May 2010 Issue: Key Points

We continue to believe that many asset classes are overvalued, that financial markets are in an increasingly fragile state, and that investors are underweighting the probability of a return into the High Uncertainty regime.

We continue to be haunted by a rhetorical question our friend Russell Taylor (the excellent British financial writer) posed two years ago, during a discussion about the deceptive calm that prevailed during the early years of the 20th century: Are we reliving 1910? Following on last month's in-depth analysis of the future of China, this month's feature article takes an extended look at two other critical aspects issues that strongly bear on the answer to Russell's question. The first is the global leverage crisis. We examine how three different approaches to resolving debt crises -- growing your way out of them, intense austerity, and default -- apply to the debt problems faced by the household, non-financial corporate, financial and public sectors. The second is the growing crisis of legitimacy for leaders of political systems around the world. We conclude with the asset allocation implications of two possible scenarios -- one characterized by muddling through just short of widespread sovereign defaults, and the other characterized by high inflation, many sovereign defaults, and the collapse of the global system into a world dominated by blocs and restrictions on cross-border capital and trade flows.

| Uncorrelated Alpha Strategies Detail | Overview of Our Valuation Methodology | Table: Market Implied Regime Expectations and Three Year Return Forecast | Global Asset Class Returns | This Month's Letters to the Editor: New Advocacy of Dynamic Asset Allocation; How to Limit Volatility While Still Achieving the Goal of Hedging Inflation Risk? Many Asset Classes Overvalued Today, Would it be Prudent to Reduce One's Exposure to Them? | Product and Strategy Notes: "The $100 Billion Question" by Andrew Haldane; Confirmation of Diversification in Portfolios; Growing Concerns of Credit Quality; Inflation Risk and the Inflation Risk Premium; Windham Capital's Mark Kritzman - Principla Components as a Measure of Systemic Risk; Timber; and Algorithmic Trading Programs - the Crash | May 2010 Issue: Key Points | Table: Fundamental Asset Class Valuation and Recent Return Momentum | Investor Herding Risk Analysis | Feature Article: The Critical Challenges Posed by Leverage and Legitimacy | Global Asset Class Valuation Updates Detail through April 30, 2010 |