What should investors do

Because of these higher than normal correlations in big market
sell-offs, the authors estimate that in the worst of bear markets
the annual return to investors could be about two percentage
points lower than expected in a portfolio equally split between
domestic and foreign stocks.

Correlation between the U.S. markets

The graph of these correlations, shows
how dramatically the relationship has changed. Until August
1998, the correlation between the U.S. markets and developed
stock markets abroad—from the United Kingdom and Germany
to Japan and Australia—had been over 0.6 only two times in
more than 23 years, in February and March of 1978. Since August
1998, the correlation has not been below 0.6 even once.

Foreign Debt market or markets

It just takes a zero and a one to explain that correlations of
stock markets around the world are rising.
A one (1) means a strong correlation in the same direction,
while a minus one (–1) means a strong correlation in the opposite
direction. A zero (0) means no correlation. In the analysis here we
are being conservative, using five-year, or 60-month, rolling correlations.
This means that each monthly correlation reading includes
five years of returns from the United States compared to
five years of monthly returns of a foreign market or markets. This
smooths out a lot of the noise.

Thanksgiving debt din- producer surplus

When consumers go to grocery stores to buy their turkeys for Thanksgiving din- producer surplus
ner, they may be disappointed that the price of turkey is as high as it is. At the
same time, when farmers bring to market the turkeys they have raised, they wish
the price of turkey were even higher. These views are not surprising: Buyers always
want to pay less, and sellers always want to get paid more. But is there a
“right price” for turkey from the standpoint of society as a whole?

New luxury tax

In 1990, Congress adopted a new luxury tax on items such as yachts, private airplanes,
furs, jewelry, and expensive cars. The goal of the tax was to raise revenue
from those who could most easily afford to pay. Because only the rich
could afford to buy such extravagances, taxing luxuries seemed a logical way of
taxing the rich.
Yet, when the forces of supply and demand took over, the outcome was
quite different from what Congress intended. Consider, for example, the market
for yachts. The demand for yachts is quite elastic. A millionaire can easily not
buy a yacht; she can use the money to buy a bigger house, take a European vacation,
or leave a larger bequest to her heirs. By contrast, the supply of yachts is
relatively inelastic, at least in the short run. Yacht factories are not easily converted
to alternative uses, and workers who build yachts are not eager to
change careers in response to changing market conditions.