It is hardly an insight to note that markets today are beset with fears. What is less widely acknowledged and critical to investment strategy, however, is that the level of anxiety has driven market segments to different extremes of valuation. On the one side, widespread fear has driven up the prices of the usual safe havens—U.S. Treasury bonds, gold, the debt of other presumably stronger governments. On the other, it has severely held back relative pricing on equities and credit-sensitive bonds. This divergence presents remarkable investment opportunities. Because valuations have braced so thoroughly for disaster, the least improvement can change the pricing equation radically. The probabilities suggest it will move in the direction of stocks and lesser quality bonds over presumably safer investments.

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

The safe havens have been so bid up that they offer investors nothing but security. Gold, for instance, has risen by more than 60% over the past couple of years, while the yields on supposedly secure government bonds have fallen to ridiculous lows. Recently German bond yields actually dipped into negative territory, effectively forcing investors to pay Berlin for the privilege of lending it money. Ten-year U.S. Treasury notes, with yields under 2%, still pay a positive nominal return, but with inflation above 2%, investors in these investments still face an ongoing real loss. Deposit rates, held down below 1% by the world's major central banks, also impose a real loss on those who would seek safety in an insured account. Fear must remain intense just to keep people in the poor-paying assets. The least hint of relief would prompt an exodus.