Balance

I don't see too many imbalances in the system. Equities appear fairly valued. The economy appears to be getting back on track. I guess bonds are the obvious area of imbalance, both in terms of the amount of debt outstanding and the price paid for that debt.

Of course, balance is predicated upon confidence and if confidence evaporates, then balance disappears along with it (or at least adjusts to a lower equilibrium).

The accumulation of overweight (aka as imbalance) is greatest in the sovereign area. But so long as sovereign's can maintain confidence, they can continue to accumulate liabilities.

Look for market reverberations (like in the summer of 2007) for signs of disequilibrium. Japan is the most obvious candidate.

Until then, party like its 1999.

Dead Man Walking

Globalization v 1.0.

Disaster exhibit no. 1: Japan

Cause: selfishness

I don't think we're at the point of no return (even in Japan), but the "writing is on the wall" for the developed nations of the world. They have lived beyond their means for too long, have made too many promises they are unlikely to deliver on, and are currently bailing as fast as they can to avert the piper. Unsustainable debt levels, unrealistic standard of living expectations, too many unfunded future promises, the need for massive infrastructure investment (water, power, transportation, alternative energy, carbon reduction), a failure of political leadership, the changing balance of global wealth, rising taxes/interest rates, and the demon of demographics are all leading us closer to a point of no return. The developed nations of the world are on notice. Now if they and the current system go down, then the developing nations will also suffer correspondingly (but because they are coming off much lower bases, their recovery will be faster and greater).

The ultimate result will be a reordering of global and domestic institutions (legal structures, governance structures, political structures, financial structures, economic structures, security structures, labor structures). China will experience a very severe recession (it is a 10 year bubble waiting to burst), but will arise stronger. India takes advantage to play catch-up.

Time frame: anywhere between 5-30 years.

P.S. Life will go on. People will work and play, love and enjoy life. New technologies will enhance our lives. For most, we will only cursorily be effected by these monumental shifts. I would also add that this doesn't necessarily imply terrible markets over the whole period. Just as always, there are likely to be periods of significantly positive returns and periods of negative returns in equity markets. The trick will be correctly understanding, interpreting, and navigating the winds of change.