Summary

The evidence suggests that the US economy cannot recover vigorously without an increase in private sector leverage. Given that the deleveraging process is only in its early stages and that households and banks are still excessively leveraged, it seems unlikely that we will see a strong revival in private sector borrowing in the near future to fuel economic recover and create jobs. Growth will more likely remain below potential for a protracted period.

• Overall, at current US valuation levels, with self sustaining recovery and earnings growth both tied to the unwinding of leverage, we would be cautious on the prospects for developed equity markets in general. The “easy” money has been made and, with so much dependent now on the follow-through from earnings, investors should not chase the market.

• We see gold to be the asset of choice in a deflationary environment and not a useful inflation hedge.

• Bond yields will remain depressed for some time, as a reflection of the ongoing deleveraging in the financial system. With bank balance sheets still under repair, the rapid deposit growth as savings rates rise provide banks with liquidity that should flow into government debt.