Wednesday, May 14, 2014

Who is Smarter, Stocks or Bonds?

They were having a shouting match on CNBC a few minutes ago. The debate was over why the US Treasury market is so strong. Yields on US 10yr bonds are at about 2.6%.
In the past the bond market was a fairly reliable indicator of the direction of the stock market and the economy. When bonds went up it was because inflation was low. Since we seem to want some inflation now as an indicator that the economy is humming along the low yields on treasuries are troubling.
And the US Treasuries were a "safe haven" and if the price is being pushed up it may be interpreted that there is a rush to safety.
But, the stock indexes keep going up. With the exception of the small caps lately.

Perhaps there is another explanation. And Jack Karugian (sp?) on CNBC today may have been on to it.
I think it has to do with the concentration of wealth in the hands of a relatively few. And I mean the very rich. It is my impression that the very wealthy do not have to have high returns on their money to be satisfied. It is not like they need to live off of the yield. They mostly want their money back. They are not as concerned about the return on their money as the return OF their money.
And as the pool of wealth at the top gets too large there is not room for it in stocks. And if there is no overwhelming opportunity due to a sluggish economy then bonds are the place.

On a related note.
The governments of the world have been "printing" money for 40 years, right?
Well, where has all that money gone?
It has gone into corporate profits.
And the common people have the increasing benefit of low interest rates. So it doesn't pay them to save, and they can go deeper into consumer debt.
The best of both worlds!


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