Top positive review
53 people found this helpful
The most original financial thinking in a long time.
on November 27, 2005
This book shows once again that GaveKal is a fountain of original thinking. Unlike many financial advisory firms, they are not content to repackage popular thinking.
The most important attribute to note regarding this book is that it is for relatively sophisticated financial readers. This book is a counter-argument to a counter-argument. That is, if the main argument is that US equities are still on track for satisfactory performance (the view from mainstream retail investors), the counter-argument is that the history of bubbles (of which the NASDAQ in March 2000 is the most recent example) is very clear and that all end in the same way. "Our Brave New World" is a counter-argument to the counter-argument that asserts that this time truly is different and that we are not destined for a post-bubble bust. If you are not familiar with the thesis regarding the history of speculative bubbles or the thesis from the dollar-bear crowd, this book is of significantly less intellectual interest. On the other hand, if you have already read Marc Faber's "Tomorrow's Gold" or Richard Duncan's "Dollar Crisis", then this book is a perfect foil.
As I have the greatest respect for the intellectual creativity behind GaveKal, I would consider the following points not a critique, but rather an open letter to GaveKal regarding points that I feel are not resolved in this book and deserve clarification.
1) The continuing expansion of free trade is a critical element in the thesis. While you acknowledge recent protectionist measures, you see these as temporary blips on the radar rather than the emergence of a trend. Perhaps some research evidence is required here. Marc Faber, whom you quote more than once, offers sophisticated arguments why protectionism can rise.
2) Many of the financial data graphs date back only to 1960 or 1980. To some thinkers, this may represent as little as one "long wave" economic cycle. What does the inclusion of data back to 1900 do to muddle the main thesis if at all?
3) The assertion is made that housing is not currently in a bubble as evidenced by its lack of acceleration compared to zero-coupon bonds. This would seem to imply, without data or argument, that zero coupons are not in a bubble. Furthermore, you compare housing against GDP. What happens when it is compared against a proxy for Net Domestic Product?
4) A distinction is made between bubbles of productive and non-productive assets. However, only a few examples from history are placed into these categories. What about the examples of US equities in 1929 and 1971?
5) Regarding US asset prices, it is argued that US dollars should naturally flow towards US assets as they begin to appear incredibly cheap and that this will be supportive of US asset prices. However, as the recent failed acquisitions of Unocal and Noranda show, politics can trump economics, which returns to the assumption (hope?) of continued expansion of free trade.
6) The VIX is presented as evidence of reduced volatility of earnings. However, my understanding is that your thesis is a decade or multiple-decade trend while the collapse of the VIX is a recent two year trend. Has the trend really asserted itself so rapidly?
7) The reduction of tax revenue is cited as a reason for the eventual reduction of government. Since this is the same reason used to argue for the eventual rise of inflation, some elaboration may be required here.
8) Regarding the criteria for a deflationary bust, an argument can be made that the US is already satisfying at least three out of the five criteria listed. Perhaps elaboration is required here as well to explain why these are not so or are expected to be fleeting.