Brad DeLong illuminated the fact that US T-bonds are yielding - 1.5% and falling, while S&P is 12% higher from last year. Serious economists say S&P is historically low. My opinion is that there was a change in EU and thay are starting to increase liquidity, just like Bernanke. Greece and Spain default is behind us. Europe will muddle through 2012.I am selling the "good" stocks and bonds, and buying "bad" corporate bonds paying 30 - 40%. I think that is the right thing to do.
6 comments:
In my opinion there are flaws in DeLong's reasoning. That 7% real return (10% nominal) on the S&P 500 applies to the very long term. From Jan 1, 2000 to Dec 31 the S&P 500 returned a real (adjusted for inflation) -1.93% annualized (CAGR). And that includes dividends. There have been time periods when the S&P was miserable for a long time. For example 1930 to 1940 0.85% (real annualized), 1970 to 1980, 0.18%. Carefully study the stock market matrix http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html to see how critical timing is. The green islands show 7% to 10% real return on the S&P 500 and when you had to go in and when you had to come out to realize the green.
I'm especially pessimistic about the S&P over the next ten years. With the baby boomers retiring, we will see a lot of stock selling which will drive down the price.
Fundamentally DeLong makes the ergodic assumption, or the same data generating process applies to the future as well as the past. Read about the ergodic axiom and how it applies to economics at http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html
Finally, in my opinion DeLong would make a poor money manager. He didn't see the global financial crisis coming, and in fact was arguing it was not going to happen. Nice when you have tenure. You never have to be right to survive.
I think buying the "bad" bonds would be a terrible mistake unless you believe the creditors will get bailed out. To which I say, "bailed out with what?" Created money? Europe is broke, and they can't fix by manipulating symbols. The U.S. is broke too, and that why one should stick with high dividend low volatility stocks issued by companies with a good business model. Look for a high return on working capital, EBIT/(net working capital) and high earnings yield, EBIT/(Enterprise value). Also remember that my advise might be worth only what you paid for it.
Whoops wrong link for the ergodic stuff. Here is is. http://rwer.wordpress.com/2012/03/28/the-ergodic-axiom-davidson-versus-stiglitz-and-lucas/
buying the "bad" bonds would be a terrible mistake unless you believe the creditors will get bailed out.
I dont think the Bank of Israel will allow the country's largest conglomerate to go under. Also American and European banks got ALL bailed out.
The Lehman Brothers investment bank didn't get bailed out and it went under in 2008. The bailout of European banks is a work in progress, we don't know what's going to happen. Remember the ECB is not supposed to create money do bailouts, they have to ignore the law. Let's not forget that late last year M. F. Global made some big bets on Spanish, Italian, Belgium, and Irish debt only to have suffer a blow up. They are also missing a lot of client money. The former CEO Jon Corzine will be lucky to stay out of jail.
In any case you are talking about very risky corporate bonds, which is different from sovereign or bank debt. As for the S&P 500, it's still overpriced according to Tobin's Q. See the book "Valuing Wall Street" for details. Also see Doug Short for the latest update on the Q ratio. http://www.advisorperspectives.com/dshort/updates/Q-Ratio-and-Market-Valuation.php The ratio is still at the overpriced level. The Q ratio has done very well in the past at predicting bull and bear markets.
The Lehman Brothers collapse was unexpected and there was no time to react. It is untypical.
REgarding valuation, I feel that S&P is undervalued. But it is open to debate.
The Lehman Brothers collapse was unexpected and there was no time to react. It is untypical.
REgarding valuation, I feel that S&P is undervalued. But it is open to debate.
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