In large parts of the financial community there is a strongly held belief that the problems which caused the credit crisis back in 2008-09 have never been properly addressed, causing many to suspect that it is only a matter of time before the ‘end game’ is upon us – the credit crisis Mk. II so to speak. I will in the following pages look at various ways the end game might unfold but, before I do so, I shall return to one of the subjects I discussed in the January letter – the end of cheap oil – which caused a flurry of comments and questions.

January each year brings with it a host of forecasts, many of which are 'pie in the sky' - silly predictions on equity markets, interest rates and currency movements. We are not in that game, but this is the first time we have written a letter in January. Why? Because we think investors should be focusing on longer term structural trends when analysing the future.

In the the last two Absolute Return Letters I have argued why one should expect global GDP growth to be below average over the next decade or so, why interest rates should, as a consequence, remain low and why equity returns should also disappoint. Not as in negative returns but below the levels we have grown accustomed to over the past 30 years. If you have read those two letters, none of this should come as a surprise.

The world is undergoing a radical shift towards lower economic growth at the moment. Some of the dynamics driving growth down are structural in nature (e.g. demographics), and even the most extreme monetary or fiscal policy will not change that. We are in for a period of lower, but still positive, global growth whether we like it or not. Despite the somewhat muted outlook, we continue to expect significant regional variations in growth and therefore also in interest rates and equity returns.

Political problems have escalated over the past seven months. Russia has been aggressive and so have extremists in certain Muslim countries. Having said that, financial markets seem to care about nothing but QE. Despite a growing disconnect in some markets between equity valuations and economic fundamentals, we expect the low interest rate environment to carry the equity bull market for a little longer, but eventually it will end in tears.

A century ago Argentina ranked as one of the wealthiest countries in world. Today it is a shadow of its former self. A long string of policy errors explain the long slide from riches to rags. Europe, like Argentina 100 years ago, is facing enormous challenges - as well as potential pitfalls - and the management of those challenges will define the welfare path for many years to come. Unfortunately, the early signs are not good. Our political leaders, afraid to face public condemnation, have so far chosen to ignore them.

Investors are overwhelmingly bearish on bonds going into 2014. In this months Absolute Return Letter we challenge that view and look at various reasons why the bond market may surprise most people and deliver a positive return this year.

QE has led to asset price inflation. That much we established in the November Absolute Return Letter. In this months letter we go one step further and look at whether we are now in bubble territory. Considering the strong bull-run we have experienced in 2012-13 it is perhaps surprising to learn that, in a historical context, it is not an outsized rally, nor are equity markets - with the possible exception of the United States - particularly expensive.

QE has had two noticeable and positive effects. It has saved the world from a financial meltdown not once, but twice, and it has had an overwhelmingly positive impact on asset prices, so in that respect QE has been a success. However, there are growing signs that QE may be beginning to impair economic growth and it may even cause dis-inflation, precisely the opposite of what was widely expected. For these reasons we believe it is time to call it quits and begin to tackle the root problem a banking industry still suffocating from bad loans.

Demographics captivate me. There are around 7.1 billion of us occupying planet earth today, going to 10 billion by 2050. I often think about how good old mother earth will cope with the additional 3 billion people we are projected to produce between now and 2050. More people translate into increased pressure on already scarce resources, but that is only part of the story and a story well covered by now.

EM currencies, stocks and bonds have struggled since the Fed signalled its intent to change course in late May. This has seemingly triggered an exodus of speculative capital from emerging markets but, as is always the case, there is more to the story than that. EM countries (ex. China) no longer run a current account surplus with the rest of the world, and this hurts global liquidity. It is not yet a re-run of the 1997-98 Asian crisis, but it has the potential to become one with all sorts of consequences for bond yields in developed markets, currency wars, etc.

A 300 bps rise in bond yields across the term structure would, according to their calculations, do substantial damage to financial institutions balance sheets. Holders of U.S. Treasuries alone would lose in excess of $1 trillion on such a move in rates, equal to 8% of U.S. GDP. Other countries would fare even worse. Losses on JGBs would equal 35% of the Japanese GDP, effectively wiping out its banking industry in the process. Holders of U.K. bonds wouldnt do much better, losing the equivalent of 25% of U.K. GDP.

