Nuances and other things that make you go hmmmm
The simple truth is this; equities are NOT really ‘cheap’. The chart of the S&P500 (middle, left) shows what valuation tops and bottoms look like in terms of P/E ratios and dividend yields and we are not there yet. Government bonds are at levels we have pretty much never seen before and likely never will again (chart, top left) and are only being bought out of fear or in the hope that the government will come in and be the greater fool (which I will admit is usually a pretty safe bet, but this time, the stampede to sell the government what it offers to buy will be absolutely overwhelming and many investors will get trampled in the rush). High yield debt is also getting way ahead of itself as a look at the number of shares outstanding in BlackRock’s iShares iBoxx $ High Yield Corporate Bond Fund ETF (HYG) demonstrates (chart, below left). Investors are being forced, by financially repres- sive government intervention, into chasing yield wherever they can find it—even if that means heading in directions that traditionally warrant a lot more caution.
As we approach QE3 in whatever form it takes (and, if there is one single thing I feel safe rely- ing on in current market conditions it is that QE3 is coming—most likely in the form of a massive, coordinated intervention by the ECB, Fed, BoE, PBOC and BoJ), it is interesting to note that in the safe-haven bond markets, the signs that investors fear the top may be in are finally beginning to show as a look at the chart on the following page illustrates. It shows the recent back-up in US and German 10 and 30 year
bond yields as the ‘smart’ money moves quietly towards the theater exit, hoping to hand its empty popcorn box and coke cup to the govern- ment employees who stand by the doors with empty rubbish bags after the show finishes.
Full Hmmm 19 Aug 2012