By Hiro Ito

Today, we're fortunate to have Hiro Ito, Associate Professor of Economics at Portland State University as a guest blogger.

In my last posting, I introduced a recent paper coauthored with Menzie Chinn and Joshua Aizenman (UC, Santa Cruz) on the "trilemma," or "impossible trinity" -- a country simultaneously may choose any two, but not all, of the three goals, monetary independence, exchange rate stability and financial integration.

In that paper, we introduced the indexes that measure each aspect of the three trilemma configurations for more than 170 countries in the period 1970 to 2006. Using these indexes, we have shown that major crises and economic events in the last four decades caused structural breaks in the trilemma configurations.

We also tested the linearity of the indexes and confirmed that countries do face the trade-off of the three policy choices. In short, we empirically found

The fundamental question in buying stocks is the expected earnings (or cash flow, depending upon the sector) compared to the stock price. One compares this to alternative choices like bonds or real estate or foreign markets. On a risk-adjusted basis, one’s asset allocation should favor the undervalued asset classes.

At “A Dash” we believe that U.S. equities, despite a multi-year, double-digit profit expansion, and some market reaction, still reflect intense investor skepticism about future earnings. The biggest cloud over the earnings picture is the continuing (and so far incorrect) forecast of a recession by bearish pundits, mostly non-economists.