Could you shed some light for an outsider on how the above should/could be viewed 'under' past US monetary policy? (Or UK etc). Historic relationships happen under periods of certain low/high interest rates. If the historical relationship measured is a ten year timeframe, that would show something different than a say 30 year version i guess.
I am not sure I understand your question, but there is definitely a strong dependency of the relative performance of stocks vs. bonds on the level of interest rates (and inflation). In general, the lower the interest rates, the larger the outperformance of stocks vs. bonds because stocks benefit more from the valuation expansion as interest rates drop than bonds do in the form of price changes to bonds (which are partly negated afterward because you have to reinvest income at lower yields).
As a rule of thumb, if you think (like me) that interest rates will decline again to lower levels from here (I am in the camp that says that our future looks like Japan) then you should expect stocks to outperform bonds by a wide margin. If you think that interest rates will remain at current high levels (for example because inflation remains high or we enter a 1970s-style period of runaway inflation and rates), you would expect stocks to have about the same returns as bonds and both to have rather low returns in general.
'As a rule of thumb, if you think (like me) that interest rates will decline again to lower levels from here'
Yes, my question was about what pov fuels the expectation. Concerning Japan: it operated under a) the rise of China and its deflationary impact, b) Japan successfully upped the productivity rate at home and c) shifted production to lower cost regions. In that sense it operated in a rather calm political and economical environment (with abundant energy). I don't think the west and certainly not Europe can expect to find itself in a few similar decades with a, b and c working in its favour the way Japan experienced.
I therefore am totally open to anything, anytime and anywhere.
I do believe that the west's, and again especially Europe's, dreamy energy- and renewables (non-security) policies are equal not to shooting oneself in the foot but machinegunning oneself in the foot. And that will impact economics and thus stockmarkets.
While EU productivity declines, energy and thus production is much more costly, immigration is a cost center, while aging and pension liabilities have only just begun to bite.
This is not Degrowth Theory, it's just degrowth (the Greens and other reactionary progressives have no issue with that since they're economical illiterates).
In this situation EU and national politicians, accorded by a broad share of the media, propose to spend phenomenal amounts of money (from most likely debt) on renewables (nuclear barely made it onto the green energy list, thanks to the French probably).
And they want to spend more on the military which supposedly suddenly finds itself having to withstand an imminent attack of a Russian version of Sauron. (Who knew western media would consider Lord of the Rings such an excellent analogy. Could it be an age thing?) A Sauron who nevertheless needed months to pass Bakhmut. *
I think we're having a nervous breakdown.
* After already being intimidated by climate horror stories (hello Guardian c.s. ) recently Swedish children needed to be reassured by the gov that a Russian attack wasn't about to happen as quickly as the chief of staff had said (like others he's obviously preparing for good times in terms of budget).
Yet it is exactly the Russians who've shown you don't necessarily need to spend that much on expensive high tech. Volume / quantity matters more. If the west would want to replicate that it would have to reinstate conscription. To the horror of western middle classes, however righteous they seem to be.
Percentage of Europeans Who Are Willing To Fight A War For Their Country: https://bit.ly/3OfGsXk
Don't count on the Dutch, Germans or Belgians...
There isn't going to be conscription. The furthest we'll go is making it easier for 17 yos to have a 'military experience year' and hope they'll stay. Like all western armies the Dutch have significant man- woman- they power issues and have tried to seduce more into their ranks by such a plan. This year about 136 extra have been added...
Would add a detail that the difference between the equity return, the earnings yield, and the [close to] risk-free bond return is the real [equity] market risk premium. This is believed to reflects of unstable fluctuating investor psychology on future returns and leads to the general adage that buying rich is less profitable, on average, than buying cheap [or sell high, buy low...]. The trick is both to exit expensive and reinvest cheap at the 'right points of time and not miss the major moves in valuation in between that drive returns - effective market timing is a b_tch to pull off.*
* Employing the current, average, CAPE, etc. earning yield as a proxy for the expected future equity returns. Next level of difficulty and more assumptions would be to use the implied equity market returns over 10 years but I believe would give directionally similar results.
The real price of money, as expressed in interest rates, has been circa 3% for thousands of years (see p. 5 of this https://1drv.ms/b/s!At9od58qwtRei8BXD8M2bV2lxxMOiQ ). Why don't peole talk about the "equity risk premium" anymore?
Apropos your recent work on Cassandras, as a young peson on Wall Street, I asked an older co-worked why people in "fixed income" (I think it's sometimes lost on people how key that department title is) seemed to be grumpier than equity people, and an older colleague said, "kid, an equity person has a great day when a stock he owns goes up 20% in one day or becomes a ten-bagger ...a bond bore has a great day when he gets his principal back."
True, bond investors are pessimists. They are used to look at the downside, while equity investors look at the upside. It's a similar distinction as the one between insurance and banks. Insurance companies trade in fear, banks trade in hope.
Yeah, I was eye-balling a single-point number, but am aware that for the past few hundred years the secular trend has been downward https://ritholtz.com/2012/01/222-years-of-long-term-interest-rates/ . Actually, one would expect that, as better communications and modern technology have decreased friction costs and opened larger pools of money. I also once heard someone make a connection between the long-term price of money and the level of GDP growth humans can sustain, which is also a 3%-ish sort of number https://www.statista.com/statistics/996758/rea-gdp-growth-united-states-1930-2019/ .
