We yearn for improvement, yet do not wish to lower our standards of evaluation. Year-over-year uptrends are indeed showing some progress, but dont factor in the bigger issues of jobs loss, savings depletion, home and portfolio devaluation and most importantly the loss of innocence/confidence that our institutions know how to do it better and can help us to sustain enthusiasm for something better ahead.

Like a train wreck, the global markets have maintained a vicious shakeout whose collapse is frightening not only for the Europeans but for America and its trading partners. For the past several months we have been building a slow crescendo which, like a great symphony, has many codas yet to play. Clearly, a correction to overborrowing, overspending, and over-expecting is in place. Turbulence and volatility, both in the markets and political discourse, is the order of the day. The foundation of trust which underpins all capital exchange and political governance is nearly in default.

Any euphoria about last weeks intermittent triple-digit rallies has to be couched in a context of longer-term developing downtrends and a desire to see any positive news as bear-busting. Alas, the ongoing downcycle persists and is likely to be the primary determinant to market performance for the foreseeable future. As junctures go, last week represented a few days of post-holiday welcome relief, but hardly the initiation of a change in secular direction. The headwinds are too daunting when analyzing market and sector relative strength quotients.

Incredibly low interest rates are telling us a story that few seem able to decipher. For well over a year, interest rates on cash deposits have been near zero, while the reward for being a long-term Treasury investor has hovered below 3%. The last time rates coalesced around 2% was more than a generation ago. Concurrently, the economy has lost buying power, jobs, and valuation. As every global bourse in my universe struggles to gain upside traction, a worldwide decline in sentiment, earnings acceleration, and pricing power has diminished the foundation of free-exchange and capital markets.

A violent shakeout in global equity bourses is reverberating to U.S. shores, and exacerbating the fear that a second global credit/equity crisis is likely. In response, the domestic equity markets shook significantly last week, despite intraday bargain-hunting and attempts to forget altogether an unresponsive fundamental framework. In hindsight, my call towards a more conservative asset allocation model this past summer was fortuitous. The financial markets dont trust the underlying fundamental statistics, and the public doesnt trust the financial markets.

For those of us seniors, the problems are now owned by the next generations. For them, it is a striking and overwhelming legacy which, not of their doing, they must attempt to fix. If asked by a younger person, your son or daughter perhaps, can it get better? can you respond with a straight face and without remorse that it might? I am not a pessimist. I worry, however, about the effect of our economic transgressions upon the psyche of young adults and children.

The Fed, and a majority of global state treasuries, have made the decision that keeping money inexpensive is at least one of the tools they can use both to sustain economic growth. This policy has been a boon to those with money, and a severe hindrance to those without. A vexing conundrum exists when monetary policy is designed to promote the flow of money into dynamic expansion but the spigot gets blocked because psychology and momentum are running in the opposite direction. In the meantime savings rates have nearly disappeared, along with whatever savings the losers in this game had.

There is one certainty about todays markets: nothing is certain. Traversing the economic landscape is akin to walking across a room with a trap door looming unseen. It is not just equities which pose this risk. Austerity programs worldwide are forcing interest rates down, and bid prices to fall as well. In effect, waiting until maturity is ones greatest hope for financial recapture in a bond portfolio. As strongly as capital gains drove bond investing during a period of declining rates, strategic options dont exist anymore as long as interest rates remain pegged to these low levels.

A fixation with tangible metals is both forward looking as well as reflective melancholy. Because the price of commodities had risen in the past, people might expect it to do so again. In the case of commodities trends lose their appeal when everyone already knows that the valuations have become inflated. In todays case we have been in a twelve year commodities price expansion. While some might try to eke out the last few cycles of profit within that trend, others wonder how much greedier can the trend enthusiasts be. There are no linear cycles that last forever and no free lunches.

When the Federal Reserve Board runs out of tools to fix the economy, its an even worse scenario. They are not simply useless, they become irrelevant. And so, last week the Fed meekly bought more long-term treasuries in an effort to salve the economy by keeping interest rates, all across the time spectrum, low. Instead, what they wrought was disdain, confusion, and declining confidence. Ive said it before. Low interest rates today are analogous to giving free drinks at closing time. You can lead a horse to water, but you cant make him spend.

