After being long and wrong in 2007 and 2008, I have been correctly bullish on stocks for the last few years, arguing they would scale the proverbial wall of worry. Bonds, on the other hand, have looked to me to be vulnerable to an eventual correction. The stock call still looks correct; the bond call may turn out OK eventually, but not for a while. Here are the key macro headlines:<\/p>\n
The main problem with these views is that they are close to consensus. But there are some bearish misconceptions about the macro picture. Some \u201cBig Picture\u201d thinkers such as Mohammed El-Erian seem to believe investors are recklessly bidding up stocks despite bad fundamentals. Actually, the PE of the market has not increased materially this year. If the S&P 500 is at 1995 by the end of September, the trailing PE on pro forma earnings will be about the same as year-end 2013 (17.1x vs. 16.8x). Another misconception is that stocks are being driven higher by buy-backs; they are only adding 1-2% to S&P 500 earnings growth.<\/p>\n
You Heard It Here First<\/strong><\/p>\n We shamelessly \u201cpoint with pride\u201d to some prescient observations:<\/p>\n Part-time America:\u00a0 <\/strong>We have been babbling for years about how Obamacare would increase part-time employment. Now a famous labor economist has highlighted the unusually \u201celevated number of workers who are employed part time but desire full-time work (those classified as \u2018part time for economic reasons\u2019). At nearly 5 percent of the labor force, the number of such workers is notably larger, relative to the unemployment rate, than has been typical historically.\u201d But though she recognizes the part-time America phenomenon (a calamity for many low-income workers who must commute between two jobs every day) Janet Yellen still can\u2019t bring herself to connect it to Obamacare, even though some recent Fed surveys have done so.<\/p>\n Costly CAPE<\/strong>. We explained why Robert Shiller\u2019s widely followed valuation metric is useless, flashing a \u201cred light\u201d to equity investors for all but a few years since 1990, while stock prices sextupled. Much to his credit, Shiller admitted as much in a NYT article. But I see little evidence he understands the accounting and fundamental factors (FAS 142, lower transaction costs, less stock market fraud, better corporate governance since 2002, etc.) that justify a PE well above the average since1871. He points to low bond yields (fair enough; see above) and investor psychology.<\/p>\n Hedge Fund Madness<\/strong>. On July 5, 2013, we observed, \u201cHedge funds have several serious flaws that are gradually becoming recognized.\u201d Now big pension funds and college endowments are belatedly taking notice. Writes the WSJ: \u201cPublic pensions from California to Ohio are backing away from hedge funds because of concerns about high fees and lackluster returns. Those having second thoughts include officials at the largest public pension fund in the U.S., the California Public Employees’ Retirement System, or Calpers. . . . The retreat comes after many pension funds poured money into hedge funds in recent years in hopes of making up huge shortfalls.\u201d\u00a0 What we are seeing is the unwinding of the \u201cstock avoidance syndrome\u201d I highlighted in December 2012.\u00a0 Now that they have doubled, stocks seem safer to asset allocation committees.\u00a0 Go figure.<\/p>\n Krugman belatedly brushes up on bond math<\/strong>. About a month ago he revealed to NYT readers that conservatives hate easy monetary policy because they are greedy. You see, easy money reduces their interest income. As we pointed out, he forgot that declining interest rates boosted bond prices, generating huge capital gains for bond holders, greedy conservatives and enlightened progressives alike. Apparently a colleague took Krugman aside and explained to him that when yields fall, prices rise. Or maybe he read this blog. Anyhow, last Friday Krugman admitted \u201cYes, low interest rates mean low long-term returns for bondholders (who are generally wealthy), but they also mean short-term capital gains for those same bondholders.<\/strong>\u201d (Emphasis mine.)<\/p>\n French Funk.<\/strong> In the summer of 2012 we highlighted \u201cseven new reasons not to create jobs in France\u201d\u2014specifically, seven tax hikes imposed by President Holland. Since then the over-taxed, over-regulated French economy has slipped from first gear into neutral, even as the conservatively managed economy across the English channel shifted into third gear. Evidently socialism works no better in Paris than Moscow.<\/p>\n Copyright Thomas Doerflinger 2014. All Rights Reserved.<\/p>\n","protected":false},"excerpt":{"rendered":" After being long and wrong in 2007 and 2008, I have been correctly bullish on stocks for the last few years, arguing they would scale the proverbial wall of worry. Bonds, on the other hand, have looked to me to … Continue reading