1. summitV I E W
hen engaging with the unknown and working summit creek
with speculative ideas, I find it comforting to
recall that the discovery of fundamental structure
has always come as a surprise and been met with As we define our system of concepts
skepticism and resistance. Oddly enough, not more precisely, as we streamline it
just the general populace, but sometimes even the and make the connections more and
more rigorous, it becomes increasingly
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very people who suggest underlying structures
have been reluctant to believe them at first. detached from the real world.
Lisa Randall, first tenured woman theoretical physicist Fritjof Capra, The Tao of Physics
at MIT and Harvard. Warped Passages: Unraveling the
Mysteries of the Universe’s Hidden dimensions. At the beginning of the twentieth century,
much of what being published by leading
physicists in leading journals was, in
retrospect, nonsensical...A comparable
meltdown is now occurring within
financial economics. Whether it is the
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latest “quantum mechanical theory of
market volatility,” or the latest conference
May 2010
on “portable alpha,” arrant nonsense is
being heard everywhere. Once useful
concepts like alpha and beta have
been stretched to the breaking point.
H. Wood Brock, “Solutions to the Portfolio
Problem,” Strategic Economic Decisions,
September 2004
The financial markets paid a lot of people
extremely well for narrow expertise
and a few people, poorly, for the big,
global views you needed to have if you
were to allocate capital across markets.
Michael Lewis, The Big Short
I was right 70 percent of the time, but I
was wrong 30 percent of the time,” said
Alan Greenspan as he testified last week
on Capitol Hill. Greenspan - aka the
Oracle during his 18-year-plus tenure
as the Fed chairman - could not have
more vividly illustrated how and why
geniuses of his stature were out to lunch
while Wall Street imploded. No doubt he
applied his full brain power to that 70-30
calculation. But the big picture eludes him.
If the captain of the Titanic followed the
Greenspan model, he could claim he was
on course at least 70 percent of the time too.
Frank Rich, The New York Times columnist
April 11, 2010
see disclaimer on last page

2. The
Morton Investment Doctrine
A transitioner’s guide to transitions
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2
May 2010
need to cut back. In theory that sounds simple.
Pondering the future of global economic activity
“
In practice it will be fiendishly hard to get the
is not for the faint of heart as many outcomes
balance right. Investors may worry about
seem viable as the world recovers from the Great
Recession. One school of thought believes the the sustainability of public debt long before
United States will rebound from the doldrums private-debt reduction is over, forcing a lot of
of the Great Recession to continue its twentieth belts to be tightened at once. The most painful
century position as the global superpower. bits of deleveraging could well lie ahead.
Another school of thought considers the post
Great Recession era the beginning of the end The above quote addresses the fundamental
of the United States as the global superpower. question regarding long term, global, economic
Considering the amount of debt accumulated growth: what will be done with all the debt?
by the public and private sectors of the United
States, the former scenario appears unlikely. As the US consumer fueled the growth of export
driven Asian economies, word of the Asian
economic decoupling from the US economic
“
The Economist summarized a McKinsey
study titled Debt and Deleveraging: The global engine became gospel. The simultaneous crash
credit bubble and its economic consequences of all global markets in 2008 removed speculation
in January by saying the following: of decoupling of Asian economies from the US
economy. At this juncture in the global recovery,
[T]here are several reasons why today’s the US consumer continues to tighten its spending,
mess could be more protracted than previous whether due to job loss, the threat of job loss,
episodes. First, the scale of indebtedness is or an increasing belief that former, prior to the
higher. The highest debt ratio in the report’s economic crisis, spending habits were profligate.
