Actually it was a bullish article using stats like global growth rates exceeding 4% as being one catalyst although growth rates above 5% are normal based on recent times. Citing stats from Morgan Stanley the article notes that European stocks are yielding 3.8% versus a bond (undefined in the article) yielding 3.4% making a ratio of 1.1 versus an average of 0.75. Also mentioned is the loose monetary policies of many countries creating an inflationary environment which favors stocks over bonds.
The article closes out with;
But given strong corporate balance sheets, healthy profits and—barring a euro-zone meltdown—a likely continued, if bumpy, recovery, stocks should maintain their poise.
In thinking about stocks being cheaper than bonds, I am on board with that. I've been writing for ages about how expensive bonds are, conceding that they can become more expensive which is what has happened if you zoom out a little and look at the last couple of years. Buying high, all time highs actually, becomes a problem at some point which is why I have kept maturities very short in client accounts.
The various ways people look at earnings results in various PE valuations. If PE ratios are number one or two on your priority list then you have some preferred method you rely on but I don't think there are any PE studies that would show stocks to be more expensive than bonds right now.
None of the above however includes any sort of accounting for current events or forward looking analysis. I don't know if the article is saying not to assess current events or do any forward looking analysis but it certainly doesn't give a whole lot of ink to those subjects.
If expensive bonds can get more expensive then cheap stocks can get cheaper. This is meant to be an incomplete statement as buying a stock based solely on it being cheap by some measure is also incomplete. In looking at the 3.8% dividend yield of European stocks this does not seem wildly cheap as European stocks generally yield more than domestic stocks but based on the conclusion that barring a meltdown in Europe...well even if there is no contagion you have a monetary union with some level of dysfunction, lousy demographics, lousy growth prospects and lousy economic stats. If the above pertained to Paraguay (just an example that is not really an accessible investment destination) it would take you one minute to decide no way.
Again, assuming no meltdown in Europe.
Buying a cheap market with lousy prospects seems short on logic. This differs from the occasional scary event like we used to have in decades past. The markets in question, these being big Western Europe (and the US and Japan for that matter), have been dealing with long term fundamental issues for years now, as reflected in stock market results for the last elven years, with no clear path to resolution.
If you buy into the above paragraph then what priority should cheap take over broken? I obviously think broken is far more important which is why I write so often about buying into investment destinations that are on firmer economic footing with reasonable prospects for equity market prosperity.
As far as loose policy creating an inflationary environment that favors stocks, that assumes a lot of normalcy, more than we might want to count on. I forget who said this but, and I'm paraphrasing, inflation is easy to create except when you need it.
I'll close out repeating a point from above because I think it is a good one and not previously articulated in this manner; if the above pertained to Paraguay (just an example that is not really an accessible investment destination) it would take you one minute to decide no way.
2 comments:
Andy Harliss at http://tinyurl.com/27fh46w isn't too impressed either but this market began tearing itself loose from fundamantals sometime in the late 90's just as the FIRE economy tore itself loose from Main Street and it's only gotten worse since. It is unsustainable AKA it can't continue but d*mn it had more legs than I figured, that's for sure.
I've joined a wager pool that the Irish will not tolerate being put on the hook for a bunch of bankers and will throw the plutocrats out, forcing either a debt reduction (nationalization of the Irish banks and a big haircut for the German banks) or departure from the Euro (or both but I didn't bet on the quiniela).
"inflation is easy to create except when you need it." Good line. We could sure use a little more of that now but there's hardly a whiff so debts just get heavier to bear. Specific price levels are going up in some places that hurt like health insurance and education (food and energy are up one month and down the next but longer term trend there is only slightly up YoY) but the general price level, the broad average that tells you whether dollars are readily available or hard to come by, is still trending down.
NB: an excerpt from one of the (many, many) articles from Ireland that helped persuade me things could end with a bang rather than a whimper: Greek riot is more, um, photogenic but national repudiation of debt has far wider impact.
From the Irish economist, Kevin O'Rourke @ http://tinyurl.com/2f5yjoh
"I yield to no-one in my loathing of the men and women who have done this to my country. ...[T]he biggest Irish joke of them all, which underpinned the bank guarantee in the first place: that if we wanted investors to retain confidence ...we needed to make sure that nobody who invested in our (private sector) banks ever lost a penny? ...On the night the guarantee was announced, [Morgan] Kelly pointed out that while it was the right policy if the Irish banks were facing a liquidity crisis, it was a terrible policy if they were insolvent, which was in fact the case ....
The reaction to the news that Irish taxpayers are to be squeezed while foreign bondholders escape scot-free has been one of outraged disbelief and anger. At the start of last week, it was possible to make the argument that ‘burning the bondholders’ was irresponsible, since it would inevitably lead to contagion, and the spread of the crisis to Iberia. That argument has at this stage lost all validity, since contagion has happened anyway.... Who knows what the political consequences of all of this will be? The southern Irish are a conservative lot... political change in normal times is slow; but when it does come, it may come in a rush...."
In the meantime the market floats like a butterfly and stings like a bee [lol]
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