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.

	Reflections - Sublime to Ridiculous (size:0.47MB) 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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	Reflections - The Next Error (size:0.49MB) 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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	Reflections - Expect the Unexpected (size:0.54MB) 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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	Reflections - American Housing: Falling Prices, But Rising Value (size:0.51MB) 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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	Reflections - Thunderstorm First, Then Rising Pressure (size:0.61MB) 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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	Reflections - Resilience, Insouciance or Denial? (size:0.75MB) 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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	Reflections -- The Limits of Largesse (size:0.66MB) 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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	Reflections -- J.M.K., R.I.P. (size:0.49MB) 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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	Reflections -- Solving For the Kiss of Death (size:0.83MB) 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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	Reflections -- Impaled on a Roman Tipping Point (size:0,69MB) 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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	Reflections -- Unintended Consequences (size:1,18MB) 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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	Reflections -- First Bubble, R.I.P. Next, Step Forward (size:0.74MB) 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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	Reflections -- The Offside Rule, The Fed, and Inflation (size:0.98MB) 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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	Reflections -- Earthquake Now, Windstorm Later (size:0.25MB) 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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	Reflections -- Income Elasticity of Demand (size:0.28MB) 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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	Reflections -- Rising Oil Prices -- The Invisible Virus (size:0.39MB) 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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	Reflections -- Hypothesis Testing (size:0.34MB) 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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	Reflections -- Cognitive Dissonance (size:0.32MB) 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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	Reflections -- It's the Denominator (size:0.77MB) 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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	Reflections -- A Long Winter (size:0.52MB) 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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	Reflections -- The Iron Fist of Competition (size:0.46MB) 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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	Reflections -- Sovereign Credit--The Return of the Deutschmark and Credit Default Swaps (size:0.23MB) 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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	Reflections -- 2.5 Forces of Contraction--a Procrustean Euro, Flats in China and Oil (size:0.32MB) 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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	Reflections -- That Which Goes Around (size:0.38MB) 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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	Reflections -- Good Emperor, Bad Emperor (size:0.41MB) 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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	Reflections -- The Future Arrives, Before Time (size:0.36MB) 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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	Reflections -- "V" is for Verisimilitude, Not Veracity (size:0.94MB) 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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	Reflections -- History (size:0.99MB) 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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	Reflections -- Two Difficult People Do Not Make a Good Marriage (size:0.31MB) 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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	Reflections -- Financing the Deficit (size:0.68MB) 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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	Reflections -- Wakefulness 1, Rest 0 (size:0.40MB) 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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	Reflections -- Inflation Quo Vadis (size:0.99MB) 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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	Reflections -- The New Calvinists (size:0.57MB) 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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	Reflections -- House Prices: Overshooting On the Downside (size:1.01MB) 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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	Reflections -- The Coming Sinophilia (size:0.81MB) 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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	Reflections -- The Stock Market and Valuation (size:0.48MB) 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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	Reflections - Investing with Leviathan (size:0.29MB) 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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	Reflections - How to Grow Poor Slowly (size:0.71MB) 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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	Reflections - A Fault Line in Economic History (size:0.34MB) 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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	Reflections - Avalanche Coming (size:0,20MB) 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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	Reflections -- Global Margin Call (size:0.89MB) 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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	Reflections -- Eating the Seed Corn (size:0.19MB) 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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	Reflections -- Decoupling Is Dead, Long Live Decoupling (size:0.31MB) 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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	Reflections -- Longanimity and Investing Money (size:0.24MB) 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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	Reflections -- The Fate of Financial Stocks, and the Role of Housing (size:0.27MB) 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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	Reflections -- Oil (size:0.30MB) 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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	Reflections -- House Prices II (size:0.15MB) 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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	Reflections -- House Prices (size:0.47MB) 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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	Reflections -- The Problem of Prix Fixe (size:0.24MB) 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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	Reflections -- Recoupling and the Consensus (size:1.01MB) 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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	Reflections -- When Crowds Set the Odds (size:0.22MB) 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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	Reflections -- Subprime Mortgages and Occam's Razor (size:0.17MB) 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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	Reflections - The Love Affair with Risk (size:0.30MB) 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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	Reflections -- The Inevitability Of Asset Bubbles (size:0.32MB) 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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	Reflections -- The Power of Mood (size:0.27MB) 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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	Reflections -- Valuation of Bonds and Stocks (size:0.35MB) 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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	Reflections - Bond Yields and the Intensity of Competition (size:0.20MB) 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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	Reflections - Private Equity and Competitive Advantage (size:0.17MB) 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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	Reflections - Yin and Yang: Growth and Error in an Era of Capital Abundance (size:0.33MB) 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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	Reflections - Private Equity and the Public Markets (size:0.22MB) 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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	Reflections - Housing: Quo Vadis (size:0.38MB) 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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	Reflections - President Chavez's Reminder (size:0.35MB) 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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	Reflections - Look East (size:0.38MB) 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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	Reflections - The Cost of Debt is Too Low (size:0.19MB) 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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	Reflections - Regulation of Housing Finance and the Prospects for Risk Taking (size:0.24MB) 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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	Reflections - Noise and Time (size:0.31MB) 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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	Reflections - Equity Market Valuation and Earnings Risk (size:0.26MB) 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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	Reflections - How High Interest Rates? (size:0.21MB) 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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	Reflections - Expedia in Terra Incognita (size:0.22MB) 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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	Reflections - The Importance of Barriers to Competition (size:0.19MB) 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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	Reflections - The Most Dangerous Words (size:0.24MB) 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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	Reflections - Returns on Businesses, and Returns on Securities--Time Matters (size:0.29MB) 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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	Reflections - All Rise (size:0.29MB) 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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	Reflections - Cash Wins Over Time (size:0.20MB) 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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	Reflections - Measuring the Price of Risk (size:0.46MB) 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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