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as if ZIRPLAND isnt already difficult enough to navigate thru...
As Correlations Rise, There's Nowhere to Hide (?)
ok - so my question is: re: the above in bold: is this what might cause the downdraft that EJ has predicted? (or have we already seen it, back in july?)
and who might be the biggest catalyst to this occurring? the EU sitch, or china?
any particular metric that can be monitored?
serious (newby) questions here folks...
As Correlations Rise, There's Nowhere to Hide (?)
http://online.wsj.com/article/SB1000...258796918.html
As Correlations Rise, There's Nowhere to Hide
By DAVID COTTLE
With Europe's endless debt crisis in the foreground and the prospect of wilting global growth as a backdrop, investors can hardly be blamed for a lack of fortitude.
They'd just clicked off their Greek debt spreadsheets and were trying to work out how much Italy owes and to whom, when International Monetary Fund Managing Director Christine Lagarde started openly discussing the prospect of a global "lost decade."
We can only assume that Warren Buffett is throwing it about as never before if he's sticking to his old tactic of being greedy when others are fearful, because there's plenty of fear around.
But the problem for the fearful is that that much-vaunted investment hidey-hole, the so-called safe-haven asset, is getting harder and harder to find.
The very nature of the debt crisis has sadly disqualified many of the old standbys. Of course it has, when its very point is that developed-market government bonds are no longer "risk free" but, often, sources of the most awful hazard.
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Reuters
Gold pigs on display for customers at a jewelry shop at the Shinsegae department store in Seoul in August.)
Even those that supposedly aren't shaky yield utterly wretched returns. The U.K.'s 10-year gilt, for example, may come with an elusive triple-A credit rating but, as of Thursday morning, it also came with a record low yield of 2.14%. Knock off the 5% or so inflation will gnaw away and that's hardly enticing, even if those top ratings are sustainable.
And dig a little deeper and you'll soon find even the safest of developed market bonds has its own little time-bomb; the U.K. and Japan are vying with each other for "most indebted nation on Earth" status. And Germany? Well, shame about the neighbors.
In the currency markets, the story is similar. The central banks of Japan and Switzerland stand ready so send investors packing from those traditional foreign-exchange lifeboats. The Swiss, perturbed by the franc's strength against the euro, have promised to counter anyone attempting to bid it up with unlimited selling. The Japanese have been less explicit, but have intervened in some force to weaken the yen in the past couple of weeks.
Away from purely financial assets are old standbys such as agricultural land or real estate. However, the former is already expensive by historical standards and the latter remains suspect. The subprime lesson was hard-learned and mortgage markets everywhere are still vulnerable to a lack of available credit.
There's a broader problem, though, in the increased correlations seen across all markets, which have come with the financial crisis. Recent research from HSBC found that, not only are the correlations between markets at record highs, but, within stock markets, the links between individual equity price moves are incredibly strong as well.
So extreme have these correlations become, the bank's analysts wrote, that "everybody has the same exposure" regardless of what position they hold. A little melodramatic, perhaps, but, at very least, the current extreme correlations make that old standby, diversification, very difficult.
As Frances Hansen, Global Thematic Strategist of U.K. fund manager Standard Life Investments, wrote in a recent sobering piece entitled "Are There Any Safe Havens?" diversification is increasingly hard to come by. Even stocks once regarded as having defensive characteristics, the worthy if often dull drug, telecom and utility names, are in a bind because, it seems, they'll just move with the herd.
Correlations have only intensified as Greece, then Italy ramp up investors' blood pressure. The trouble is, they seem unlikely to relax their grip until the debt crisis does, which could mean they endure at elevated levels for years to come.
In the end, it looks as though investors are left with the dollar and gold, which arguably isn't much to show for what we're all assured have been decades of financial innovation.
The dollar gets a pass for, well, not being the euro when all the other plausible currencies that also aren't the euro, such as the Scandinavians, simply aren't big enough to fill the gaps. However, the dollar has a central bank that expects to stick with record low interest rates until at least the middle of 2013, and may well start the presses again if the U.S. economy can't fire. So, probably not that safe, then. The U.S. has also, of course, lost its own top credit rating.
If history is any guide, gold clearly stands to do well at a time when governments are printing money, but it is already close to record peaks itself and is vulnerable to selling when investors need to cover losses elsewhere.
Perhaps the safe-haven asset is much like a definitive solution to the euro zone's debt crisis. The markets' fervent wish to see both doesn't mean either can easily be found.
As Standard Life put it, "Investors should use scenarios and construct portfolios that are resilient, but they are unlikely to be able to protect themselves completely."
