It is hardly an insight to note that markets today arebeset with fears. What is less widely acknowledged and critical toinvestment strategy, however, is that the level of anxiety hasdriven market segments to different extremes of valuation. On theone side, widespread fear has driven up the prices of the usualsafe havens—U.S. Treasury bonds, gold, the debt of other presumablystronger governments. On the other, it has severely held backrelative pricing on equities and credit-sensitive bonds. Thisdivergence presents remarkable investment opportunities. Becausevaluations have braced so thoroughly for disaster, the leastimprovement can change the pricing equation radically. Theprobabilities suggest it will move in the direction of stocks andlesser quality bonds over presumably safer investments.

The concerns that have driven this valuation situation are wellknown. In addition to the usual Middle Eastern anxieties, there'san especially acute threat of war in the Persian Gulf. Europe'ssovereign debt crisis continues and threatens to do as muchfinancial and economic harm as America's 2008-09 subprime crisis.Washington seems unable to find fiscal direction or even beginto address the country's public debt crisis. And the U.S. economyis growing so slowly that prospects of a second recessionary dipare never far from investors' minds. This is only a partial list.But in today's pricing equation, the question is less about therealities of these great risks—something that is indisputable—thanwhether relative valuations have exaggerated them. The figures onboth sides of the safety spectrum suggest that they have.

The safe havens have been so bid up that they offer investorsnothing but security. Gold, for instance, has risen by more than60% over the past couple of years, while the yields on supposedlysecure government bonds have fallen to ridiculous lows. RecentlyGerman bond yields actually dipped into negative territory,effectively forcing investors to pay Berlin for the privilege oflending it money. Ten-year U.S. Treasury notes, with yields under2%, still pay a positive nominal return, but with inflation above2%, investors in these investments still face an ongoing real loss.Deposit rates, held down below 1% by the world's major centralbanks, also impose a real loss on those who would seek safety in aninsured account. Fear must remain intense just to keep people inthe poor-paying assets. The least hint of relief would prompt anexodus.