September has been a wild ride for global markets, and October is expected to bring more of the same. On the horizon is a key inflection point at which portfolio allocation might either protect or bury any portfolios. As global economic recovery sputters there is a new urgency about either continuing on a portfolio path of growth, or reverting altogether to a default cash position. Within each scenario, however, is a psychological uneasiness that borders on shock and awe. It is much more difficult to manage clients downside risk appropriately, than to pick winners when all stocks are rising.

With the market recovering only slightly last week, I am once again reminded of my admonition that the market and the economy are not interchangeable, one-and-the-same phenomena. In fact I coined the term parallel disconnect to refer to two paths which seemingly move in lock-step, but which are not innately connected in any way. To be sure, they are sometimes confused one for the other, but in real terms the events and triggers which guide one do not necessarily, or specifically, impact the other.

A number of factors have conspired to make investing not the same game it used to be, not the least of which is the excessive need for speed and immediacy of information. Keep in mind that before the internet, fortunes were also won and lost. The difference is access and acceleration of information digested. The human brain just isnt wired for that type of speed when processing data. As a result, many investors are unprepared for the impact of exogenous events upon their plan. When the market moves at a snails pace, it is unacceptable, when it moves at warp speed it is too fast.

A number of factors have conspired to make investing not the same game it used to be, not the least of which is the excessive need for speed and immediacy of information. Keep in mind that before the internet, fortunes were also won and lost. The difference is access and acceleration of information digested. The human brain just isnt wired for that type of speed when processing data. As a result, many investors are unprepared for the impact of exogenous events upon their plan. When the market moves at a snails pace, it is unacceptable, when it moves at warp speed it is too fast.

A new political dynamic is overspreading the globe. It's a force not only of political will, but fiscal interests. It sets up a defensive, cash-only paradigm which favors no one but those who have capital. Ironically, this new renaissance is concentrated not in regions of vast wealth already, but in the more distressed areas of the globe. The implications are vast. Foreign investment in these regions in agriculture, water purification, industrial development, and manufacturing could prove to be the next revolution in capital spending that saves the markets and people in need at the same time.

Has the markets crisis been averted because Congress passed a debt-ceiling bill or because the bear panic last week wiped out a lot of doubters? Not at all. One can forget the immediate knee-jerk responses. The most powerful ally we have now is time. The indecision and ambiguity which triggered the panic is still firmly entrenched in boardrooms and kitchens around the globe. Multiple solutions only confuse the markets direction. While spending and stimulus are probably whats needed to avert a recession, neither is going to happen in this climate of political intractability.

Historically, the most potent bull markets and vibrant economies are led by significant consumer demand and corporate capital expenditures. We know, today, that corporations are sitting on cash reserves and that consumer demand is lacking owing to confusion and concern about fiscal and monetary policy and governments direction. In addition, there has been a drastic decline in disposable household spending, shifting the burden to government intervention to keep production incentives viable.

Since the end of the internet bubble in the late 1990s, the medias search for the next it sector of the market has been incessant. Let me suggest an area for your consideration: crops and farmland. While a debate rages about climate change and global warming, it is indisputable that the search for fertile natural resources is basic to humankind. Today, any magnitude of population shift is based less upon need than vanity but a focus upon survival in some distressed areas redirects our attention to the search for replenishable natural resources.

Technology has indelibly changed our lives. One sees this evolution in the way we process information and the multitude and complexity of decisions we are called upon to make but the overriding issue to me is not whether we have the technology to execute complex decisions but whether or not there is an imperative to do so.In other words, simply because we have it does not necessarily mean we have to use it. This is particularly relevant to the financial industry because the complexity of market derivates, multiplied by infinite factors has created a system that cannot support its own weight.

