While tensions on the Korean peninsula have abated somewhat, those in the Middle East involving Syria have escalated. The U.S., the U.K., France and Russia are now involved over Syria and the Saudi/Iranian arm wrestle continues. This has ensured the volatility in global equity markets remains elevated while concerns over bond yields and inflation take a temporary backseat.

The heightened fears over global trade, with the U.S. and China at the forefront, add another dimension. We now have four egotistical leaders on stage, Donald Trump, Vladimir Putin, Xi Jinping and Kim Jong-un, each coveting the centre. Honest psychological reports on each would make interesting reading. If a movie was made of today's stage play, perhaps Jack Nicholson could be cast in the role of either of the former two. The latter two would require an insurmountable make-over.

Morningstar's research methodology incorporates an economic moat rating and a fair value uncertainty rating. The uncertainty rating, from low to very high, is assigned to the fair value estimate (FVE) and determines the discount or margin of safety required to establish relevant positive star recommendations - five star (Buy) and four star (Accumulate). The higher the uncertainty rating the greater the discount to FVE or margin of safety required to act. Morningstar also rates management with a stewardship rating based on the record of capital allocation decisions.

With the actions of the four abovementioned leaders influencing global financial and commodity markets, investors should make their own assessment of uncertainty and the margin of safety required before investing. Despite pullbacks from earlier highs, global equity markets and valuations are still at historically elevated levels. In today's environment, is the margin of safety currently adequate for the risk prevailing? The stewardship rating of the four players is anyone's guess, but definitely not exemplary!

In my Forecast 2018, published in mid-December 2017 my greatest concern was the clash of U.S. monetary and fiscal policy. "The clash of the largest U.S. monetary tightening process in history with equally the largest ill-timed non-wartime fiscal stimulus." In normal circumstances, accelerating GDP growth combined with some inflationary pressure would be reflected in an upward sloping yield curve - higher rates associated with longer maturities. That tradition, along with many others, has not followed. The yield curve has flattened despite upbeat growth expectations, although inflation remains subdued.

The root cause is the necessity for the US government to fund its massive fiscal programs from widespread tax cuts to massive infrastructure spending. The government's finance arm, US Treasury, is on track to run consecutive trillion-dollar deficits for the next three years. It is issuing (borrowing) short-term treasuries (bonds) to fund its long-term liabilities, pushing up yields at the short-end of the curve and responsible for a flatter yield curve. A year ago, the 2-year/10-year spread was 105 points and 2-year/30-year 170 points. Today they are 44 and 63 points respectively. The 2-year yield is now 2.43%, 30 points higher than 2 February when US markets capitulated following the January wages growth spike. Most of the rise can be attributed to the actions of the US Treasury. The current dividend yield of the S&P500 is 1.85%.

Smart management would be careful not to mismatch the timing of borrowings. Meanwhile Fed Chairman Powell looks on in dismay as he tries to normalise both interest rates and the Fed's bloated balance sheet, with the US Treasury in the opposite corner. At some stage sparks will fly and the equity market will probably be singed.

Reserve Bank remains cautious

The minutes of the Monetary Policy Meeting of the Reserve Bank Board on 3 April reveal a cautiously optimistic outlook for the Australian economy. The pathway forward is sprinkled with signposts which suggest, while the next move in official rates is likely to be up, it is far from certain and is some way off. The cautionary signposts warn of slow wages growth and high household debt levels and will be difficult to ignore.