group of belt-tighteners was 286%, in Britain
after the second world war. Today more than Although the US consumer remains still the
half the rich countries in the McKinsey sample driver of global consumption, the process
have debt totaling more than 300% of GDP. of changing spending habits, from the
Second, the number of countries afflicted US consumer saving more to the Chinese
consumer spending more, will not be straight
simultaneously means that rapid expansions
line. Without developed, internal demand
of exports, which have supported output in the markets, emerging economies will continue to
past, are harder to achieve. Third, big increases rely on foreign consumption of domestically
in public debt, while cushioning demand in the produced goods. As consumption ebbs over
short term, increase the overall debt reduction the next number of years in the developed
that will eventually be needed. Once private world, returning to a level in line with long
deleveraging is done, the public sector will term averages, what happens to the emerging

3. economies? When will domestic consumption
increase sufficiently to capture a significant
piece of the goods produced domestically? As
infrastructure development continues, what
happens to the emerging economies if capacity alpha.” For the investor, each has a unique
utilization rates drop and layoffs occur? risk profile, or risk aversion, that determines
one’s asset allocation as per the Capital Asset
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Periods of transition, historically, while Pricing Model (CAPM) and Modern Portfolio
common, are often disruptive. With the Theory. Once the appropriate asset allocation
aforementioned in mind the US investor is faced is determined, the investor is expected to
with the challenge of positioning portfolios to maintain that asset allocation, assuming of
protect against financial market volatility as course, the extenuating circumstances or inputs
cycles of consumption, economic growth, and used to derive the allocation remain constant.
debt reduction play out over the next ten years.
How does one position a portfolio of assets MPT’s theoretical foundations are based on
to realize wealth preservation in addition to assumptions that do not reflect the real world, as
in the belief that asset class returns are derived
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achieving growth during these transition years?
Considering the inadequacy of Modern Portfolio independently of one another and that returns
Theory (MPT) to facilitate proper portfolio are identically distributed, that is the return
distribution of one asset class is mirrored in
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construction relative to one’s risk profile, the
investor’s challenge to construct the most another. Theories concerning the “knowledge”
suitable asset allocation is as formidable as ever. of the market, where all pertinent information
is reflected in the current price, utilize the
Over the last five decades MPT has become assumptions of MPT as its basis. What is real
the theoretical foundation for asset allocation, is that the market can and does often fail to
providing investors a framework to build represent all that is real, all that is or should
an optimal portfolio commensurate with the be affecting the asset price. See the price
investor’s risk profile. The theory’s foundations performance of assets during 2007 - 2008 for an
stem from the false premise that the returns example of prices not reflecting all available data.
of assets classes are each identically and
independently distributed (as like a coin flip
where the prior flip as no affect on the result of
the next flip). The idea that asset returns are
identically and independently distributed also
feeds into the random walk theory of market
returns, where one cannot predict future
returns based on past performance. Further,
MPT is grounded in the assumption that the
inputs into the model can change but the model
itself does not change, known as stationarity.
As H. Wood Brock states, “when stationarity
prevails, all investors will be able to predict the
correct probability of all future events from the
historical data alone. In this sense, no investor will
make ‘mistakes’ in his probabilistic forecasts.”
All who are participants in the markets know The above comments about the inherent
that all investors make mistakes in estimating, fallacies in MPT are not to be interpreted as
forecasting, or foretelling what the markets will do. extending to the fundamental MPT assertion
that investment returns are best achieved
The result of MPT is the belief the investor through asset diversification. As it is through
should maintain an asset allocation (appropriate portfolio diversification that an investor can
for the investor’s risk profile, of course) that will achieve returns commensurate with his risk
withstand and benefit from various economic aversion level. Where MPT breaks down is in its
cycles. Tactical adjustments are made to the application, where the investor has one optimal
allocation through such measures as rebalancing portfolio allocation. MPT is grounded in the belief
to prior determined allocation percentages that all investors have all the facts, as reflected
or by using constructs such as “portable in asset prices, and cannot make mistakes.

4. An investor in financial markets has to be
proactive in developing asset allocation models
that better capture economic and market
realities (or states) and that reflect the investor’s
risk aversion. One cannot rely on the belief that
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an asset allocation that worked in the past will
work in the future as asset class performance
over various periods of time has been irregular.
The mantra of an asset manager should always
be “first, do no harm.” With the mantra in mind
how does one advise clients and allocate assets
so as to minimize risk and maximize return?
LLC, echoed the same sentiment in discussing
For an investor, the question of most pertinence is,
the housing bubble of the United States. Schiller
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did the value of the assets grow or did it decline.
wrote in April 2010 in the New York Times, “In
To an investor the growth of the wealth, not the
short, a public case began to be built that we really
relative performance of the various asset classes,
were experiencing a housing bubble. By 2006 a
May 2010
matters most. With the aforementioned thinking
variety of narratives, taken together, appear to
in mind, how does one develop an asset allocation
have produced a different mind-set for many
that best meets the investor’s risk profile?
people - creating a tipping point that stopped
the growth in demand for homes in its tracks.”
