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