Are markets efficient? This is a debate that has been on-going for decades. In one corner you have the proponents of the Efficient Markets Hypothesis. In their world alpha does not exist, or at the very least it is not sustainable. In the other corner you have the supporters of behavioural finance who see investors as being mostly irrational and suffering from all sorts of behavioural biases which create alpha opportunities galore. Out of this long lasting stand-off a new paradigm is emerging called the Adaptive Markets Hypothesis which aims to reconcile the two.

In the long run we are all dead, said Keynes. Maybe so, but we could be in trouble long before then. Investors appear preoccupied with central bank policy. We argue that investors are quite right in keeping their eye on the ball but, to us, it looks as if they are focusing on the wrong ball. The real worries for the long term are demographics and negative real interest rates and the effect these factors may have on equity returns.

The seeds of the next crisis have probably already been sown as a consequence of the lax monetary policy currently being pursued. Frustrated with the lack of direction from political leaders, most recently witnessed in the handling of the crisis in Cyprus which was a complete farce, central bankers from around the world are likely to demand change, but politicians will have to be pushed into a corner before they will respond to any such pressure. Hence nothing decisive will happen before the next major crisis erupts.

With real interest rates being negative in many countries we expect low returns on both equities and bonds going forward. Many investors have responded to that by allocating more and more of their assets to passive strategies such as ETFs. We believe it is the wrong approach for this type of environment.

"Who is afraid of currency wars?" asks Gavyn Davies in the FT. I have known Gavyn for 25 years and have to confess that he is way out of my league intellectually. He is one of the smartest people I have ever met and, thankfully, also one of the humblest. He rarely gets things wrong so, when I occasionally disagree with him, it always makes me slightly uneasy.

This month's letter focuses on the short to medium term factors that drive our asset allocation and portfolio construction. All research suggests that financial markets are not driven by economic fundamentals in the short to medium term, so why should the investment process be?

We are now five years into a crisis that just doesn't want to go away. Paraphrasing Charles Gave of GaveKal who wrote a supremely succinct paper on this topic only last week, policy makers continue to tamper with interest rates, foreign exchange rates and asset prices in general. They continue to permit deposit-taking banks to operate like casinos. They issue new debt to pay for expenditures when we are already drowning in debt. They just don't seem to get it. Albert Einstein once defined insanity as doing the same experiment over and over again, expecting a different result.

In this month's Absolute Return Letter we pick up the baton from last month. How does the current crisis actually affect financial markets? How do you overcome the low returns? What can you do to protect the downside risk in a high correlation environment? We argue that career concerns often lead to irrational decisions by professional money managers and that this provides opportunities for those who can afford to deviate from the norm.

This month we take a closer look at the root problems behind the current crisis. Too often root problems are confused with symptoms and the wrong medicine is prescribed as a result. We identify five root problems, all of which must be addressed before we can, once and for all, leave the problems of the past few years behind us.

This month's Absolute Return Letter picks up on the question we left hanging in the air back in May - is Asia a potential re-run of Europe? Although policy rates appear to be dangerously low, and thus encouraging further borrowing, Asia has come a long way since 1997 and there is no immediate risk of a financial meltdown. Australian property prices and commodity prices - in particular crude oil prices - are more likely 'credit event' candidates in our opinion.

Investors often behave as if they operate in a world of logic and certainty even when that is not the case. For that reason, history is littered with investors who have failed miserably. In this month's Absolute Return Letter we look at many of the pitfalls facing risk managers and we take a stab at where the next big crisis is going to surface. Our conclusion may surprise a few readers.

The UK may not be facing the same set of challenges as many other European countries but that does not mean that the next few years will be plain sailing for the British. Households are overextended, banks are highly leveraged and the pension model is deeply flawed. Meanwhile, the British government, obsessed with keeping the coveted AAA rating, is pursuing a fiscal policy which is well intended but entirely inappropriate.