How does an investor develop asset allocations
The following questions are in an environment where qualitative factors
relevant to developing a suitable have such an impact on return outcome?
asset allocation for investors:
• What kind of return distributions do As a student of history, I believe the behavioral
markets have? aspects or factors can be derived from an
assessment of current political, economic,
• What distributions do asset classes and social states. For example, in our debt
have if not independent and laden society, how will the efforts to reduce
identical? household debt affect the long term growth
• How does an investor respond to of the US economy and the continued
shifts in the relative returns of asset development of the export driven economies
classes? that relied heavily on the US consumers’ debt
driven consumption over the last ten years?
• What factors best indicate an asset
class’ future performance? Late last year, while considering investment
• To what extent does investor
options for United States citizens over the next
sentiment effect total return ten years, I laid out how one should begin to
outcome? think about their investment options. Using
an aerial view of the current global landscape
• Does investment optimism and factoring in the above thinking, I decided
or pessimism effect return to ground future investment decisions in
beyond economic and financial
terms of political thought, specifically the
fundamentals?
Monroe Doctrine introduced in 1823 by then
U.S. President James Monroe. In response to a
Brock’s work points to the reality that it is political policy issued to protect United States
the investor’s belief structure (the proportion interests in the Western Hemisphere in the early
of investors at a given point in time who 19th century, I have revised the policy to reflect
hold below average to above average return US investor interests in the 21st century. Namely,
expectations) that greatly alters the asset return how does a US investor derive the appropriate
outcome. Recently, Robert J. Schiller, professor risk/reward relationship in his/her particular
of economics and finance at Yale and co- asset allocation for the future? Specifically,
founder and chief economist of MacroMarkets how does one protect and grow their assets?

5. “
To be sure, if you are an Anglo-Saxon
As previously discussed, Modern Portfolio country with a stable financial base, limited
Theory has failed to provide proper guidance government intervention and contained
to investors due to inherent flaws in the theory.
“
deficits along with heavy resource exposure,
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Therefore, what are the steps one has to take to your currency is in demand – as we have seen
ensure proper asset allocation commensurate of late with the Kiwi, Aussie, and of course, the
with one’s risk tolerance? As I considered the Loonie. These currencies are overbought and
amount of debt in the US, held both publicly and expensive but are retaining a premium for a
privately, substantially accumulated over the reason – stability and commodity orientation.
last couple of decades, I reflected on historical
examples of empires gone bust due to colonialism Stepping back and assessing the current state
or imperialism, coupled with excessive expansion of the global economy, the potential for global
of credit (e.g. the Roman Empire and the British growth far outweighs any other time in the recent
Commonwealth). Albeit, the US does not
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past. The migration to urban environments will
continue to expand its borders geographically. continue for years to come in countries such
as China, India, and Brazil. As the People’s
Using the thinking behind the development of
May 2010
Republic of China’s experiment with capitalism
the Monroe Doctrine to protect the long term has proven, prosperity is a great motivator.
interests of the United States, I have developed the As more move up the socioeconomic ladder,
Morton Investment Doctrine (MID). Essentially, demand will continue to grow. Increasing
the MID relies on both geographic proximity of per capita gross domestic product (GDP) is a
foreign, investable free markets and countries of great indicator of potential product demand,
common ancestry to facilitate the US investor’s where, for example, more durable goods and
development of appropriate asset allocation higher protein content foods are desired as per
models during what are expected to years of
financial market volatility. As global consumption
declines in the developed worlds and increases
in the developing worlds, the transition
period likely will be shaped by uncertainty.
The Federal government continues to pile on
debt to solve an over levered prior state. In
an environment of burgeoning bureaucracy
and ever increasing debt and entitlement
spending, one is forced to contemplate
options for protecting and growing wealth:
• Does one use blind faith that the
US government will be successful
developing the processes and
methods by which the levered
consumer and government are able capita GDP expands. As the urban migration
to reduce debt to a normalized level? continues, infrastructure to meet the needs of
the migrating worker will grow. China appears
“
• Will the processes and methods
to be poised to experience its own Industrial
developed and deployed by the
Revolution with wealth expansion for all classes.
Federal government return the US
economy to a past normal state of In 2006 The McKinsey Global Institute wrote:
growth anytime soon?
