low inflation around the world creates an environment

In addition, low inflation around the world creates an environment
in which foreign central banks are more likely to prevent
a sharp rise in the value of their currencies against the dollar—to
avoid domestic deflationary pressures—and are thus more likely

One way to view the benefits of diversification into other assets

One way to view the benefits of diversification into other assets
than stocks is to look at the returns for a portfolio of stocks,
bonds, commodities, and cash over time—for example, over the
past 10 years. The surprise here is not that an all-stock portfolio
did better over the long run. The surprise is that the diversified
portfolio did not do badly at all, in comparison. And it proved to
be less volatile. So there may have been a few more restful nights
for the investors who were diversified, although it is quite true
that they would have had fewer parties in the late 1990s.

High bear market correlation

What should investors do when confronted with the rising
trend in correlations of world stock markets and the fact that
these stock markets are even more closely correlated when stocks
are falling?
Butler and Joaquin said that if this high bear market correlation
continues, investors will have to try to anticipate and avoid markets
that will have higher correlations with the U.S. stock market in future
downturns. In a bit of economic analysis understatement,

Globalization increases

“The more that people invest overseas, the more common
ownership there is, the more there will be common responses to
events that move markets,” he said, referring to the 2006 summer
slump of global markets. “That is a fact of life and this correlation
is going to increase as globalization increases.”
It just takes a zero and a one to explain that correlations of
stock markets around the world are rising.

Market economies

In previous chapters we saw how, in market economies, the forces of supply
and demand determine the prices of goods and services and the quantities sold. So
far, however, we have described the way markets allocate scarce resources without
directly addressing the question of whether these market allocations are desirable.
In other words, our analysis has been positive (what is) rather than normative

Payroll tax

We can apply this logic to the payroll tax, which was discussed in the previous
case study. Most labor economists believe that the supply of labor is much less
elastic than the demand. This means that workers, rather than firms, bear most of
the burden of the payroll tax. In other words, the distribution of the tax burden is
not at all close to the fifty-fifty split that lawmakers intended.

S&P 500 had a total return

But that is known only with hindsight.
With diversification, you have to commit yourself in advance to
the fact that a variety of securities in your portfolio will move in
different directions or at different paces. The simple 50–50 split of
this example is diversification, but you can do a lot more.
The result of diversification is not always a smaller loss. It can
be a smaller gain. In 2003, the year the stock market began its recovery
from the 2000 crash, the S&P 500 had a total return of
28.7 percent while the return for the Russell 2000 was a stunning
47.3 percent. The combined return was 38 percent.