There has been a great deal of discussion, on our blog and more broadly, on the question of which direction the economy, and in turn the markets, will take in the months to come. I seek to highlight a forceful voice of caution here--that of Jeffrey Gundlach, chief investment officer of TCW. Gundlach argues convincingly that we're not out of the woods yet. Indeed, he says, trouble could come sooner rather than later for risk assets. (See also my conversation with Gundlach and Bob Rodriguez earlier this year for Morningstar Advisor magazine.)

In a recent meeting here at Morningstar, he told me that the debt binge that brought the United States to the financial crisis was not created overnight. In fact, he isolated a number of stages to the debt explosion, which began in the early 1980s and by the first quarter of 2009 had left total credit market debt at roughly 375% of gross domestic product, its highest level on record.   More 

As everyone now knows as a result of late-2008's financial crisis, return correlations between most asset classes, originally thought to behave differently one from another, can converge during times of extreme market stress. One fascinating manner of thinking about this problem is discussed in a PIMCO market commentary by Vineer Bhansali.

Bhansali argues that we must progress from thinking about investment diversification in term of asset classes to thinking about risk factors and accounting for them independently of how they're embedded in the range of asset classes available to investors. In other words, although people expect the fixed-income portion of their portfolio to bolster returns as the equity side collapses, this view ignores the fact that many bond sectors themselves hold an equity risk factor.   More 

When reading over many market commentary pieces lately, I'm struck by the lack of consensus about both the fundamental trajectory of the economy and the sustainability of 2009's equity market rally. Two of the positions contending in this debate were put forward in a pair of op-ed articles in Tuesday's Financial Times.   More 

Early 2009 saw some interesting sparring between top political and economic officials in Washington and Beijing over the somewhat esoteric, yet vitally important issue of Chinese currency convertibility (or lack thereof).

The row began as U.S. Treasury Secretary Timothy Geithner accused the Chinese government in Congressional testimony of currency manipulation. That shot over the bow was quickly followed by statements by Chinese government officials of the need to diversify from the U.S. dollar as the international reserve currency of choice. (China is thought to hold roughly $1.3 trillion in USD-denominated U.S. government-backed debt, roughly 60% of its total reserves.) The Chinese also criticized the United States' credit quality erosion.

Political grandstanding aside (which has since calmed), there are some good reasons to think that China may at some point in the not too distant future move to a convertible (floating) currency regime, as outlined in a special report published by Asia-specialist firm Matthews International Capital Management. The report states:   More 

There has been a good deal of ink spilled on the question of whether trouble in the commercial real estate market could catalyze a second dip in a fragile recovery. Since at least mid-2007, the commercial mortgage-backed securities (CMBS) markets have been on a wild ride, and we've seen several occasions in which investment managers rushed in to purchase "undervalued" CMBS only to get burned by further losses. Many asset management firms were buying up CMBS in early 2008, around the time of the Bear Stearns rescue, and though the securities appeared to recover that summer, that market declined precipitously in the wake of the Lehman failure.   More