Population will grow from 7-8.3 billion people over the next decade. Meanwhile, arable land across the world will shrink and living standards will continue to rise, with the OECD projecting 3 billion new middle class consumers over the next 20 years. Many of these people will change their diets in favor of more animal protein. Livestock is quite inefficient in terms of converting grain to energy, so the pressure on farmers to deliver more will be immense. We conclude that agriculture should be represented in every long-term portfolio, but farm land has already risen a lot in value.

Europe is going from crisis to crisis at the same time as stock markets climb higher. Meanwhile, investors are left confused. The key to understanding the apparent disconnect between stock market behavior and economic fundamentals is the aggressive policy being pursued by the ECB which has eased credit conditions in the crisis-stricken European banking industry. With more QE from the ECB in the pipeline, we expect equity prices to benefit.

Our industry needs a good old fashioned kick up its backside. Far too much mediocrity is rewarded for nothing other than destroying value.

The ink on the Greek rescue agreement has barely dried, and the feeling in financial markets is sombre yet again. However, investors have changed their focus away from Greece towards Italy - a change which could prove disastrous for the eurozone given the size of the Italian bond market. In this edition of The Absolute Return Letter we take a closer look at Italy's refinancing needs and suggest corporate bonds as an alternative to government bonds.

The current level of pessimism is quite overwhelming, in particular in Europe where the eurozone crisis has taken its toll on investor confidence. This has led to valuation levels we haven't seen since the dark days of 1981-82, just before we embarked on the 1982-2000 bull market - the biggest of all time. It is our view that investors will be amply rewarded if they begin to buy European equities at current levels, although it is a strategy that shall require both a solid stomach and some patience.

The old world is drowning in debt. Governments are responding with austerity programmes and near zero interest rates but neither will work. Economic growth will be required to get the escalating debt under control, but policy makers need to dig deep into the tool box for different ideas as to how to create this growth. In this month's Absolute Return Letter we focus on one particular idea which will greatly benefit economic growth at no cost to the tax payer - reform the mortgage finance system across the world, using the model developed by the Danes over the past 200 years.

So what does it mean? Near term, other U.S. financial institutions (Fannie Mae? Freddie Mac? JP Morgan?) will be downgraded as a result - perhaps as early as today or tomorrow. Following that, if Standard & Poors wants to maintain whatever credibility it has left, it will probably have to downgrade a few sovereigns as well. France springs to mind; it is not far behind the US as far as profligacy is concerned, and it may prove difficult for Standard and Poors to justify the AAA rating it currently assigns to France.

If Portugal and Ireland, and eventually also Spain and Italy, increasingly get dragged into this crisis ? and everything I see on the horizon suggest they will ? the ?400 billion the ECB has pumped into the banking sector in those countries so far will be pocket money compared to what will be required going forward. At some point the creditor countries will say enough is enough. And if the politicians don?t know when to say no, the electorate will do the job for them. The ECB?s strategy for now seems to be one of buying time.

DSK is not the only one in need of a bailout! As the sovereign crisis intensifies - and it will - bond yields in some countries will go higher. But they won?t go higher everywhere. Demographic as well as technical factors (e.g. Solvency II) will drive ever more money towards bonds, and that money will have to go somewhere. Germany, Switzerland and Scandinavia are probably the safest bets in terms of where sovereign bond yields could fall further. You should also expect high quality corporate bond yields to trade through sovereign yields in many countries. The trend has already begun.

This month we take a closer look at oil and reach what many of our readers will probabaly find a surprising conclusion: We believe that we are approaching the end of the oil era and that oil prices will undergo a substantial correction over the next several years. But we cannot be very precise on timing, as there are too many variables at this stage. Our conclusion is based on 3 observations.

Woody Brock is advocating a regime change. Throw away the generally accepted approach of two generations of investment ?experts? and start again, is Woody?s recommendation. As a practitioner, I certainly recognise the limitations of MPT and I agree that, in the wrong hands, it can be a dangerous tool, but there is also a discipline embedded in MPT which carries a great deal of value. And, in fairness to Woody, he does in fact agree that you can take the best from MPT and mix it with a good dose of ?common sense? and actually end up with a pretty robust investment methodology.

