The end of a 30-year bull run?

Thu, 29 Jul Pre-Open

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No, we aren't talking stocks here. That bull run ended a decade back and it lasted about 20 years in the US. What we are referring to instead is bonds. Yes, if Bill Gross, the head of the largest bond fund manager in the world is to be believed, bonds seemed to have seen their best days. Gross believes that the bond rally has come to end as nations sell record amounts of debt to fund their deficits. This would then spur a return of inflation and rising interest rates. Such an environment is never good for bonds. Since bonds offer a fixed payout, the only way of making them earn higher rates is by allowing their prices to fall. Thus, an investment in bonds from a long term perspective may not turn out to be the right choice as per Gross.

According to him, risky assets like equities and real estate will give better returns than bonds over the next 10, 15, 20 years. "Over the long term, stocks return more than bonds when appropriately priced at the beginning of an investment period", Gross is believed to have said. He may not have a great deal of knowledge about stocks as he has focused on bonds for most of his career. However, we believe that this last statement of his is spot on. Equities indeed give better returns than bonds over a long period if they are bought at the right price.

This is because unlike bonds, equities, especially those of blue chip companies, have the necessary pricing power to offset the impact of higher inflation and thus, keep growing their earnings power at a decent rate. Thus, with the threat of inflation higher now than any other time in the recent past, stocks would indeed turn out to be a much better bet than fixed income securities such as bonds.

Euro bank stress tests were a sham

Trust Jim Rogers to come up with over the top statements like the above one. The bow tie sporting investor told a TV business channel recently that the European stress test was a PR exercise just as was America's. "There are more problems coming in the currency markets, pension funds, US states and cities, etc. None of this was considered although the latter is only indirect for the European banks," Rogers is believed to have said. Indeed, there are quite a few experts out there who have questioned the very validity of the stress test and have even dubbed them not strict enough. We have our doubts as well. If the biggest crisis in Europe in recent times needs no more than a few billion dollars of capital injections, then there are indeed reasons to be worried. Thus, the stress tests do little to allay fears over the problems facing the Euro banking system and its ability to lend freely. In view of this, as Rogers says, it will indeed pay to be invested in the countries that have the cash rather than the ones that have the debt. And the creditor nations seem all to be in Asia currently whereas the developed regions of Europe and US continue to live with the tag of debtors for quite some time to come.