A few weeks ago, a pair of billion dollar nuclear submarines managed to crash into each other in the vastness of the Atlantic. Despite all the high-tech gear on board, such collisions are surprisingly frequent; back in 2005, a US submarine was almost destroyed when it crashed into an undersea mountain in the Pacific. As a kid, when I first boarded one, I was fascinated not by the claustrophobic living conditions, but by the trick of navigating blind using sonar, of inferring the risks surrounding you not by directly observing them but by picking out the faint signals they generate amid all the surrounding background noise. Investing is similarly based on inference and can become hazardous if the noise to signal ratio gets to an extreme, making sensible decision making very difficult. In recent weeks, many asset correlations which have been useful in navigating treacherous investments waters have simply broken down.

A few months ago, gold would have been inversely correlated with the dollar (the store of value play) and positively with oil (the inflation play); now the dollar and gold move in tandem, gold is at a record multiple of oil and seems to have taken the role of the Vix as a fear gauge. The Yen, rocket fuel of the global carry trade, was long inversely correlated with the S&P, but again this relationship has recently cracked, leading to a 10% tumble versus the dollar (as I forecast on Jan 27th). Again, Treasuries would typically have a strong safety bid in the latest equity market sell-off, but they have barely rallied after seeing a sharp spike in yields in January. Even more strangely, sovereign CDS spreads have soared globally, yet spreads on the banks those same countries now explicitly guarantee have generally narrowed. Equities are now yielding 50-100% more than their local bond markets around the world, which seems very excessive even allowing for the undoubted pressure on dividend payments. I can't recall ever seeing so many correlation breakdowns across asset markets. So what are the implications for investors? The charts below provide some useful perspective.