Market Overview In the calendar year 2013, the MSCI World Index rose 26.7%, while in the U.S. the S&P 500 Index increased 32.4%. In Europe, the German DAX increased 25.5% and the French CAC 40 Index rose 18.0% during the year. The Nikkei 225 Index increased 56.7% over the period. Crude oil rose 5.7% to $98.42 a barrel and the price of gold declined 28% to $1,205.65 an ounce by year- end. The U.S. dollar rose 20.8% against the yen and declined 4.3% against the euro.
When we consider the markets' strong performance in 2013, it might appear that we have an all-clear signal based on higher equity valuations, declining credit spreads, normalizing longer-term interest rate expectations and lower gold prices. But despite the sense of relief implied by asset and commodity price movements, we believe that there are still vulnerabilities in the financial architecture. In particular, when we look at household and sovereign debt levels in the U.S., the country carries more debt than can be naturally paid down through domestic household savings without having to resort to either liquidating assets or imposing higher taxation on assets. Through a generational illusion of policy-induced macro-economic stability, we have built a system dependent on capital markets liquidity and repressed interest rates which camouflage the debt's full impact. This system is vulnerable to confidence shocks, particularly since broker-dealers now hold fewer securities in inventory in the wake of reforms imposed after the 2008 crisis. We believe that what we are witnessing is a Keynesian mirage. Easy monetary and fiscal policy has helped sustain corporate profit margins and valuation multiples, which, in turn, has had a positive ripple effect—boosting net worth and job prospects, encour - aging investment and consumer spending (which otherwise would not have occurred) and lowering household debt service ratios (the percentage of one's income spent paying off interest and amortizing loans). Continue Reading »