Time To Forget About Equities In Your Portfolio?

by: Roger Nusbaum

Jim Bianco raised some interesting points in a recent interview that are worth exploring. He was very critical of the 'Stocks for the Long Run' mentality, even singling out Jeremy Siegel. The building block for his thesis is that we have something of a large sample size that favors bonds over stocks which is the opposite of the argument that he says many financial professionals make. Bianco goes on to say "we don't understand the fundamental relationship between stocks and bonds."

There are a lot of things to consider here for anyone caring to draw their own conclusion. The tenet being attacked is that the more risk we take the more reward we get. Stocks are riskier than bonds so we get more reward from owning stocks. The last eleven years hasn't quite worked out that way which is a reason to ask some tough questions.

My comments all along about bonds, meaning US treasuries, is that they are expensive. They may stay this expensive for a long time or get more expensive but they are expensive. Buying the wrong part of the curve now only to have rates then go up would seriously impair capital. Buying two-three years out would not really impair capital but might leave you with below market yields in your portfolio for a little while if you can't sell. I've disclosed before that we own a lot of short-dated corporates and a lot of short-dated foreign sovereigns.

A building block of this site has been the extent to which plenty of foreign markets have had a very good, or at least "normal," run as US stocks didn't. US stocks have had lousy decades before so the experience of the 2000s is not unprecedented. From a purely contrarian viewpoint, and based on the 1930s and 1970s, it would not be crazy to think the next ten years could be pretty good. However, right here right now, there is no fundamental case IMO for the next ten years to be pretty good but there probably wasn't a good case in 1940 or 1980 either.

To be crystal clear, the above is more about what has happened in similar events before. My base case continues to be a muddle for US equities with "normal" returns coming from foreign markets ex-Big Western Europe and ex-Japan.

Bianco says we have to admit that we have a problem. I think many did that a long time ago (I'd like to think I did that many years ago) as collectively we all know far more about foreign markets than we did ten years ago.

The line of thinking expressed by Bianco is correct when applied to US equities, at least I think so, but just looking at US stocks (if that is what he is doing) is incomplete.