When Markets Malfunction (FT Column)

This is an extract from my latest published column in the Financial Times. To read the whole column, please click here.

Surveying the investment environment at the start of 2009, there is clearly no shortage of malfunctioning relationships on which investors have traditionally come to rely. Here are just three of the most obvious ones;

1. Equities are yielding substantially more than Government bonds, a marked reversal of a trend that goes back, with only isolated exceptions, to the late 1950s;

2. Spreads between corporate and Government bonds have recently widened to unprecedented levels. The same goes for implied default rates;

3. Despite zero interest rates and a central bank which is deliberately printing money as if there is no tomorrow, the dollar has been extraordinarily strong – an impressive performance by a currency that is being wilfully debased by the day.

The simplest and most obvious explanation, as I ventured to suggest before Christmas, is that Mr. Market and his expanding family, whose job is to set the marginal price of assets, have once again gone into one of their rare but extraordinary periods of collective funk. Government bonds, for example, as Edward Chancellor noted here a week ago, clearly look like the next bubble in the making, or, as I preferred to express it before, a game for market timers and Greater Fool practitioners rather than investors in the traditional sense.

Gold meanwhile continues to look an ever more attractive prospect, as does corporate credit, even though so many sensible people now seem to be saying as much about both (not normally a recipe for investment success). In my own day job, it has been encouraging to note the positive recovery by many agricultural commodities following the spectacular but hair-raising ride they enjoyed in 2008, during which the dollar price of soybeans for example first doubled and then halved again, all in the space of less than 12 months.

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