DIVESIFICATION IN A 100 PERCENT CORRELATED WORLD

 

In a global economic market driven by liquidity all economic instruments: Stocks, bonds, derivatives and crypto currencies are 100 percent correlated.  

As long as the global system if flooded with 40 years and many tens of trillions of dollars worth of deficit and bailout fueled gambling, all paper/electronic assets: credit, stock, derivative, crypto rise together.

Yes, the Fed is raising rates.  But nobody believes they won't revert to zero rate/ unlimited bailouts the second a credit event developes.

So paper/electronic assets keep rising.

Meanwhile Globalization has kept inflation low with cheap commodity and labor inputs.

But when the next credit event occurs in a deglobalized world the excess liquidity created will cause an explosion in commodity and labor costs.

Then all paper/electronic assets will crash together,  Bond yeilds will shoot up crushing bond prices, and sucking capital out of risk assets like stocks, derivatives and crypto.

So how do you diversify?

Real Things.

Real things are completey uncorrelated.  Excess liquidity will only drive the price of real things up.  Those who have benefited from the last 40 years of liquidity fueled asset booms have already been in the Real Things trade for the last 10 years.  

But this trade has started slowly.  Until recently not that many people have regarded Wine or Coins or Sports Cards or Rare Books as serious investment.  They seemed more of a hobby. 

Fine Art, of course, has always been a serious investment. 

Suddenly the same auction houses that specialize in Fine Art are now also dealing in a vast variety of Real Things.  Sotheby's is auctioning off Basketball sneakers, whiskeys, handbags, watches and wines. Heritage Auctions is auctioning off Comic Art, Cartoon Art, Video Games, Music and Movie posters,  contracts, wardrobe and  Instruments... and the top sellers in these seemingly banal catagories are hammered off for millions of dollars.  

Fad?  It's hard to call markets that specialize in things that have deep emotional resonance rooted in shared history a Fad. 

Of course some of these things will fade in value as the items resonate less with subsequent generations.  Will a dress worn by Maralyn Monroe mean that much to movie fans in another 100 years?  Who knows?  It doesn't mean much to me right now, so I would never buy it.

But how about a gold protrait of Alexnder the Great minted just after his death?  Will that ever be less evocative than it is now?

Or how about a gold portrait medallion of Napoleon, handed out to a few dignitaries at his Coronation?  Will that ever be worth less to subsequent generations?

I doubt it.

And how many people right now even realize that, and similar items are avaiable on the open market?

The answer is more and more people are becoming aware each and every day.