Detail on Two Pending Disasters, And Why We're Underweight Equities

Though we recently boosted our equity weighting, we're still not yet 2/3 of our "policy allocation" because we think additional tsunami waves of crisis are on the way. Last week we let this post sum-up our cautions. (And did you see Nouriel Roubini on CNBC this morning, reiterating all these points?) Today we are linking to two further elaborations on just how bad and likely these tsunami waves are:

• CDOs. Banks, especially foreign banks, are only just starting to reveal the holes [scroll down that page for article] in their balance sheets left by Collatoralized Default Obligations (CDOs), which are bundles structured credit products (the kind that has been blowing up recently). Buyers of CDOs were doing so on faith in the credit ratings; they lacked the personnel to evaluate the garbage they were buying unwittingly. The gaping new holes in bank balance sheets that we're seeing could lead two another shock wave of asset-selling and illiquidity, and gaps down in public markets.
• Emerging Markets. Global de-leveraging, bursting investment bubbles within emerging market economies, and tumbling commodity prices, are creating a rush for liquidity (namely, dollars). Many emerging economies can't get the dollars they need [scroll down that page for article] to finance their economies, so asset prices are dropping even faster in those places. We continue to wait for several major financial crises in emerging economies before raising our allocation from 1% currently toward our long-run allocation of roughly 10%.