This is a fair call right now.  Professor Shiller shows the housing prices are down about 15.8%, year-over-year, through May.  If you go back further, from the top in housing prices, we are down 18%.  Morgan Stanley, Goldman, and others expect the total decline to be 25% to 30%.  Probably another 10-15% decline is coming.  Nobody can call this.  Of course, there is a local aspect, with places like Miami and Las Vegas hit harder than others.  Bernstein is right on target.  There needs to be a stabilization of prices, and inventories have to be worked off.

This is one of the reasons we have a higher-than-normal cash position.  We are normally at 5%; now we are at 14% and we were as high as 16%.  We remain cautious, but are willing to put a toe in the water with the equities markets.  [Morgan Stanley’s recommended asset allocation for high-net-worth Moderate/Balanced portfolios is shown to the right.  They also have separate recommendations for Conservative/Balanced and Aggressive/Balanced portfolios.]

Morgan Stanley is looking at a 4.6% CPI this year.  We know these numbers don’t reflect everyone’s experiences.  Individual budgets do not track the government’s calculations.  We are looking at 3.5% to 3.6% next year. 

As for hyperinflation, advisors need to worry about it a little bit and have a mental check box for it.  There has been huge monetary growth because of a flood of dollars into other countries.  This has not been “sterilized,” and has increased foreign countries’ inflation rates.

As a result, the inflation rate for 42% of the world’s 6.5 billion people is over 10%.  Almost half the world is living with double-digit inflation.

I don’t think we have a risk of hyperinflation, like the 10,000-plus levels in Zimbabwe.  The bond market vigilantes have their hand on the steering wheel, alongside the Fed.  It is like driving your car, “The chances are that we saw a bottom in inflation and interest rates in 2003.”if you start to doze off, your spouse will quickly put their hand on the wheel.  The bond markets are the brakes and governors for inflation getting out of control.

The markets have benefited from a 20-year tailwind, the result of increased trade, declining inflation, and interest rates, and decreased labor costs, and this has increased P/E ratios.  I am shocked there has not been a bond-market rebellion over the risks of higher inflation.  Sometime this may very well reverse.

The chances are that we saw a bottom in inflation and interest rates in 2003.  The only thing that would cause us to alter our forecast is a global shock, such as war, new findings on climate change, or an epidemic like the bird flu.

I agree 100%.  We don’t want to be currency traders.  I have seen portfolios with 20% or more exposed to currencies through asset positions and through cash.  Currency exposure became easier with new ETFs.  We try to keep pure currency exposure on its own to a minimum, and confine it to equity allocations in the developed and emerging markets, including Canada.  Advisors need to help clients avoid currency speculation.  Our currency overweights are done through products like international TIPs (symbol WIP).  These State Street products are a few months old, and are good for people who want a little extra currency exposure.

We get currency exposure through assets and not through currencies themselves.  Occasionally we get exposure through cash, and sometimes through foreign bonds.

The currency markets are dominated by traders and huge corporations.  Advisors can’t expect to pick them off and make a profit.