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Wednesday, June 20, 2007

Is the economy permanently less volatile?

I recently read a fascinating research paper by Lewis Sanders at Alliance Bernstein.

In it, he argues that the US and world economies are more stable than they were in the past, and that this may justify higher equity valuations going forward than we saw in the past.

The paper is well researched and raises some great points. GDP growth, inflation and corporate profit growth have been remarkably more stable over the last 11 years than over the previous 39.

This has been caused by a host of factors, including: less volatility in defense spending, less inventory volatility due to better inventory management, improved trade due to trade liberalization, more flexibility in the financial services industry due to deregulation, lower default rates due to better lending, and more efficient company financing due to private equity firms.

What could shatter this lower volatility and lead to falling financial asset prices? The usual: increased regulation, trade barriers, and geopolitical risks. These would all lead to higher inflation, lower efficiency, less flexibility and more volatile growth.

In other words, the risks are almost all political, and therefore very difficult to forecast. I think the political pendulum swings one direction and then the next, so I'm worried that all the good news over the last 11 years may not continue over the next 10.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

1 comment:

Rodrigo said...
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