Sunday, September 05, 2010

End of the Equity Cult? Maybe - but don't buy bonds!

Citigroup says that it's the end of the equity cult ...

It has taken 10 years, and two 50% bear markets, to reverse this cult. European and Japanese equities are already trading on dividend yields above government bond yields. US equities are almost there as well. An immediate reincarnation of the equity cult seems unlikely. Global corporates, especially the mega-caps, rushed to exploit cheap financing as the equity cult inflated. They have been slow to redeem equity now that the cult has deflated. Equity oversupply remains a drag on share prices."


The investing buying public is now pouring into bonds, with tragically low yields, at a fraction of the purchase volumes for equities, a ratio signalling a top for bond prices, unless long-term deflation really is coming.

My question is ... how can deflation truly be on the long-term horizon, in the face of obvious and growing disparities between food production, and consumption? Food inflation, always and inevitably, leads to all other kinds of inflation. Long term deflation like Japan - not a chance! (Post-script addition: this food inflation will be caused by, mainly, climate change as the primary driver).

So what piling into bonds will get you, over the medium to longer term (5-10 years), is a yield unlikely to keep pace with inflation, or a price which virtually ensures that you suffer a capital loss if you sell early.

Instead, you can take a dividend yield for a great many S&P 500 stocks which are well above the 10 year US government bond rate, something that hasn't happened for a very long time.

Bonds or stocks? Well, at the yields offered, bonds are now very risky.

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