Could you shed some light for an outsider on how the above should/could be viewed 'under' past US monetary policy? (Or UK etc). Historic relationships happen under periods of certain low/high interest rates. If the historical relationship measured is a ten year timeframe, that would show something different than a say 30 year version i guess.
I am not sure I understand your question, but there is definitely a strong dependency of the relative performance of stocks vs. bonds on the level of interest rates (and inflation). In general, the lower the interest rates, the larger the outperformance of stocks vs. bonds because stocks benefit more from the valuation expansion as interest rates drop than bonds do in the form of price changes to bonds (which are partly negated afterward because you have to reinvest income at lower yields).
As a rule of thumb, if you think (like me) that interest rates will decline again to lower levels from here (I am in the camp that says that our future looks like Japan) then you should expect stocks to outperform bonds by a wide margin. If you think that interest rates will remain at current high levels (for example because inflation remains high or we enter a 1970s-style period of runaway inflation and rates), you would expect stocks to have about the same returns as bonds and both to have rather low returns in general.
'As a rule of thumb, if you think (like me) that interest rates will decline again to lower levels from here'
Yes, my question was about what pov fuels the expectation. Concerning Japan: it operated under a) the rise of China and its deflationary impact, b) Japan successfully upped the productivity rate at home and c) shifted production to lower cost regions. In that sense it operated in a rather calm political and economical environment (with abundant energy). I don't think the west and certainly not Europe can expect to find itself in a few similar decades with a, b and c working in its favour the way Japan experienced.
I therefore am totally open to anything, anytime and anywhere.
I do believe that the west's, and again especially Europe's, dreamy energy- and renewables (non-security) policies are equal not to shooting oneself in the foot but machinegunning oneself in the foot. And that will impact economics and thus stockmarkets.
While EU productivity declines, energy and thus production is much more costly, immigration is a cost center, while aging and pension liabilities have only just begun to bite.
This is not Degrowth Theory, it's just degrowth (the Greens and other reactionary progressives have no issue with that since they're economical illiterates).
In this situation EU and national politicians, accorded by a broad share of the media, propose to spend phenomenal amounts of money (from most likely debt) on renewables (nuclear barely made it onto the green energy list, thanks to the French probably).
And they want to spend more on the military which supposedly suddenly finds itself having to withstand an imminent attack of a Russian version of Sauron. (Who knew western media would consider Lord of the Rings such an excellent analogy. Could it be an age thing?) A Sauron who nevertheless needed months to pass Bakhmut. *
I think we're having a nervous breakdown.
* After already being intimidated by climate horror stories (hello Guardian c.s. ) recently Swedish children needed to be reassured by the gov that a Russian attack wasn't about to happen as quickly as the chief of staff had said (like others he's obviously preparing for good times in terms of budget).
Yet it is exactly the Russians who've shown you don't necessarily need to spend that much on expensive high tech. Volume / quantity matters more. If the west would want to replicate that it would have to reinstate conscription. To the horror of western middle classes, however righteous they seem to be.
Percentage of Europeans Who Are Willing To Fight A War For Their Country: https://bit.ly/3OfGsXk
Don't count on the Dutch, Germans or Belgians...
There isn't going to be conscription. The furthest we'll go is making it easier for 17 yos to have a 'military experience year' and hope they'll stay. Like all western armies the Dutch have significant man- woman- they power issues and have tried to seduce more into their ranks by such a plan. This year about 136 extra have been added...
Would add a detail that the difference between the equity return, the earnings yield, and the [close to] risk-free bond return is the real [equity] market risk premium. This is believed to reflects of unstable fluctuating investor psychology on future returns and leads to the general adage that buying rich is less profitable, on average, than buying cheap [or sell high, buy low...]. The trick is both to exit expensive and reinvest cheap at the 'right points of time and not miss the major moves in valuation in between that drive returns - effective market timing is a b_tch to pull off.*
* Employing the current, average, CAPE, etc. earning yield as a proxy for the expected future equity returns. Next level of difficulty and more assumptions would be to use the implied equity market returns over 10 years but I believe would give directionally similar results.
The real price of money, as expressed in interest rates, has been circa 3% for thousands of years (see p. 5 of this https://1drv.ms/b/s!At9od58qwtRei8BXD8M2bV2lxxMOiQ ). Why don't peole talk about the "equity risk premium" anymore?
Apropos your recent work on Cassandras, as a young peson on Wall Street, I asked an older co-worked why people in "fixed income" (I think it's sometimes lost on people how key that department title is) seemed to be grumpier than equity people, and an older colleague said, "kid, an equity person has a great day when a stock he owns goes up 20% in one day or becomes a ten-bagger ...a bond bore has a great day when he gets his principal back."
True, bond investors are pessimists. They are used to look at the downside, while equity investors look at the upside. It's a similar distinction as the one between insurance and banks. Insurance companies trade in fear, banks trade in hope.
By the way, I would like to challenge your statement that interest rates have been 3% for thousands of years. Take a look at this post: https://klementoninvesting.substack.com/p/the-long-run-is-lying-to-you-or-is
Yeah, I was eye-balling a single-point number, but am aware that for the past few hundred years the secular trend has been downward https://ritholtz.com/2012/01/222-years-of-long-term-interest-rates/ . Actually, one would expect that, as better communications and modern technology have decreased friction costs and opened larger pools of money. I also once heard someone make a connection between the long-term price of money and the level of GDP growth humans can sustain, which is also a 3%-ish sort of number https://www.statista.com/statistics/996758/rea-gdp-growth-united-states-1930-2019/ .