Think Happy Thoughts . . .
We came across this pleasant thought from the contrarian Albert Edwards at Soc Gen this morning. Obviously, we agree and think long term US Treasuries are among the best performing asset classes over the next twelve months or so. Interesting enough at a level of S&P “500” today, the market would be priced at 4.8x average ten year trailing earnings, falling into the cheapest quintile of historic valuations where average real returns have been 11.4% annually . . . and consistent with prior secular bear market bottoms.
“It went almost unnoticed this week that core CPI inflation rates in the US and eurozone continue to slip-slide their way down towards zero (see chart below). Although this is seen as buoying bond prices at the margin, it is a pernicious development that investors will focus on when this cycle starts to fail. Regular readers will know that I believe that in a post-bubble world, recession follows recession with surprising rapidity.
We are now only one cyclical failure away from Japanese-style outright deflation in the US and the eurozone at a time when de-leveraging still has years to run (falling prices bring the risk of a classic debt deflation trap). Impending cyclical failure and a deflation scare will trigger new lows in equities as the valuation bear market finally plays itself out with the S&P falling below 500. We therefore maintain our long-standing target of sub-2% US 10y bond yields – and that is the point when QE will really begin to get serious.”