The rising economy in China will lift hundreds
As a discerning investor one has to weigh of millions of households out of poverty. Today
probable outcomes of the steps and policies 77 percent of urban Chinese households live on
the Federal government is using to correct less than 25,000 renminbi a year; we estimate
the highly levered state of the US consumer. that by 2025 that figure will drop to 10
As David Rosenberg said in April 2010, percent. By then, urban households in China

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“
May 2010
will make up one of the largest consumer into markets where risk/reward parameters
markets in the world, spending about 20 are suitable. Considering the aging population,
trillion renminbi annually — almost as the high ratio of retirees and non-workers to
much as all Japanese households spend today. workers, increasing entitlement spending by
(note: as of April 2010, 25,000 renminbi is approximately 3,660 US dollars)
the Federal government, growing public debt
burdens, leaders unwilling to lead, no long term
How does a US investor position resources energy policy, little to no regard for infrastructure
to benefit from the long term trends in global, improvement, and a public unwilling to force
socioeconomic development? Investing politicians to make responsible decisions, at
directly in China and India is difficult and what point does the primary economic trend
restricted; difficult in that the local markets are change? The U.S. economy will continue to grow,
not as developed as the liquid, open markets just not at a pace at which most are accustomed.
found in the United States, United Kingdom,
or Hong Kong, for example. In addition, in So, what are the implications of lower economic
growth coupled with higher and higher debt
“
India and China there exist restrictions on
foreign direct investment (FDI). In Brazil, loads? High systematic risk and little economic
FDI is not so much restricted as it is taxed. reward. Again, Woody Brock offers insights into
the current economic state of the United States:
The Morton Investment Doctrine proffers to
investors a thinking by which one can develop a The failure of President Obama’s policy of
suitable asset allocation based on their particular “engagement” to achieve any bargaining
risk profile. By allocating assets to the neighboring concessions by Russia, by China, or by Iran is
economies of Canada, Brazil (and other Latin fully consistent with this analysis of declining
American countries), and to Australia (although US power. Finally, as the US evolves over
not a neighbor, Australia is a developed country the next two decades into yet another ageing
“
with similar ancestry and legal structures), an welfare state where fiscal expenditures shift
investor gains both systematic and economic from defense to social welfare expenditures,
diversification. By allocating assets outside its loss in overall power will increase still
United States borders, a U.S. based investor further. If the US’s looming “fiscal red hole”
gains diversification into growing economies evolves as predicted over coming decades, the
that have considerable less private and public nation is likely to disarm while China arms.
debt, have stable, transparent governments run
by elected officials, and are directly exposed One might as well look beyond US borders to
to the middle class development of 40 percent achieve the investment returns one expects and
of the world’s population in India and China. needs, regardless of where one fits on a risk
aversion scale. Once an analysis of one’s future
The challenge to investors is not so much liabilities (be they retirement income, education
“achieving alpha” as it is allocating resources tuition or some other future, quality of life

7. expectation) and current assets is complete, coupled
with expected future income flows, the proper
allocation to fulfill those obligations can be developed.
Earlier this year in February 2010, Brazil’s countries and empires to provide perspective.
“
wealthiest person, Erik Batista, was on Charlie Rose. Who is to say the country cannot succumb to
Discussing Brazil’s prospects for the global economic the same fate of the British Commonwealth?
Perhaps the immediate circumstances are
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future, Batista, the CEO of OGX said of Brazil,
not exactly the same, but similarities persist.
It’s the highway between Brazil and China that the Based on the current path of the United States,
world should start paying attention to, because it’s its long term, primary trend, is one of declining
“
fabulous. Most things that the Chinese need we global influence. The path can change,
have in abundance, and we can export, and there’s but change is slow in a democratic society.
an entrance market on the other side within, because
what does the world [need] in an economy, you need In May 2008 Parag Khanna said, “I believe that
pent-up demand. China has an endless pent-up Latin America will emerge as the solution to the
demand for these products, oil, food, and iron ore. problem of the United States’ future competitiveness.
7
The answer doesn’t lie in worrying about China
When asked by Charlie Rose what investments or expanding influence in the Middle East or
Batista had in the United States, the answer was none. restoring transatlantic ties. The answer lies in our
May 2010
own backyard. Literally.” I couldn’t agree more.
