We have long maintained that the older concept of political economy has merit in this cycle which incorporates considerable change. In capital markets, risk premiums have appeared bifurcated into binary positions, most obviously in Europe. Still, the less quantitatively malleable issues of political change are likely to remain globally important. Growth has been a crucial contributor to the Arab Spring turmoil and indeed the Middle East as a whole with crucial Egyptian presidential elections due on May 23,2012. While devoid of the political violence seen at turning points in France, the run-up to the second phase of its presidential elections on May 6, 2012 has already changed the European dynamic. Actual recession around Europe and deeply so in Greece may mean pushback there to include not just Spain but also Italy, soon after the Greek elections. So far, central bank policy and sharp corporate margin gain appear to be issues that markets became conditioned to. These could be considered as steady state were central banks to continue their largesse and economies be mired in chronic weakness without inflation or political pressures derived internally or externally. We see such an outcome as unlikely. Markets once more are potentially running the risk of assuming the future to be a replica of the immediate past. As elections are held, we would expect oversight scrutiny to rise, not least due to the size of monetary largesse ( reportedly $ 14 trillion worldwide) expended that after all has to have as backing the entire productive capacity of a region or country.

We see no room for complacency for investors, despite massive quantitative ease. Still, complacency has returned forthwith after 2008. Our call remains focused on quality -- .

In current politics, we are reminded of the reputedly Indo-Persian fable about a scorpion and a turtle. The European economic stresses are not singular in that many democracies have yet to navigate between negotiation or confrontation. The same applies to political stresses engulfing a violent Middle East. Asia has its internal challenges of today. In the capital markets, fiduciary abstinence appears in short supply so soon after 2008. Risk premiums for low quality bonds have declined to minimal levels versus distortedly low 10- year U.S. Treasury Note yields. Further and despite oft-expressed support for equity valuation expansion from other quarters, we believe such expansion as a positive force cannot be sustained until more normality returns to sovereign bond markets. Also in current markets, US dollar recovery could add further complexities. In sum, we see volatility as being enhanced. Strong arguments prevail in favor of a quality overlay as well as cash reserves.