As governments are forced to shift policy from spending to saving, the instruments they have at their disposal become obsolete without consumer support and/or confidence. The acquisition of ?things? paid for by leverage, margin, and debt is a fruitless endeavor in today?s climate. As a result a truer ?new paradigm? must develop which: Shifts the focus from hard asset leverage to savings and cash, Raises secular interest rates, Globalizes investment capital, trade, and profitability and Provides for a fairer, equal playing field in financial assets.

Last week, the market digested less-than-spectacular end of quarter data about earnings, interest rates, valuations, investor sentiment, inflation and exports and took a lurch towards the downside. Investors and observers are growing weary over interday advances which recede at the slightest inference of declining fundamentals.The market wants growth. It needs sustained positive valuations because the flow of investment capital requires a secure landscape. If manufacturers slow down making things, or hiring people, the drip of capital becomes inert.

Market trading is driven more and more by machines talking to each other triggering buy and sell orders that are algorithmically pre-programmed. Gone are the days of floor traders executing the specialist?s book, doing favors for each other and ?working the bid.? Today?s syncopation is well orchestrated and devoid of human response or emotion. Machines aren?t the enemy, however. They are simply the new reality. As the burden of making trillion dollar bets shifts from to machine, greater efficiency and lack of peer pressure gives the markets a new benchmark of necessary change.

?Which way is the market going?? That?s one unanswerable question. What we do know, empirically, is that the global credit markets are poor; pricing in most stocks is inefficient and governed by short term trading and speculation; sustainable economic growth is non-existent; and inflation is rampant in consumer goods and raw materials. Even if we?re correct with our asset allocation, we are playing defense and hoping to minimize any downside damage. If hindsight and backtesting are any indication, I would posit that the current equity market continuum is poised for more downside potential.

So what is the state of the economy and the financial markets? Poor. Whether it?s drought, weather disasters, human disasters, or economic uncertainty, the markets seem to be going nowhere. The most potent markets are driven by cash, confidence, and confluence. But with two bear markets in the last decade, behavior and attitudes have changed. There has been a drastic decline in consumer confidence brought on by the dot.com bubble and by the horrific events of 9/11 and their reverberations. No matter how accessible cash became, it only seemed to lead to some kind of disaster.

The funny thing about perpetual motion devices is that they give the impression of constant, and sometimes complicated, activity, but in reality they don?t actually go anywhere. Such is the state of global bourses, traversing an active up, then down, then up again pattern, yielding a great big net-nothing. The problem, though, with such market-driven perpetual motion is that unless the ?axis of ascent? is rising it must either be neutral or falling. And in today?s climate since the run-up in markets dating back to 2008, many securities are doing just that, declining or going nowhere.

Last week, I wrote about a phenomenon in global markets ?at the top? as being almost like perpetual motion inertia, constant movement, seemingly ending up static. Why does that exist, and what can we do to enhance its portfolio benefit and to reduce its incumbent risk? I believe that today?s risk derives from overvaluations created from ?efficiencies? which magnify profitability, but don?t reflect declining top line revenue or demand. Indeed, as stock prices have migrated upwards, relative strength quotients within my proprietary measurements have disconnected, instead moving downwards.

Investors cheered the execution of world terrorist Osama Bin Laden last week, by parking money in defensive sectors such as Non-Cyclicals and withdrawing from tangible assets while they waited for what many believe might be an inevitable disruption and reprisal. Obviously, patriotism was running high but confidence was not. Can the markets persist in gaining new capital inflows, or will money recede in cyclical fashion into cash and defensive investing? It depends on whom you ask. Speculators see exogenous moments like this as reason to gamble short-term in currency exchange.

It looks to me as if some are confusing a market rally, an extension really, for an economic revival.The Fed Chairman declared last Wednesday that we are only half-way through a decade?s long process of recovery. The primary engines of capital gains today are price pressure, speculation, natural resources and inflation.It?s no wonder that Energy, Basic Materials, and Technology are in the vanguard, while ?traditional? front-end engines of economic prosperity languish.At first blush this reveals that the consumer is not the driver of prosperity at this time.

