Thad Fenton: “I’ve noticed a disconnect recently in traditional correlations between asset classes and wonder if we have entered into some new economic model. For example, there is an ongoing major political event that threatens economies in many ways (the Kosovo “peacekeeping” conflict). Historically, this kind of uncertainty would cause gold prices to go up, stocks to go down, and perhaps a flight to US Treasuries. Amazingly, through this and similar events of the last, say, 12 months, gold has not gone up. The stock market, rather than taking a dive, has actually gone up. There has been no flight to Treasuries.
“I wonder why this is? Could it be that communications and more or less efficient global markets have eliminated fear and risk in the marketplace? If this phenomenon continues, does your friend the Asset Allocation Expert think new models are warranted? Are precious metals and heavy weighting in long bonds relics of the past?”
Well, there’s no “answer” I suppose, but mine would be that a situation like Kosovo simply underscores that the U.S. is currently the sole Superpower — very different from, say, the Cuban missile crisis — and in this case shows all of NATO working together. So maybe what something like this tells the average investor is: Gosh, we’re lucky to be so strong and not to live in Kosovo. The sad, awful events there will have no impact on the sale of most goods and services around the world, nor slow down the world’s astonishing technological progress — or the breathtaking knitting-together of communications and commerce. So: full speed ahead!
I’m not saying this is entirely how I feel. I’m not comfortable when the market goes up on good news, bad news, no news, wrestling news, cooking tips . . . ANYTHING these days seems to make the market go up. So I would not rush to buy Gillette at 53 times earnings or AOL at 717 times. But I have been so wrong about this for so long, it may just be old age. And, happily, I do own some stocks.
My hope is that we will — if not forever, then at least for a long time — avoid the terrible problems and setbacks that have plagued all of human history. The spread of technology, and its acceleration, lead to increased efficiency. That leads to increased prosperity. Prosperity nurtures peace. Peace nurtures prosperity. All this really may offer a new model, of sorts. Maybe the market’s a bargain here and the new world order is: buy!
Then again, electricity was no small thing — think about it! — and neither was the telephone or the airplane or television or computers. Yet the market didn’t go up 20% a year over the last century, or anything even vaguely close. And recessions and panics did not disappear.
In short, asset allocation may not have lost its relevance.
Quote of the Day
Panics do not destroy capital; they merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works.~John Stuart Mill, 1867 (Like shopping centers in the middle of the desert. Or millions of pages of legal documents.)
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