Our favorite former trader explains, again, why asset allocation investing models are cr#p. Of course, he’s too polite to put it that way, but look at this:
Sorry if I’m belaboring the topic, but I can’t help but point to what’s going on in the Japanese markets as a perfect example of what I’ve been talking about on this thread.
Last night (from an American point of view it was last night – it was daytime in Japan), the Japanese stock market crashed, closing down over 10%. An equivalent loss in the Dow Jones would have been over 1200 points.
In the panic and crisis, no doubt gold surged and the Japanese yen sank, right?
Actually, quite the opposite happened. In spite of the panic, gold and silver dropped sharply, tick for tick with the Japanese stock market, as did crude oil. Agricultural futures dropped sharply too, to lows not seen since last December. As those asset classes lost value, the Japanese yen surged higher, closing at new all-time highs.
How to explain it? It may have started with Japanese insurers, who had to sell stocks to raise cash for what surely will be huge claims. As stocks crashed, investors and hedge funds had to raise cash to meet margin calls and other obligations, so they sold everything that was not tied down – precious metals, agricultural assets and futures, and crude. Foreign (non-Japanese) currencies had to be sold too – you can’t pay claims or meet margin calls in Japan with euros or dollars – so the yen rocketed higher.
Note that being diversified across asset classes was no help at all, as they all dropped in unison. Only holders of yen did okay.
In other words, in today’s world it’s a tug of war between inflation and deflation, between “things” and cash. The strong tendency is that when “things” go down, they go down together, while cash goes the other way.
That’s not the way it always was and one day it will no doubt change again. But until then, that’s the way it is.
Our only quibble, and it is tiny, is that one of our favorite Internet presences, the Sovereign Man, pointed out in a recent newsletter that the only commodity price that governments around the world are NOT trying to control is the price of gold.
So, oil is back under $100/bbl and gold is back up over $1400.