others do not. |
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Issue: June, 2006 Language: English
Author:
John Gilbert
Summary:
Barriers to competition are the source of superior returns on capital. They tend also to attract assailants. Maintaining a competitively privileged position is growing more difficult, even for the best-positioned firms. |
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Issue: May, 2006 Language: English
Author:
John Gilbert
Summary:
The vertical ascent of commodity prices is not only not unprecedented, but the history of commodity price cycles admonishes one that chasing such prices has a low probability of success over time. |
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Issue: April, 2006 Language: English
Author:
John Gilbert
Summary:
It takes time, but cash flows and the returns on capital they represent do emerge in securities values. It can take patience, but it happens. We believe this means a coming change in the capital markets is likely. |
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Issue: March, 2006 Language: English
Author:
John Gilbert
Summary:
The simultaneous ascent of so many asset markets around the world is striking, and likely temporary. Such general enthusiasm is an environment in which pricing errors are probable. |
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Issue: February, 2006 Language: English
Author:
John Gilbert
Summary:
The cash components of the return from equities continues to improve, and thus the premium one must pay for growth is falling, which is striking given the relatively good performance of corporate earnings over the last three years. |
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Issue: January, 2006 Language: English
Author:
John Gilbert
Summary:
We consider the signals implicit in the contest for AOL between Google and Microsoft, and what it says about the current preferences for risk. |
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