Frank Suess
Thursday, December 29, 2011 – by Frank Suess
The four most expensive words in the English language are, "This time it's different."~ Sir John Templeton
Sir John knew what he was talking about. Every excessive boom in financial markets, whether it's an entire asset class or an individual stock, appears to share this common and historically repetitive characteristic. People know of imbalances. They know that under the given circumstances people will get burned. Yet they get caught up in the belief that this time things will be different, that a recovery is right around the corner, that governments will be able to turn things around, and that the good times will be back soon.
Unfortunately, this time will NOT be different. As the year 2011 is rapidly and irresistibly nearing its end, despite all the volatility, turmoil and challenges the year held in store for us, I feel urged to look forward and share a summary outlook of what might be headed in our direction in 2012.
As to not keep you from joining your families for the more important matters of Christmas and the holidays, I will try to make it very short and provide you with an overview of our current 'Big Picture Scenarios,' which we define on a regular basis as part of our four-monthly BFI MAP(TM) Big Picture Review. This review, and the scenario analysis that goes with it, is a key ingredient to our portfolio management's top-down asset allocation process.
In today's commentary, I'll provide you with an overview and brief description of how we employ these scenarios in our allocation model. I'm hopeful that this summary overview will give you some food for thought as we head into 2012. And, I look forward to discussing more of it as we enter into the New Year. I do think it is paramount that you not be fooled by the mainstream media 'sedation chimes.' This time will NOT be different. In fact, it may well be a lot worse.
BFI MAP(TM) Big Picture Scenarios
The following image provides you with a summary overview of our Big Picture Scenarios developed as part of our latest Big Picture Review in November, 2011. This is a summary of the scenarios and a reflection of our expectations on the possible economic, financial and geo-political developments over the next 3 to 24 months.
This summary overview does not purvey our more differentiated conclusions and considerations with regard to the various global regions (US, Europe, BRICS, etc.). That would go beyond the scope and scale of this Update. Although those differences are important to consider, we are also of the opinion that the global economy has become sufficiently inter-linked to work with global scenarios that summarize our expectations of the core themes and developments, which will ultimately affect all regions. That said, I do admit that the scenarios, based on the continued (albeit retracting) economic dominant influence of Western economies, are focused on Europe and America, particularly in terms of the scenario titles we have selected.
BFI MAP(TM) Big Picture Scenarios (Big Picture Review November, 2011):
The scenarios we have defined are the scenarios that we consider most possible in consideration of all the factors and trends we are aware of. Obviously, no single scenario will be completely accurate and reflect the global economy entirely. They do, however, provide us with a structure to 'play around' with different hypotheses and, based on our time horizon and probability expectations (see below), develop BFI's asset allocation models and investment strategies.
Scenario Probabilities and Suitable Asset Classes (Big Picture Review November, 2011):
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