This blog is part of a new series on Institutional
Investor entitled Global
Market Thought Leaders, a platform that provides analysis,
commentary, and insight into the global markets and economy
from the researchers and risk takers at premier financial
institutions. our first contributor in this new section of
Institutionalinvestor.com is AllianceBernstein, who will be
providing analysis and insight into equities.
Investors recent actions suggest two somewhat
contradictory fears. Some believe the world will end in the
debasement of major currencies and hyperinflation (witness the
price of gold). Others believe it will end in a great
depression (witness Treasury bonds low yields, the
Standard & Poors downgrade notwithstanding).
Thats not to say investor reactions to current
conditions are entirely irrational. After all, investors
worldwide are at the mercy of highly uncertain government
policy. And you can still make a lot of money joining the
multitudes in crowded trades such as Treasury
bonds, but youd better exit before the outflows
One culprit in the 2008 financial crisis was the collective
willingness to believe in a great moderation. This
led investors to extrapolate a period of highly unusual
stability in asset prices into the indefinite future and
hence dramatically increase their financial leverage.
On the other side of the crisis, investors are prone to
equally extreme assumptions. This time theyre
extrapolating that the intense volatility of 2008 will be with
us forever. In fact, current long-dated options imply
volatility over the next ten years that has actually occurred
in only one period: the Great Depression (see display
The question is what the potential catalysts for the next
reversal might be. Key elements would be providing economic
stimulus and liquidity in the short term, as well as a credible
long-term framework for addressing severe structural problems.
More specifically, a solution might include:
Congressional agreement on providing aid to U.S.
Monetary easing in the emerging markets (increasingly
a possibility as their economies cool off) and currency
A coherent framework for addressing the long-term
debt and deficits in both Europe and the U.S.
A global drop in commodity prices, which might do the
seemingly impossible boost consumer spending
A repricing of U.S. risk assets as a result of a
pickup in M&A activity or increased foreign direct
investment by China or the oil-producing nations
None of the above is happening quite yet. But there are two
positives that investors are overlooking in their dash to the
Higher consumer spending in the emerging countries
and not just for staple items as their middle
classes grow should have a ripple effect globally as the
developing world buys and sells more goods.
There is unequivocal evidence of underinvestment in
capital equipment in the developed world. Businesses can
stretch their plants and equipment only so far; the tipping
point is on the near horizon.
So far, investors are having none of it, to the point that
stock dividend yields are beginning to exceed bond yields.
If you dont believe the world is ending I do
not youd want to own equities, particularly
large-cap companies with superior relative growth and
demonstrated pricing power, as well as those sitting on
stockpiles of free cash. Many of those cash-rich companies are
not yet returning cash to shareholders, but eventually the
money will start flowing and their stocks will be rerated
Arguing against the current focus on tail risk in light of
our collective 2008 experience, the ongoing European debt
crisis, slowing global economic growth and political gridlock
in the U.S. may seem like starry-eyed optimism. But the
response of asset prices to recent events, excessively
influenced by 2008 and our desire to avoid making the same
mistakes, is creating highly attractive investment
The views expressed herein do not constitute research,
investment advice or trade recommendations and do not
necessarily represent the views of all AllianceBernstein
portfolio management teams.
Vadim Zlotnikov is chief market strategist at