05/08/2011 at 12:43 pm 1 comment

It wasn’t supposed to happen like this.

Equity markets had a bad week of it at the end of last month: downward revisions to US growth and brinkmanship over the government’s borrowing authority saw the S&P fall by 3.9%.

Then there was an eleventh hour deal on the deficit that saw the government avoid shutdown. Ratings companies Moody’s and Fitch promptly affirmed the country’s AAA (though S&P has yet to opine).

And with crisis averted and the previous week’s economic news already absorbed by markets in that efficient way of theirs – they fell again. The S&P closed last night 7% below where it ended July and 4.8% down in yesterday’s trading alone.

At the same time, bond markets went bananas. Ten year gilt yields made a new record low. Ten year yields in the US have fallen 40bp.

All of which makes for a pretty interesting valuation picture. As a dollar investor, you have the opportunity to buy treasuries at 2.4%, cash at 0.25% or an equity market with an earnings yield of 7.6%. The picture is even more extreme here in the UK – you can own ten year gilts at 2.7%, cash at 0.5% or an equity market yielding 9%. In Europe it’s almost embarrassing: the dividend yield on the Euro Stoxx 50 index is 5%, more than twice what your euros would return were you to invest in ten year German bonds.

This is pricing for Armageddon. Many investors have clearly discerned the hoofbeats of apocalyptic horsemen in the air.

So much, once again, for the “summer lull“.

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How Safe Are The Havens? Meltdown – Cont. …

1 Comment

  • 1. Realignment « The Blog @ Vigilant Financial  |  17/02/2012 at 1:35 pm

    […] result, as we know, was meltdown. The world watched in horror as the perfect storm unfolded under the influence of events on either […]

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