As the markets fumble and roil, bounce intraday from Fed pronouncements and geopolitical unrest, should we be cautious or aggressive at these levels? Although the averages defy gravity by maintaining lofty valuations, I would think twice before betting the farm on its continuation. Although most data indicate that we are ?turning the corner? from recession, the same risks that got us in trouble originally still exist for the most part. In addition, as if climbing a ?wall of worry,? the more robust the numbers get, the more frightened some become.

Acknowledging that all market activity is cyclical, not linear, I am often amused at the reaction by investors to each day?s trading results and the media commentary that follows. I am often asked by the media to characterize a market?s daily events, as if one might create a justification for volatility out of context. I view this day-after commentary as specious, at best. It takes days/weeks/years for real trends to evolve. In my methodology and study of the market it is most often these secular, or generational, themes that most resonate upon asset allocation and equity selection.

Every Year, every new calendar quarter in fact, brings a heightened sense of anticipation about market performance. In its proper perspective, we have a unique demarcation that allows us both to look back and to look forward. Whether we are ?licking our wounds? from a beating we took previously, or rebalancing our assets and expectations for future success, investing is by its nature a regenerative endeavor, always filled with hope. That is why I find it almost comical that day-traders, hedge fund managers and strategists calibrate their successes, or failures, by the minute, day, or month.

Recent events in the Middle East, combined with weather, have put tremendous pressure upon raw materials prices. The fear is that cyclical pricing pressure might become secular (generational) trends, accelerating inflation in energy prices, foodstuffs, and industrial components, thus undermining a tenuous uptick in consumer spending, global trade, and consumer confidence. While Wall Street rejoices that something, anything, has stimulated trading activity and profit margins, the world watches as surpluses contract and statistics become human convoys of disaster.

No one disputes the necessity to trade the markets or to engineer boardroom-level merger and acquisition conversations. These activities are the foundation of the capital markets. But there has been an unusual amount of focus upon deal-making almost to the exclusion of efficiency, to give the impression that someone?s at the helm and using capital to acquire ?stuff.? To that end, clients do suffer, finding their equities violently fluctuating based not upon long term fundamentals, but short news cycles and speculation. Such activity numbs the average investor into submission.

Despite last week?s contraction in global equity prices, the activity seemed mainly focused upon energy stocks and the turmoil in Libya and the Middle East. Of course, the world is also shocked by the earthquake tragedy in Japan. More significantly, there seems to be no cohesion of thought about whether these disruptions are ultimately (1) good for shareholders (2) bad for economic recovery. Instead, the debate rages on as to the sustainability of any short market rallies or the viability of real economic recovery in the face of pricing pressure upon commodities, particularly energy.

The case for gold and energy-related price spikes is rooted, in part, by good intentions hedging against dollar fluctuations, inflation risk, and political discord. But unlike a level of rational speculation one might expect to see, one has to wonder whether the market?s players are overdoing their hand just a bit. Simply, the world of commodities gambling has been turned into a shootout. While oil production and distribution (as with gold) has been spiking over the last 3 years, real demand has only turned up modestly.

Among the economic havoc wrought by turmoil in the Mid East and severe weather around the globe has been the impact upon inflation and upward pressure on prices for raw (and core) materials. Today, most economists and market analysts fear that this confluence of factors could accelerate inflation in energy prices, foodstuffs, and industrial materials, thus undermining a nascent uptick in consumer spending, global trade, and consumer confidence.

I believe the markets are extended and at risk of consolidation. If one is compelled to invest, I would urge caution, patience, and dollar-cost-averaging rather than an ?all-in? philosophy at this time. The big picture for financial securities is long-term positive but short-term precarious.

While many are transfixed by the chaos and confusion in Egypt, Tunisia, and Yemen, it is important to recognize that such unrest is not uniquely Middle Eastern, nor is it caused specifically by unruly despots.Indeed, the root cause of social upheaval usually lies in the breakdown of social institutions whose function is to provide, or create, fairness and opportunity amongst the citizenry.

