Hat tip to Clusterstock this morning which posted about a Bloomberg article, “Cash best as Record Correlation Hits Herd Collapse“. Essentially, the article captures the saying on trading desks “that when it all hits the fan, all correlations go to 1″. In other words, when markets crash, they crash in unison.
The Bloomberg article explores a 5 decade high in correlation between different asset groups, like stocks and commodities. In fact, 
according to Bloomberg’s data, the correlation coefficient hasn’t pierced throught the .66 mark ever. It sits today at 0.74.
“There’s nowhere to hide,” said Joseph Mezrich, the head of quantitative research at the U.S. brokerage unit of Nomura Holdings Inc. in New York. “The problem of correlations is growing, and I don’t think it goes away.”
If we continue to see asset classes move in tandem, this makes diversification all the harder. Proponents of market timing, versus buy-and-holders, will find vindication in this data.
Financial planners will look at the data and take a longer view — basically calling attention to longer term data that shows that owning different asset classes provides real diversification longer term. Check out Geoff Considine’s great work on this subject.
Gotta know when to hold ‘em and when to fold ‘em.
