Monday, 12 April 2010
Are we back to blowing asset bubbles already?
I’m starting to look around me and wonder if record low interest rates and loose regulation today are already starting to cause bubbles to be blown meaning another bust is just around the corner. As I posted a couple of days ago the Bank of England kept rates at record lows of 0.5% for the fourteenth month in a row. The Federal Reserve Rates are also at record lows. Are they doing exactly what Mr Greenspan was accused of doing?
Looking around I just can’t find any examples of an asset class that is close to fair value. Let’s look at a few examples:
UKBonds. UK 10 year gilts are currently yielding 4.05%. Given that the UK retail prices index is currently 3.7% the real (after inflation) return is only 0.35%. We know for bonds that as yields rise prices fall. Are UK gilts in a bubble?
UK Equities/Stocks. Returns on stocks for an investor are always the capital gain on the stocks (increase in price) plus the dividend yield. Recent history suggests that it’s very difficult to get a return through capital gain as my first chart courtesy of Yahoo Finance for the FTSE 100 shows. Additionally the dividend yield on the FTSE 100 is currently 3.0%. The yield is less than inflation. Are UK Equities in a bubble?
US Equities/Stocks. The cyclically adjusted price earnings ratio (PE10 or CAPE) for the S&P 500 is now back above it’s 80 percentile. Are US Equities in a bubble?
Gold. Since 1968 real gold has carried a correlation of -0.32 with real S&P 500 prices. This means that generally when gold is falling stocks are rising and vice versa. This can be seen on my regular gold charts. However look at the chart more closely. Since the start of 2009 the correlation has changed to 0.85 which can be seen in my second chart today. So gold as an asset is rising along with stocks in almost perfect correlation. Is gold in a bubble?
Of course I would never try and trade this. I am more than conscious of the old saying that the market can remain irrational longer than you can remain solvent. I’ll stick with my mechanical strategic asset allocation with some tactical mixed in based on cyclically adjusted price earnings ratios (PE10 or CAPE) for my retirement investing strategy.
I will however ask have we not learnt anything from history? In fact recent history that was being reviewed only last week.
As always DYOR.