Market Currents
Ugly chart of the day: The widening gap between earnings yields and Treasury yields represents...
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Friday, June 1, 2012, 6:25 PM ETUgly chart of the day: The widening gap between earnings yields and Treasury yields represents "a massive failure of our economic institutions" - we have low bond yields because the Fed has failed to do its job, and we have high stock yields because the market has failed to do its job.
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He seems to be indicating that the market's volatility over the last decade or two has created too much risk, higher than the risk tolerance of too many investors, who are flocking to bonds.
From the article:
"investors’ key goal is loss-avoidance, not profit-seeking."
"the financial industry’s failure adequately to mobilize society’s risk-bearing capacity for the service of enterprise."
"Well-functioning financial markets would mobilize that risk-bearing capacity and put it to use for the benefit of all, so that people who did not think that they could run the risks of stock ownership could lay that risk off onto others for a reasonable fee."
He also notes a loss of faith in governments' ability to do what is needed to stabilize markets: "keep the flow of spending stable so that big depressions with long-lasting, double-digit unemployment do not recur."
The author factually lays out the mathematical disparity presently existing between equities and bonds, presently, and what that means for projected returns. Then, he goes into subjective reasons why the equity returns may not be being selected by investors (i.e., perceived risk). However, it's just as possible that the paltry (negative even) return projected for bonds might not develop, either, and could get worse in a major way with even a modest increase in interest rates.
There is no way to quantify the risk of either stocks or bonds missing their objective returns, so, for me, at least, the choice to pick +7% versus -1.02%, which are the expected values based on known data, is relatively easy. If we apply any similar, but unknowable, outcome-risk discount factor equally to both scenarios, the equity side will still have a higher "expected value" (a statistical term) over time.
Absent introducing unquantifiable subjectivity, the statistical choice remains obvious.
Of course that is just IMO and they way I am playing it. Even had to add a bit more TBT yesterday under $15. I never would have thought I'd see 10-yr rates under 1.5 but it can't last forever.