With markets trading sideways last week and not much else happening either, I thought it prudent to liven things up with an interesting article about the correlation between food and gold prices. The former is essential and whose value derives from its life-sustaining properties, while the latter is all-but-useless in a practical sense and has value as a result of the vivid imagination of a single species on Earth: Homo sapiens. So the 30 year correlation between the two can correctly described as both mysterious and inexplicable. Yet as the chart shows, the two have moved in tandem for more than 3 decades now. But if you think that's confusing, I refer you to David Rosenberg's attached article which highlights the contradictory short and long positions taken by the "smart money" with respect to bonds and equities. Essentially the market is betting against itself in a schizophrenic self-defeating way. Circling back to gold, investors are betting the commodity will rise (gold being seen as a safe haven should equity markets correct) while the fear index on equity markets themselves is low. Huh?!
Cognitive dissonance accurately describes investors and markets right now, particularly with respect to the Canadian economy and the TSX Composite. Our GDP is falling, unemployment is rising and exports are down more than 20% year-over-year. So why is our benchmark index performing so well? Chalk it up to unfounded optimism. Our view is that this sunny way of thinking will quickly change when clearer heads prevail. Hoping for the best is fine, but we're positioned in our client portfolios for the worst. As the saying goes, the best offence is a good defence.