Get Bullish, Muppets!

Sounds like Goldman has some equities (AAPL?) to dump on its muppet clients.

From Business Insider:

Goldman portfolio strategists Peter Oppenheimer and Matthieu Walterspiler are out with a doozy of report, basically presenting a big bullish case for stocks, relative to bonds.

From Goldman:

In 1956, George Ross Goobey, the general manager of the Imperial Tobacco pension fund in the UK made a controversial speech to the Association of Superannuation and Pension Funds (ASPF) arguing the merits of investing in equities to generate inflation linked growth for pension funds.  He became famous for allocating the entirety of the funds investments to equities, a move that is often associated with the start of the so-called ‘cult of the equity’.

Prior to this, equities were largely seen as volatile assets that achieved lower risk adjusted returns than government bonds and, consequently, required a higher yield. As more institutions warmed to the idea of shifting funds into equities, partly as a hedge against inflation, the yield on equities declined and the so-called ‘reverse yield gap’ was born. This refers to the fall in dividend yields to below government bond yields; a pattern that has continued, in most developed economies, until recently.

In his speech to the ASPF, Ross Goobey talked about the long-run historical evidence that the ex-post equity risk premium was positive and that investors ignored this at their own peril.

The long-run performance of equities was much greater than for bonds having adjusted for inflation. As he said: ‘I know that people will say: ‘Well, things are never going to be the same again’, but … it has happened again, and again. I say to you that my views are that it is still going to happen yet again even though it may not be the steep rises which we have had in the past.’ Over the 50 years that followed Mr. Ross Goobey’s pitch, his predictions proved very successful. The annualized real return to US equities (as a proxy)  between 1956 and 2000 were 7.4%.

But things have changed since the start of this century and the collapse of equity markets following the bursting of the technology bubble. In this post bubble world valuations fell from unrealistically high levels. But the decline of equity markets continued well after most equity markets returned to more ‘normal’ valuations. The onset of the credit crunch, and the deleveraging of balance sheets in many developed economies that followed this have punctured the confidence that once surrounded equities, and the pre-1960s skepticism about equity returns has returned. Dividend yields are once again above bond yields and both historical, and expected future returns have collapsed.

That’s right muppets, time to get bullish and hoover up all the equities we want to offload! This is a once in a generation opportunity to own equities!

Or not. Let’s just say that prices aren’t exactly being supported by a surge in manufacturing:

That’s right: manufacturing is just about where it was at the turn of the millennium, and unsurprisingly so is the S&P.

However there is a sliver of a superficial hint that the muppet masters may be right.

Here’s the S&P500 priced in gold:


Looks cheap next to where we were ten years ago. But in the long run I don’t really think where we were ten years ago tells us much about the fundamentals; it tells us more about Greenspan’s propensity to grease markets with shitloads of liquidity and watch stocks soar. The deeper I dig into the data, the more I tend to conclude that we really need to throw all recent historical trends out of the window.

Here’s a choice data set:


Does that look like a normal recovery? It looks like a complete paradigm shift to me. I’ve already covered my underlying reasons for believing that we live in unprecedented times. But this chart from Zero Hedge speaks as much as anything else:


So, if you have money to burn and a gullible nature go ahead and throw your money at the muppet masters. In the long run, equities and other productive assets have proven themselves superior to any other asset class, because they tend to produce a tangible return.

But right now? The real problem is that the global economic system is a mesh of interconnected fragility where one failed party can take the entire system down. Well run companies can be dragged down by badly-run counter-parties, and badly run companies can just be bailed out, totally obliterating the market mechanism. This is not an environment conducive to organic growth. It’s a cancerous environment, juiced up on (priced in) central bank interventions. It is the very definition of iatrogenesis: when “medicine” causes deeper and worse sickness.

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23 thoughts on “Get Bullish, Muppets!

  1. a move that is often associated with the start of the so-called ‘cult of the equity

    hmmm… the advent of first generation funny-money vaacum tubes that let keynesians forget printing causes inflation. it took half a century to realize vacuum tubes also get clogged :)

    The real problem is that the global economic system is a mesh of interconnected fragility

    I agree we’re probably meters away from a plunge, Baltic Dry still crawling on the floor, Goldman itself changed its asset valuation policy (abandoned mak-to-market), ZH showed credit anticipates plunge etc..

