Still Bullish

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For months we have stated that monetary policy around the world is a powerful engine for raising asset prices. We continue to argue that classic and typical valuation methods have to be set aside in an era in which the short-term interest rate is near zero; hence the equity risk premium determined on the short-term interest rate is near infinity.

We have also argued that if you calculate the equity risk as being based upon the benchmark longer-term (10-year) government bond rate, it is also a very high number. Either interest rate results in calculations that would send stock prices soaring.

We have seen that occur for months. Powerful engines of monetary stimulus translate into asset prices. They also gradually take economies that are in a deep hole and trying to recover from a downward spiral and help them do so. The elixir of very low interest rates is quite robust.

Worldwide asset prices have an upward bias. This is true of stocks, real estate, art, collectibles, and other asset prices. Traditional valuation methods that would restrain participants are holding them back from exposure to these rising markets. Pressures mount as the markets continue to rise, overcoming worrisome and uncertain economic scenarios.

We are nervous and concerned about the eventual unwinding of this policy, but for the time being we are bullish and fully invested.

Source: Cumberland Advisors

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