Monthly Letter July 2012
Will the world be able to muddle through? The concept has been popularized in the last couple of years as a symbol for a world that has gone to being low growth mainly because of a need to de-lever. Muddling through is not good in any traditional way. It means that the world will grow at a slower pace, corporate profits will grow slower, you need more capital to do business, banks will need more capital and so on. Muddling through does not go hand in hand with a bullish view on equities. Muddling through is slow and boring. Your average muddling through-man walks and talks slowly and he is long bonds and he hates risk. This might not be a bad thing unless he is managing money. So what is the market telling us? We believe that if Europe manages to muddle through this crisis then European assets are too cheap, at least in a relative sense. If the euro holds and none of the euro countries are forced out or leaves voluntarily then there is quite a fat tail risk that will be/should be taken away from European asset valuation.
The market reaction to Mario Draghi’s statement at the end of July is interesting. He said that the ECB will do what it takes to save the Euro. The market reacted with a violent move up, admittedly after a quite severe sell-off in the preceding months.