    Marc Faber, however, points out that owning equities proved to be relatively safe vehicle for preserving capital during highly volatile perodios, like war. bond holders got obliteraded why equities recovered.

    it’s a question of diversification model I guess

    • Marc Faber, however, points out that owning equities proved to be relatively safe vehicle for preserving capital during highly volatile perodios, like war. bond holders got obliteraded why equities recovered.

      In a word, yes. Taleb notes this also. During hyperinflation stocks tend to crash up.

      However I still have further and deeper doubts, because of corporations entanglement in the derivatives mess. It’s like so many corporations took nuclear bombs, stuffed their balance sheets with them, and wired them up all up so that if one goes off they could all go off.

      Very dangerous. The beauty of (physical) gold and tangible assets is it has no such counter-party risk.

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  4. Wouldn’t your conclusion about throwing all historical norms asside, also apply to gold?

    Don’t get me wrong, I’d rather own gold over equities – but i’m increasignly skeptical about gold’s role in our future. Today, all is digitized, and unless we get a mad max breakdown, gold might in fact end up being an old relic.

    Barclays bank just addopted a smart-phone cash machine, where you can use your phone to “text” money to another smart phone. Do you really think those in power will slap their heads, realize their mistakes, and go back to using gold coins?

    Gold has held its value very well since 2001, but will that not change at some point in the future?

    • Gold has held its value very well since 2001, but will that not change at some point in the future?

      Gold has held its purchasing power for a much longer time:

      I suppose in theory gold could end up losing its purchasing power. But it won’t be because of (by-definition hyperinflationary) digital currencies. It would be more exotic than that; a particle accelerator that can produce gold atoms from iron cheaply, perhaps.

      My view is that gold is not really a norm (like a price support level, for example) but rather a heuristic. The fact that commodities and real estate priced in gold are relatively stable (certainly moreso than fiat, which has a huge inflationary bias) in spite of its (ahem) “demonetisation” proves that gold remains stable and robust.

      Gold does not necessarily have a role in everyone’s future. Certainly, I do not assume a return of the gold standard. But if it has a role in your future, it will retain its purchasing power, while equities and treasuries may not. It does not, however create wealth, and people should be wary of the difference.

  5. I have Sheep I can sell. As long as you can get free land, I can promise you will make a 100% return a year.

    If you know any rich people who bought a Ranch/Estate.Station, just approach them and offer to cut grass. They will appreciate it.

    I have over 200 acres of free land now at my disposal. It is a wonderful hobby. I love my pets.

    This is how Australia’s settlers made their fortune. Exchange Tobacco with Natives in return for land the size of England to Texas.

  6. Are you sure those weeks unemplyed graph is right? So a person was unemployed for 7 weeks in 1950, right after the war. when there were 5 or more Auto Manufacturers, no imports of stuff from Europe (War) nor Communist China. I admit it is tough for job seekers now but back then you had any job, even if it was menial.

    • sorry I answered my own question. It was Mean. If you were unemployed back in t he 50′s There was something wrong with you, so you were generally unemployed until you were hungry and needed to buy booze. Now with Welfare you can stay unemployed longer before shovelling Chicken Manure. Nothing wrong with that, it was how I paid my way through University.

      • Well basically the problem is that the USA has outsourced its productivity, and so now many people find they are not “needed” by the economy. This is cheap but fragile. The answer in my view is to deregulate certain domestic markets (e.g. taxis, food carts, trade, etc) to lower barriers to entry so that unemployed people can more easily become self-employed. At present it can take thousands of millions and money months of bureaucratic health and safety training to become licensed to do many of these menial jobs.

        • Spot on. In Australia our Labour (Democrat/Left/Socialist) Government encourages unemployed people to undergo formal training with Registered Trainers. It is a rort as it is more theory than practice, and the trainers make a packet.

          The job seekers are still unemployable! Their training is insufficient. Our WorkSafety legislation and insurance does not encourage employers to take on long term unskiled staff. Unfair dismissal is impossible without heavy compensation. This results in high long term structural unemployment.

          Great if you are a Union worker on twice the average salary. No competition from keen job seekers. A steady stream of Labour voters (Welfare is far more secure!)

          And if a long term unemployed person wanted to freelance as a hired worker, they can not. Plus Local Government Red Tape when setting up a business.

          Suffocating is not the word for it!

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