"Three" Horsemen of the Apocalypse and the PP
Posted: Wed Jul 29, 2015 9:58 pm
A mid-2012 paper I read on SSRN about 18 months ago has hit the "pop" investment-economic media (with all-to-typical click-bait headline):
[url=http://Opinion:%20Two%20reasons%20why%20gold%20may%20plunge%20to%20$350%20an%20ounce]Opinion: Two reasons why gold may plunge to $350 an ounce[/url]
Hypothetically, if Messrs. Erb and Harvey are onto something, and gold continues a reversion to their "fair value" (roughly $825 by their calculation) or, worse, overshoots to the downside, what does it bode for the PP when stocks are already at historically high valuations (almost 2 standard deviations above mean by some analyses http://www.advisorperspectives.com/dsho ... uation.php) and the Fed is widely expected to start returning interest rates to something more historically "normal"?
The prospect of another 20 percent (or more) decline in gold, if accompanied by a reversion toward the mean in stock valuations and the negative impact on long-term bonds of the Fed starting to raise interest rates toward something more historically "normal" would seem likely to push the PP toward out-of-character negative performance. Seems like this triple whammy would simply be too much load for the cash to carry.
Does the history of the PP suggest that simultaneously declining gold, stock, and long-term bond valuations are simply implausible? Is at least one among the gold, stock, and bond bears wrong? Since the money will want to go somewhere, will at least one of the three be buoyed when circumstances suggest all should trend toward the downside?
[url=http://Opinion:%20Two%20reasons%20why%20gold%20may%20plunge%20to%20$350%20an%20ounce]Opinion: Two reasons why gold may plunge to $350 an ounce[/url]
Hypothetically, if Messrs. Erb and Harvey are onto something, and gold continues a reversion to their "fair value" (roughly $825 by their calculation) or, worse, overshoots to the downside, what does it bode for the PP when stocks are already at historically high valuations (almost 2 standard deviations above mean by some analyses http://www.advisorperspectives.com/dsho ... uation.php) and the Fed is widely expected to start returning interest rates to something more historically "normal"?
The prospect of another 20 percent (or more) decline in gold, if accompanied by a reversion toward the mean in stock valuations and the negative impact on long-term bonds of the Fed starting to raise interest rates toward something more historically "normal" would seem likely to push the PP toward out-of-character negative performance. Seems like this triple whammy would simply be too much load for the cash to carry.
Does the history of the PP suggest that simultaneously declining gold, stock, and long-term bond valuations are simply implausible? Is at least one among the gold, stock, and bond bears wrong? Since the money will want to go somewhere, will at least one of the three be buoyed when circumstances suggest all should trend toward the downside?