We find it very amusing that former Fed czar Bernanke has now taken to blogging his views in an effort to explain (defend) the current state of affairs. CD’s and short Treasuries in the U.S. offer nothing but a “stick in the eye” to savers and many blame him. That reality and the frustration it breeds, of course, pushes many investors to jump into stock land where the idea seems to be that returns there must be better than the virtually nothing in notes or bank savings vehicles.
Our guess is that the vast majority of investors would be shocked if told that a 10-year Treasury yielding near 2% will likely outperform the S&P 500 over that note’s life based on historic valuation measures. Just because most investors do not know how valuation math works for stocks over time does not mean that those returns can be anything one hopes or needs them to be. Just like with bonds or any investment, the initial earnings yield (not dividend yield) one receives upon purchase explains most of the returns one can expect over a reasonable investment horizon. Right now, based on numerous metrics, the yield on the median stock has never been lower.
Looking back over the last hundred years, someone owning a portfolio of equities would be hard pressed to find investors willing to pay the multiples of the median stock today and low interest rates or easy policy do not guarantee high stock prices. History proves that. Some of the worst market performance occurs when the Fed is in easing mode. Besides, 30-40% corrections are the norm for a typical economic cycle let alone the bubble we are in now. Mr. Bernanke might just want to mention that on his blog.
We find it stunning that the Fed and other central banks now target a need for higher inflation as their excuse for zero-bound policies, but we come from the school of thought that likes lower prices. It will be fun to watch the former chairman try to explain on his blog why it is better that the average consumer spends more at the grocery store. We suspect he might quietly cheer for higher oil prices because it would boost gas prices and inflation measures, but we know very few consumers who would be excited about that.
The reality is that the Fed needs to inflate assets to 2007 bubble highs or the banks that “butter its bread” will have to start provisioning for bad debt again as opposed to releasing loan loss reserves to goose earnings. That will be a tough pill to swallow and call into question the wisdom of all of those Greek lettered equations the FOMC members studied in their economics classes. Right now, all those Greek letters are spelling t-r-o-u-b-l-e not only in Athens, but also in the capitals of far too many countries.
The views expressed on this blog are the opinions of the authors. This information is not intended as investment advice or to recommend the purchase or sale of securities. More information on Strategic Balance, LLC may be obtained by contacting investor relations.