As Americans we have become accustomed to
driving the world’s economy for the last fifty Understanding the truth of the United States’
years, especially in the last twenty-one years since economic reality will facilitate thriving in future
the Berlin Wall fell. Consequently, adjusting one’s economic regimes, and by embracing change
perspective to reflect new global realities is not easily the US investor can position assets to benefit
accomplished. Viewing Brazil, and other Latin from this transitional period in which we exist.
American countries (pick one: Mexico, Colombia,
Argentina), through a lens tainted by past experience As William Faulkner said, “Facts and truth
will bring one to surmise the risks are too great given really don’t have much to do with each
each countries’ former systemic problems. Will other.”
hyper inflation consume Latin American economies?
Will civil unrest rise, endangering investment
capital? Is the sovereign risk too high; could a
currency default ripple through the global economy?
“
A rose tinted view of United States history will do
little to ensure a future as prosperous as the past.
In When Markets Collide, Mohamed El-Erian wrote,
Inevitably, the particulars of the individual action
“
plan involve revisiting elements of conventional
wisdom. Some imply a change in mindset; other
a retooling of institutional and organizational
parameters. As such, they are not easy to implement.
And they involve risks. But these difficulties pale
in comparison to the consequences of not adjusting.
In assessing the current state of the United States
economy one can easily return to prior history
and assume, all things being equal, that the past
is prologue for the fate of the United States. Two
things are important to consider in the prior
sentence. One, will things continue to be equal? Are
the circumstances that fueled United States growth
and success over the last century the same as the
circumstances of the country now? Two, which past
is prologue? One should consider the paths of other

8. SOURCES
Bremmer, Ian and Preston Keats, “The Fat Tail: The Power of
Political Knowledge for Strategic Investing”, Oxford Univer-
sity Press, January 2009
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Brainard, Lael and Leonardo Martinez-Diaz, editors,
“Brazil as an Economic Superpower? Understanding Brazil’s
Changing Role in the Global Economy”, Brookings Institution
Press, Washington D.C., 2009
Brock, H. Wood, “Solutions to the Portfolio Problem” Profile,
Strategic Economic Decisions, Inc., September 2004
Brock, H. Wood, Profile, Number 74, Strategic Economic
8
Decisions, Inc., February 2005
Brock, H. Wood, Profile, Number 85, Strategic Economic
May 2010
Decisions, Inc., June 2008
Brock, H. Wood, “The Rise of the East, and the Decline of the
West - A Clarification of What this Really Means” Profile, Stra-
tegic Economic Decisions, Inc., March 2010
Capra, Fritjof, “The Tao of Physics: An Exploration of the Par-
allels between Modern Physics and Eastern Mysticism” (25th
Anniversary Edition), Shambhala Publications, Inc., 4th
edition, Boston, MA, January 2000
Economist, The, “Digging out of Debt”, January 14, 2010
El-Erian, Mohamed, “When Markets Collide: Investment
Strategies for the Age of Global Economic Change”, McGraw-
Hill, 1-edition, May 2008
Farrell, Diana and Ulrich A. Gersch and Elizabeth Stephen-
son, “The value of China’s emerging middle class”, McKinsey
Global Institute, McKinsey & Co., June 2006
Khanna, Parag, “The Second World: Empires and Influence in
the New Global Order”, Allen Lane, January 2008
Lewis, Michael, “The Big Short: Inside the Doomsday Ma-
chine”, W.W. Norton & Company, New York, March 2010
McKinsey Global Institute, “Debt and deleveraging: The
global credit bubble and its economic consequences”, McKin-
sey & Co., January 2010
Randall, Lisa, “Warped Passages: Unraveling Mysteries of Uni-
verse’s Hidden Dimensions”, HarperCollins , January 2005
Rich, Frank, “No One Is to Blame for Anything”, New York
Times, April 11, 2010
Disclaimer: All material presented herein is believed to Rosenberg, David, “Breakfast With Dave”, Gluskin Sheff +
be reliable but we cannot attest to its accuracy. Neither Associates, Inc., April 15, 2010
the information nor any opinion expressed constitutes a
solicitation by us for the purchase or sale of any securities. Schiller, Robert , “Don’t Bet on a Long Housing Recovery”,
New York Times, April 11, 2010