Equities do look cheap, relative to bonds, because bonds are incredibly expensive
At present, as I have said before, equities look cheaper versus bonds than they have in half a century. This means, more or less by definition, that the first cult of the equity is over. It also provides a necessary condition for the beginning of a new one.
But it is not a sufficient condition. Equities do look cheap, relative to bonds, because bonds are incredibly expensive. All else equal, that should mean people start selling bonds – and buy at least some stocks with the money they release.
But talk to fund managers, and it is obvious that they are buying bonds not because they are in the grip of a cult or bubble mentality, but because regulations force them to do so. This is financial repression – to deal with the debt they took on to quell the credit crisis, governments are forcing us all to lend to them at ruinously low rates. While artificial incentives to buy bonds stay in force, bonds could stay expensive – and equities could stay relatively cheap.
John Authers, FT
http://www.ft.com/intl/cms/s/0/7e86e80a-a58e-11e1-a77b-00144feabdc0.html#axzz1w92ZRi4z
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