So why all of the changes? Our guess is that there is a profound disconnect between current asset prices and economic fundamentals that has rendered the models useless.
A good deal of the disconnect seems to be with the decline of the U.S. dollar. When the global currency system was established several decades ago with the U.S. dollar as the reserve currency, the US was more than 50% of the world's GDP. It is now around half of that amount, causing their to be more dollars in the world then there is demand for them. Also QE by the Fed has accelerated this process and threatens the long-term value of the dollar. One has to wonder if the new models will be able to handle the disconnects that will likely manifest in an economic environment where monetary policy is not as accommodative.
We must also keep an eye on inflation versus deflation debate as the central banks around the globe face great challenges in resurrecting but containing inflation while making sure a deflationary spiral does not take hold.
