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Peter Brimelow
Oct. 14, 2010, 9:55 a.m. EDT · Recommend (6) · Post:
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Gold: Not over yet?
First Take "º
Letter editors unexcited by Yahoo's potential
By Peter Brimelow, MarketWatch , Edwin S. Rubenstein
NEW YORK (MarketWatch) "” Is there a bond bubble? Short answer: yes.
We come to this conclusion by looking at data assembled by Yale economist Robert Shiller, author of the 2000 best-seller "Irrational Exuberance," who has a good claim to have called bubbles in both the stock and house markets. See Shiller's website.
Our chart (below) takes the dividend yield on stocks and subtracts from it the one-year interest rate on CDs "” a riskless investment.
This replicates the choice confronting an investor deciding whether to allocate assets into stocks or bonds. Because we're looking at the one-year rate, inflation over that short time period is pretty much a known quantity.
Adjusted this way, the dividend yield on stocks is higher than it's been for 45 years
A high dividend yield is generally taken to be a sign of a stock market bottom. Note that the adjusted dividend stabbed up almost as high when stocks collapsed 2000-2002.
Of course, there was also a major stock market bottom in the early 1980s, but then the dividend yield was down into record negative territory.
However, that was also a major bond market low. Interest rates were at extraordinary peaks, in reaction to the Great Inflation of the 1970s.
Interest rates came down, and bonds reciprocally rose.
The situation right now is completely different. Interest rates are at record low levels, because of the Federal Reserve's efforts to keep the economy moving after the Great Crash of 2008.
In other words, interest rates have nowhere to go but up. And bond prices have nowhere to go but down.
Unless, of course, there is deflation. Under those circumstances, bonds would continue to appreciate in real terms.
Dollar came under renewed pressure against most Asian currencies after Singapore's central bank tightened policy. That pressure was also evident in the trade deficit, which ballooned in August. Kathleen Madigan, Eduardo Kaplan and Paul Vigna discuss.
But our long-term charts show that deflation would be out of line with the last 100 years of financial history. Inflation appears to be far more likely. Read Sept. 24, 2009 column. See Sept. 24, 2009 column.
In the 100 years before 1964, common stocks paid dividends that, on average, exceeded yields on bonds. The stock premium sometimes disappeared in bull markets, only to return in the bear cycle.
Dividend yields peaked relative to bond interest rates during the Great Depression.
By the 1970s, however, dividend yield premiums disappeared "” arguably for two reasons. Bond investors, burned by that decade's virulent inflation, demanded interest rates above expected inflation. At around the same time the stock market became a mass market: small investors poured money into the market via mutual funds, 401(k) and pension plans, pushing dividend yields sharply lower.
Today the small investor has retreated to his foxhole, and fear of deflation is as commonplace as inflationary worries. The dividend yield premium is back.
Hopefully the depression scenario is not.
But whether you think deflation or inflation lies ahead, the moral of the adjusted dividend yield chart is, short-term, that stocks seem to be a better bet than bonds.
Edwin S. Rubenstein is the president of ESR Research in Indianapolis.
Peter Brimelow has been an editor at Barron's, Fortune and Forbes and is the author of "The Wall Street Gurus: How You Can Profit From Investment Newsletters."
Only one of nearly 200 monitored investment newsletters has been recommending Yahoo's stock.
11:34 a.m. Today11:34 a.m. Oct. 14, 2010 | Comments: 1
- jeeemusna | 9:00 a.m. Today9:00 a.m. Oct. 14, 2010
"Peter Brimelow: Is there a bond bubble? http://on.mktw.net/b5Y0gB" 9:15 a.m. EDT, Oct. 14, 2010 from MKTWBrimelow
"Peter Brimelow: Gold: Not over yet? http://on.mktw.net/cuhKWj" 11:27 p.m. EDT, Oct. 10, 2010 from MKTWBrimelow
"Peter Brimelow: Linde Equity Report keeps rolling along http://on.mktw.net/d858t2" 6:26 a.m. EDT, Oct. 7, 2010 from MKTWBrimelow
"Peter Brimelow: Most gold bugs confident of more gains http://on.mktw.net/bsBRiJ" 1:33 a.m. EDT, Oct. 4, 2010 from MKTWBrimelow
"Peter Brimelow: Famous bear seems about ready to give up, for now http://on.mktw.net/9AATjm" 2:27 a.m. EDT, Sept. 30, 2010 from MKTWBrimelow
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