Two remarkable events unfolded during the month of February. One cleared the front pages all over the world. The other one barely got a mention - outside of its home country that is. Both have the ability to derail the economic recovery currently unfolding. The first one is not surprisingly the uprising in the Middle East and North Africa. The other one is perhaps less obvious; we are referring to the Irish elections. We take a closer look at both of those events and what the implications may be for financial markets.

We celebrate the Chinese New Year - the year of the rabbit - by taking a closer look at what is now the second largest economy in the world. We embrace the longer-term opportunities which present themselves, but we also discuss some of the near term challenges, which include uncomfortably high inflation combined with surprisingly weak economic growth towards the end of 2010. Enjoy the read!

In the following I list a number of risk factors which I believe investors should give serious consideration, but I do not for one second pretend for that list to be exhaustive. Neither should you read anything into the order of which those risk factors are listed. If you want my assessment of how to rank the various factors, you need to take a look at the risk scatter chart at the end of the letter.

The world is in an unprecedented situation in which all four major trading currencies (EUR, GBP, JPY and USD) face serious challenges. Not all four major currencies, however, can fall at the same time. Currencies are unique in the sense that they are relative as opposed to absolute trading objects. You don't just buy dollars. You buy dollars against some other currency. The scaremongers may have their day in the sun, but ultimately common sense will prevail and currency traders will have to go back to focus on housing starts again.

On 1st January 2013, Solvency II, a new directive governing capital adequacy rules in the European insurance and life insurance industry, will come into effect. Going forward, European insurers will have to be able to pass a 1-in-200 years' event stress test, which has been designed to give the industry enough of a cushion to withstand even the most severe of bear markets without being forced to sell. Risky asset classes such as equities, commodities and other alternative investments will be assigned much higher reserve requirements than less risky asset classes such as bonds.

Austerity hurts domestic economic growth, and all those countries facing harsh austerity programs over the next several years will thus realize that the only way out of the current predicament is through higher exports and/or lower imports. We cannot all export our way out of our problems, however. Somebody will have to do the imports. Lower economic activity will again lead to lower tax revenues for the public sector; it is a very unfortunate and rather vicious spiral which is also very deflationary.

This month's letter is different. Our usual ramblings about the dire outlook for the global economy have been put aside for a while. Instead we focus on a couple of ideas for equity investors who have grown frustrated trying to beat the market - which is very difficult indeed. We do make some rather unflattering comments about active managers, but please note that these are specific to the equity space. In other, less efficient, asset classes, active managers often do much better than is the case in the equity world.

It should be blatantly clear that Greece is by no means the only country at risk of falling into the much dreaded debt trap. The United Kingdom, the United States, New Zealand, Spain, France, Portugal and Australia are all in dangerous territory and Ireland is in very deep trouble on this account. This cross-European contagion risk threatens the very existence of our banking system, and it is this risk that French and German leaders are thinking about when they say that Greece will not be allowed to go down.

Investor allocation to commodities has grown dramatically in recent years - to the point where commodities have become a mainstream asset class. Commodity prices have thus at least partly been driven not by fundamental demand but by demand from financial investors eager to diversify their equity risk and attracted to the seemingly high probability of generating uncorrelated returns. What these investors do not seem to understand, however, is that now that traders themselves determine market prices, the promised land of uncorrelated returns is little more than wishful thinking.

An echo bubble is upon us. Echo bubbles are the children of primary asset bubbles, and emerge when monetary authorities respond to the bursting of a primary asset bubble by slashing policy rates. Extraordinarily low interest rates are currently encouraging another bout of excessive risk taking. If policymakers raised rates now, however, they would almost certainly kill the fledgling recovery. The pressure is therefore on monetary authorities to keep rates low and feed the new bubble. Investors should steer toward assets that benefit from high volatility.

Aggressive advertising feeds us the fallacy that as long as we invest for the long term, equities will always provide us with solid returns. This may be true if your investment horizon is 30 or 40 years, but most people do not start saving for retirement until they are in their 40s. Hundreds of millions of baby boomers are now chasing whatever returns they can to ensure that they can retire in relative comfort. Jensen also examines the relationship between net private savings, foreign capital inflows and government debt.