Thursday, November 6, 2008

The Past As Future

From our crystal ball dept. (always cloudy conditions there):

Before this so-called "crisis" is over dividend yields on the S&P 500 will be significantly higher than AAA/Treasury long bond yields. As in 2-3x higher...

Look at the historical chart below. And ponder what this (cloudy) prediction means for stockmarkets.

Enough said...


  1. That's assuming companies will be paying dividends...

  2. Hello Hell,

    Long time fan here, Miss America / Rich H from the RGE crowd.

    Don't know if you've had a chance or noticed... but I'm contributing for the RGE now. I love some feedback, as i deeply repect your output.

  3. What's the real story on 401K/pension confiscation? I've always thought (for years and before this election) the gov't salivates at all that money they "can't" get their hands on.

    Anybody think they'll do it? I did a bit longer curiousity note over on financial ninja.

    Brant, Atlanta, GA

  4. Sorry, could you spell it out for the hard of thinking, please,


  5. Various possibilities here:
    1. The S&P crashes to about 200, then dividends might be significantly higher than treasury bonds provided the company is still in business AND is making a profit. Kind of unlikely.
    2. After the recent debt orgy it will get increasingly difficult to find suckers to finance our trade and budget deficit. Treasury actions will fail and government is forced to offer substantially higher interest rates to attract attention. Still not that likely either since government owns the printing presses and will just print the money it needs. That worked well for Argentina and Zimbabwe, why not here?

  6. My scenario, after the dust settles:

    Investors will increasingly demand higher dividend returns to adjust for risk and lower EPS growth, i.e. more of the expected gain from holding stocks will come from holding stocks for their current return (dividend) than from capital gains.

  7. We are runnin 52%
    cannot say much more without
    being dropped in a legal wood chipper. Basic Material Sector
    "If moves tax it, if it keeps moving regulate it, if it stops moving subsidize it must cease."
    Core Function needed till debt erased.

  8. Brant,
    I saw someone comment on another blog that instead of direct confiscation of pension assets, the govt could require that a percentage of 401 balances be held in govt securities in order to maintain preferential tax status and over time that percentage could be increased. That's one possible scenario and more likely than a daylight raid on pension accounts.

    Just curious Hel, is that cloudy crystal ball reference a dig at moi.

  9. Without a period of great pain and increased oversight we will end up chasing speculative bubbles once again. No doubt about it.

    we are approaching the Great Do-Over. Many people will have to reinvent themselves along with their hopes, dreams and definitions of what is normal over the next few years.

  10. Re: Just curious Hel, is that cloudy crystal ball reference a dig at moi.

    Not at all. Why should it be? I think crystal balls are ALWAYS cloudy!

  11. But as the Chinese will need to use their own money to support their own economy, as probably also Russia, there will be so much less money buying US treasuries. With money becoming scarce globally, the price of money will rise, i.e. long yields up up and away...

    So dividends higher than long yields? Cannot see going that way in near future.

    If my logic false, would really love to be reassured that this actually is a tunnel, and not just a very long and deep cave.

  12. Re: the price of money

    Money prices (interest rates) are not the same for everyone. And many people cannot get ANY money at all (can't borrow). So, we can have a very long period during which nominal govt. rates are very low (say 2%) but few others can borrow and/or raise equity capital.

    Thus, we can have dividends at 6% with US Treasurys at 2%.

  13. More on thoughts of the Past as the Future:

    Monetary Reform: Gold And Bills Of Exchange by Antal E. Fekete

    Address before the Civil Society Institute at Santa Clara University
    November 3, 2008

    Its wonderful that my (MBA) Alma Mater would host this talk/presentation.

  14. Treasuries at 2% and yield at 6% is my estimate for the bottom. Current SPX yield is around 3%. So, SPX will have to fall by another 50% to 450 or so, which is my estimate for bear market bottom by another measure. In a study of previous bubbles, famous investment manager Jeremy Grantham showed that all bubbles deflate to whether it started. The current stock market mania started in 1995, when baby boomers started to invest in the stock market for the long run.

  15. I really like Fekete. Thanks for posting.

  16. "Before this so-called "crisis" is over dividend yields on the S&P 500 will be significantly higher than AAA/Treasury long bond yields. As in 2-3x higher..."

    LOL, LOL, LMAO, ROFL, LOL... You are hysterical.

    looks like you don't understand the premise of your blog. As businesses get crunched in the recession, they will need to CUT dividends to conserve cash. Meantime, as the government is forced to do more bailing out and dollar hegemony comes to an end, longer end yields will rise.

    You've got it backwards, kid.. but hey, thanks for the Saturday morning laugh.

  17. Re: You are hysterical.

    A dividend YIELD is a RATIO... but I'm glad you got a laugh, anyway :)

  18. I read you up here in Canada,great blog,and i think your blogger name has nailed it,hell as ious could not be more fitting.
    The CDN markets (TSX) have taken an absolute pounding,and i believe its gonna get a lot worse.

    as far as hysterical goes...well hes hysterical,i guess thats what loosing 60% of your net worth will do to one.

    ps..i drew all my stock holdings out in may/07 a little early,but at least its safe.

    Thanks for the blog.


  19. Hell, I got your point, and I agree that the government-corporate-interest rate differential will go much wider in the next year.

    I also see your point in the dividend being percent of the market price, thus as the market price drops even modest dividend will be more in percentage terms. (And even as companies need to save, they also need to keep on paying good return for investors money, or they won't get any.)

    But my view of the world is that China won't be lending like it used to - maybe not at all - Europe needs its own monies and so will Russia. Oil countries have less as the price of oil will keep sinking due the demand being less. Thus while we will see the short end of the government curve approach to zero, I fear that even governments will very soon be paying dearly for longer money.

    And as the state probably will increasingly keep on socialising banks, and soon other industries (cars?), they will need more money than ever before.

    Huge demand - very much diminished supply; the price will go sky high. ?

  20. Hell, this is a tad OT but can you (or anyone else) answer whether GMAC's asset backed auto backed debt is in any way guaranteed by an insurer?

  21. Drake,

    I'm guessing the now ongoing restriction of supply by OPEC might prevent your scenario of oil falling much further on lessened demand.

    But, I could be incorrect.


  22. Yes, thanks for the links Dave. I find Fekete's articles especially informative. Here's his archive at Financial Sense, btw.

    If anyone here has strong disagreement with Fekete's views, I'm glad for contrary references. But he certainly gets my attention.

    Reluctant Poseidon Hamster

  23. I'm wkwillis. Livejournal does not seem to work on suddendebt when I am using my laptop (xp and ie).

    I am going to go with default.

    The US government is being held up by overseas investors. They are going to stop propping us up some day.
    When they do the US government will have a choice of defaulting on the (mostly defence and security) civil service pensions, or defaulting on the social security pensions, or inflation/defaulting on the national debt, or raising taxes on ownership rich people.
    They can't raise taxes on poor people. They don't have any money. They can't raise taxes on earnership rich people because if we have European tax rates we will have European work hours and we won't get any more taxes despite higher tax rates.

    There is no solution. Deal with it.