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If someone says this war could expand and becoming very problematic and lasts a very long time, I would agree with this view. It doesn't have to, but you understand once you start the war and you have no clear objective, it's very difficult to just walk away from it and kind of go home.
It's actually a tragedy that nowadays when we have a global economy that is relatively sound, I'm not saying perfectly sound, but we have a global economy that has created a lot of prosperity around the world. I mean, and lifted the standards of living of many people that people go to war for whatever. It is not clear to me what is the objective of the Americans.
I was writing my report when the aggression occurred and I was thinking at the time, you know, how will markets react? And my view was it's going to be volatile. And the bond market, the first reaction was to rally. That was also my inclination to think that bonds would rally, but they rallied and then they came down again because obviously a war is sort of inflationary. And the inflationary pressures are there in the US anyway because the money supply is accelerating again on the upside.
So one thing I'm quite sure of: it's very questionable that this war is good for financial assets because you have to consider wars are inflationary. You can look it up in the economic literature. During the Napoleonic wars, prices went up. During the American Civil War, prices went up. World War I, World War II, and so forth. And sometimes they go up before the war and sometimes they go up after the war. But around war times, commodity prices tend to go up and also peak out. But the fact that prices go up strongly leads to misallocation of capital. And in my view, this war will provide an excuse for the Federal Reserve to print money.
So whereas the initial reaction has been for the dollar to go up, I would expect eventually the dollar to weaken again. And I think that bonds are not attractive because they are low-yielding instruments to start with. It's not like in 1980 bonds were yielding 15% to 10 years and were relatively attractive at that time. Now this is not the case. But in bonds, you may lose less money than in stocks because American stocks are pricey. I mean, not every stock is pricey, but the ones that are contained in the indices, in the S&P, in the NASDAQ, namely the magnificent seven stocks, they have a very large market cap and a heavy weight in the index, something like 35%. And they are very pricey. And if they go down, then the index is pulled down as well. So, I'm not very optimistic about US stocks.
And the rest of the world, in my view, will to some extent suffer economically from the war in the Middle East and they may get involved in some way. So I'm sort of not very optimistic about financial assets. We also have to recognize financial assets are in the sky relative to the real economy. But I acknowledge there are markets that are not terribly expensive. Latin America is not terribly expensive and Southeast Asia is not terribly expensive. Is what I would call reasonably priced. I mean, I'm still positive about the precious metals, but frequently a market will peak out on the news. And in my view, the market for precious metals was strong before the announcement of the aggression because the market was expecting an aggression. Maybe not you and me, but some people in Washington, they knew it's going to happen because it was discussed. And in Israel, they knew it would happen.
When people talk about diversification, they frequently think, well, okay, I will have a portfolio of 20 different companies and so I'm diversified. But they hold the 20 different stocks in a portfolio with one custodian, say Group or State Street Boston or Merrill Lynch or Goldman Sachs or whatnot. But I'm talking diversification in holding stocks, bonds, and cash, precious metals, and real estate. So four asset classes. And then someone may say, okay, I want to have additional asset classes such as collectibles and cryptos and whatnot. And then I'm talking about diversification in terms of geographical diversification. I want to have some assets say in Canada and some in Europe and some in Australia and some in Asia, in maybe Singapore and Hong Kong and so forth. You understand? So I have geographical diversification, like also real estate. I have some in Switzerland but I also have some in Thailand. This is my idea of diversification.
Now an individual may say, well Mark, you are in a fortunate position. You can do these things. I cannot say a small investor, he doesn't have the money to be so diversified. But equally, he may not be as vulnerable to asset price movements as someone like me whose business is asset markets. Say a doctor doesn't depend terribly on the stock market and so forth. But my wealth and earnings depends on financial markets not collapsing. That is a different position.
If you look at history, the last 40 years have been heaven on earth for asset holders. The prices of paintings went up. The price of stocks went up in the world. The price of real estate went up and so forth. And in the process, affordability became very limited. You know that in real estate, and we're talking here about residential, the affordability is at the lowest in history in the US. It means that wages, they have gone up, but they haven't gone up as much as the prices of real estate, so affordability is down. And when I started to work, the stock market capitalization in the US was 25% of GDP. Now it's 150% of GDP. In other words, when I started to work, salaries were high and asset prices relatively low. And now asset prices are in the sky and salaries relatively low. You can thank the central bank for this condition. That's why I'm negative about financial assets, period.
But I'm also aware that there is a risk to hold all your cash. I mean, all your funds in treasury bills and treasury bonds and in savings accounts at banks as risky as to hold a reasonably good corporation. The emerging markets, and by the way also Europe, have been in a bear market against the US since 2010. In other words, if you measure the relative performance of emerging markets visually, the US is a straight downwards trend since 2010 until 2025. The turning point was December 2024 when emerging markets began to outperform the US. And as you know, last year many US indices were flat to up a little, but emerging markets, a lot of them went up 30, 50%. And for the first time in 15 years, since 2010, both Europe and emerging markets significantly outperformed the US.
Now knowing how investors are in time, retail investors will wake up and also portfolio managers and say, "Hey, emerging markets and Europe and gold and silver perform better than my portfolio. I better do something about it. Otherwise, my bonus is going to be cut." And then they'll go and buy emerging markets. It's begun like there some money has been flowing into emerging markets recently, but nothing in comparison to before. And if you look at the assets of ETFs, the assets of ETFs say of semiconductor ETFs and of magnificent seven ETFs, they are expanding dramatically. The assets of gold funds, they went down and recently they've gone up, but they haven't gone up much at all. They're lower than say 5 years ago. And that tells me we actually for precious metals and for emerging markets, we are at the beginning of major upward moves.
But the instances where a seam goes down, say 1973-74, the US stock market went down and everything went down with the exception of gold and silver and other instances. In 1989, the Japanese markets went down, but the money flowed out of Japan into other markets and they went up. Both is possible. After 2000, until 2003, precious metals didn't move up and the resource stocks didn't move up, but then they moved up a lot. So, there's in my view no urgency to buy into emerging markets. My portfolio is emerging markets, you understand? But I'm saying what an investor should do who doesn't have any exposure. I already have my exposure and I'm happy to hold stocks.
Here is the question an investor has to ask himself. Say I own a good company. I bought it at 10 and it is now at 30 and I think it will correct now. Should I sell it and with the view to buy it back at 25 or at 20? Or should I just hold it because if I sell it, I'm in cash and maybe something happens to my cash? I don't know. Maybe it's better to sit on the stock. It goes from 30 to 20. It's a good company, so I don't know. You understand, each individual is different, has different objectives. I can live with a portfolio that goes down 20% because it went up a lot before. But other people, they have diarrhea if the stock market goes down 5%.