The first part may be the definition of "easier said than done"; the second may end up looking like a masterly piece of understatement.
- AGENDA
- NOVEMBER 10, 2011, 4:23 P.M. ET
As Correlations Rise, There's Nowhere to Hide
By DAVID COTTLE
With Europe's endless debt crisis in the foreground and the prospect of wilting global growth as a backdrop, investors can hardly be blamed for a lack of fortitude.
They'd just clicked off their Greek debt spreadsheets and were trying to work out how much Italy owes and to whom, when International Monetary Fund Managing Director Christine Lagarde started openly discussing the prospect of a global "lost decade."
We can only assume that Warren Buffett is throwing it about as never before if he's sticking to his old tactic of being greedy when others are fearful, because there's plenty of fear around.
But the problem for the fearful is that that much-vaunted investment hidey-hole, the so-called safe-haven asset, is getting harder and harder to find.
The very nature of the debt crisis has sadly disqualified many of the old standbys. Of course it has, when its very point is that developed-market government bonds are no longer "risk free" but, often, sources of the most awful hazard.
Enlarge Image
CloseReuters
Gold pigs on display for customers at a jewelry shop at the Shinsegae department store in Seoul in August.)
Even those that supposedly aren't shaky yield utterly wretched returns. The U.K.'s 10-year gilt, for example, may come with an elusive triple-A credit rating but, as of Thursday morning, it also came with a record low yield of 2.14%. Knock off the 5% or so inflation will gnaw away and that's hardly enticing, even if those top ratings are sustainable.
And dig a little deeper and you'll soon find even the safest of developed market bonds has its own little time-bomb; the U.K. and Japan are vying with each other for "most indebted nation on Earth" status. And Germany? Well, shame about the neighbors.
In the currency markets, the story is similar. The central banks of Japan and Switzerland stand ready so send investors packing from those traditional foreign-exchange lifeboats. The Swiss, perturbed by the franc's strength against the euro, have promised to counter anyone attempting to bid it up with unlimited selling. The Japanese have been less explicit, but have intervened in some force to weaken the yen in the past couple of weeks.
Away from purely financial assets are old standbys such as agricultural land or real estate. However, the former is already expensive by historical standards and the latter remains suspect. The subprime lesson was hard-learned and mortgage markets everywhere are still vulnerable to a lack of available credit.
There's a broader problem, though, in the increased correlations seen across all markets, which have come with the financial crisis. Recent research from HSBC found that, not only are the correlations between markets at record highs, but, within stock markets, the links between individual equity price moves are incredibly strong as well.
So extreme have these correlations become, the bank's analysts wrote, that "everybody has the same exposure" regardless of what position they hold. A little melodramatic, perhaps, but, at very least, the current extreme correlations make that old standby, diversification, very difficult.
As Frances Hansen, Global Thematic Strategist of U.K. fund manager Standard Life Investments, wrote in a recent sobering piece entitled "Are There Any Safe Havens?" diversification is increasingly hard to come by. Even stocks once regarded as having defensive characteristics, the worthy if often dull drug, telecom and utility names, are in a bind because, it seems, they'll just move with the herd.
Correlations have only intensified as Greece, then Italy ramp up investors' blood pressure. The trouble is, they seem unlikely to relax their grip until the debt crisis does, which could mean they endure at elevated levels for years to come.
In the end, it looks as though investors are left with the dollar and gold, which arguably isn't much to show for what we're all assured have been decades of financial innovation.
The dollar gets a pass for, well, not being the euro when all the other plausible currencies that also aren't the euro, such as the Scandinavians, simply aren't big enough to fill the gaps. However, the dollar has a central bank that expects to stick with record low interest rates until at least the middle of 2013, and may well start the presses again if the U.S. economy can't fire. So, probably not that safe, then. The U.S. has also, of course, lost its own top credit rating.
If history is any guide, gold clearly stands to do well at a time when governments are printing money, but it is already close to record peaks itself and is vulnerable to selling when investors need to cover losses elsewhere.
Perhaps the safe-haven asset is much like a definitive solution to the euro zone's debt crisis. The markets' fervent wish to see both doesn't mean either can easily be found.
As Standard Life put it, "Investors should use scenarios and construct portfolios that are resilient, but they are unlikely to be able to protect themselves completely."
The first part may be the definition of "easier said than done"; the second may end up looking like a masterly piece of understatement.
and who might be the biggest catalyst to this occurring? the EU sitch, or china?
any particular metric that can be monitored?
serious (newby) questions here folks...
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