September 19, 2001

The underperformance of the U. S. can be the result of a rise in the rest of the world rates of returns or a decline in the rates of return in the U.S. Clearly the latter would be the worst alternative as far as investors are concerned. It would signal that the economy is slowing. However the decline in real rate of returns and low inflation rate do not match up with the expectations of rising bond yields. A U.S. recovery with a stronger surge outside the U.S. is one of the ways that one could explain why the dollar would weaken, bond yields increase, while inflation would remain in check and the market stop deteriorating. The alternate scenario, which we do not share, is one of stagflation in the U.S. economy.

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