There is a lot of talk about the direction of interest rates and the cost of money.Sometimes, exogenous influences also exert influence over monetary factors.Today, tightening supplies of natural resources have created a subterranean inflation whose gross result has been to raise prices at the production and consumption sites.Corn, sugar, coffee, soybeans and other crops are at their lowest reserve levels in a generation.Demand, however, has not ebbed.

Today, bond and stock inventors sit at the edge of a new paradigm, indeed, where inexpensive money has yielded about as much as possible from corporate balance sheet expansion, while lower interest rates no longer offer high yield or capital gains probabilities to fixed income investors. The difficulty today, however, is that stocks are at a significant inflection point where the likelihood of perpetual sustainable upside gains is limited.

As if to signal the arrival of a new yardstick, the year?s first trading day was strong, while the balance of the week was digestion of the same old lack of enthusiasm and trust. Might we expect to see a new metric in place after the rough-and-tumble in Congress is settled? Don?t count on it. Whichever way the debate shapes up, there is still a credit crisis, an insurance crisis, and a confidence crisis. All the avoidable blunders Wall Street might make will still occur because the brazen on Wall Street are not being held accountable for their greed.

Despite 2 year gains in financial valuations, most major global bourses remain in a downtrend as we enter 2011. Year-end improvements in market performance have not erased the erosive cycle trend decline begun in late 2006. Some argue that the past two years represented the regeneration of a new bull cycle in financial markets. However, empirical macro data, as well as a longer term perspective about the duration of bull markets, indicates that last year?s bull was simply a second intermediate upleg within a much longer bear market. No turnaround in the secular trend just yet.

Each of the recent ?relief rallies? draws many into thinking that the worst is over, at least for equities. I believe, however, that investors are putting too much emphasis upon short-term consequences to the exclusion of looking through the wider aperture. Of course, during the holiday season we are all searching for ?good cheer,? but market cycles that are unsupported by fundamentals are not ?rallies,? but bear traps.

Federal debt, personal debt, political gridlock and global currency imbalances are systemic problems. It was difficult and time-consuming getting into these predicaments, and will be equally as difficult getting out. I am seeing indications in my quantitative database that we are in the early stages of cyclic deterioration, a period during which the rate of capital gains probabilities declines and market valuations perform indiscriminately in a non-correlated way. We should be prepared for the opposite of what we expect or want.

We?re in a particularly vulnerable time in world financial markets. Having just completed a significant 2 year market response (upwards) to the global credit crisis, the question of whether or not we can sustain similar economic magnitude has everyone?s attention. Although financial data seems more or less in line with a nascent recovery, investor confidence and activity are still less than robust.

'How will the election results impact upon the markets and my portfolio during the next year?' Scotty George evaluates the data.

We are two months removed from the end of this year, 2010, and already investors are bracing themselves for 2012 as if next year won't count. With unemployment widening and portfolio values simply treading water, many have their sights set on a rebound year in 2012 that they think has more promise than 2011. In fact, informal opinion polling suggests that many see 2011 as nothing more than a postscript to a miserable three year cycle begun when the global credit crisis erupted.

After the steady run-up in natural resources equities the past year, some are concerned that the progression might come to an end. Based upon improving policies and demand worldwide, however, it is still entirely appropriate to reserve an overweight ranking for these investments. As long as industry prudently manages inventory-versus-demand cycles, upward valuations might persist. In the long term, depleting resources might provide the science and politics for an elongated trend with significant capital gains potential.

Global equity markets are doing a poor job of mirroring the fundamentals. The key to equity performance is earnings acceleration. Despite year-over-year improvements from their depths one year ago, real integers are still down from their highs, and are unlikely to show any improvement without marked top-line demand. Du Pasquier is therefore continuing to underweight equity exposure, even as certain individual companies become more attractive from a valuation standpoint.

The current global rallies in stocks seem to be short-cycle upswings within the existing secular bear trend. Low interest rates are leaving no other suitable alternative for investors, and high grade fixed-income opportunities are few and far between. Interest rates may rise, however, before year end as global debt continues to mount. Investors should therefore look for an above-average exposure to cash in the short term while waiting for downward movement in stocks in the long term.