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European equity markets are incredibly cheap.

Gold is so difficult to grasp that most economists have been unable to model its behavior with satisfactory results. However, despite its apparent unpredictable moves, Gold has been astonishingly consistent across history in outperforming during periods of banking crises.

The agreement reached on October 26, which will supposedly increase the size of the EFSF to EUR 1 trn, apply a 50% haircut to Greek debt and increase bank capital by approximately EUR 110 bn is necessary, to the extent that it removes the immediate threat of systemic banking collapse, but not yet sufficient to address the structural underpinnings of the current crisis.

While our indicators are suggesting the US is already in recession (or on the verge of it), and in a climate of ongoing concern about sovereign solvency and serious doubt particularly in Europe about the solvency of many over-leveraged banks, Ben Bernanke and the Fed are once again focusing on monetary liquidity instead of on the real issue of excess leverage.

Whilst part of the debt issues faced by European countries are now starting to be priced in, with CDS spreads reaching historically high levels, yields in peripheral countries implying worrying likelihoods of sovereign defaults, the story is rather different on the other side of the Atlantic.

As widely recognized, Western economies have accumulated huge amounts of debt over the past decade, with a corresponding build-up in Emerging surpluses. This has contributed to global and unsustainable imbalances that are now weighing on most - if not all - world economies.

In a world of increasing government debt with greater emphasis on the issuance of nominal bonds, the structural decline in trend growth rates which has been demonstrated (by Reinhart and Rogoff, 2010) as government debt ratios extend beyond 90% considerably increases the temptation for governments and central banks to solve their debt problems by springing an inflation surprise.

The business cycle, as illustrated by the level of the ISM index and other leading economic indicators, is often viewed as an important driver of short-term equity returns.