Time to move to equities and commodities?

[OttoVonBismarck]

I don't know how closely everyone has been following things as of late, but with the Greek bailout and rumors of QE3 and the G20 building a $2T war chest I feel like the United States and the world at large has basically made the long term decision to cause high inflation.

If I'm correct about this, it means that holding dollar or euro backed assets is, quite simply, insane. If we have serious inflation some of the worst things to hold will be long term bonds of any type (government/corporate.) Most people should already have a majority of their holdings in equities in any case, but it's definitely something to be thinking about for the rest of your portfolio.

[Iormlund]

Europe is not going that route unless Club Med + someone else (Hollande) stages an unlikely coup at the ECB.

The Greek bailout is not being paid by printing money. Most 'new' money in Europe has come through Draghi's LTRO program, going to banks in peril, and it's not really circulating at all. €800 billion (80% of LTRO) are parked at the ECB overnight deposit facility, earning a whooping 0.25% interest.

That being said, oil prices and capital flight are indeed taking inflation well above safe gov bonds.

[Tamas]

I think we will continue to have a very news-driven market for quite a while.
I just fail to see how the European "solutions" currently excersized or planned can resolve the core reasons behind the problems. So uncertainity will prevail, and stock and commodity prices are bound to fluctuate greatly, imho.

What would be nice, is to have Portugal go through something like Greece just did, together with a grand reform of EU finances - federalizing it, basically, US-style more or less.
That, of course, is not going to happen without a financial collapse first.

[The Minsky Moment]

There is going to have to be much stronger movement on the employment front for core inflation to start moving up briskly.  The Greek bailout is small plaki, the G20 remains a glorified talking shop, the Fed backed off QE3 last meeting and now the rumor is that any further easing would be sterilized.  And the theory of commodity induced inflation push has taken a bad hit from the latest super-cycle which has run its course without budging non-commodity price levels, which have remained at subdued to deflationary levels during the period.  So I am not holding by breath yet.

If core inflation did rear its ugly head, the Fed would likely respond by raising rates, which would be a big negative for being long commodities, both because it would suppress growth expectations that drive demand, and because to the extent real interest rates rise, the opportunity costs of holding commodities increase significantly.  As for equities, in theory they should be decent inflation hedges, and compared to bonds, they clearly are, but history suggests equities perform poorly in inflationary periods.  Finally, there are inflation protected securities like TIPs, but these are already quite expensive, and it looks like a lot of inflation risks is already priced in those markets. 

[mongers]

....
  Finally, there are inflation protected securities like TIPs, but these are already quite expensive, and it looks like a lot of inflation risks is already priced in those markets.

JR, what else is priced into the markets ?
How sustainable are the current levels of indexes given the long term prospects for growth in the West ?

[The Minsky Moment]

JR, what else is priced into the markets ?
How sustainable are the current levels of indexes given the long term prospects for growth in the West ?

If i had any clue what future growth prospects were going to be, I would be doing something else.
There are good bull and bear arguments for equities right now and damned if I know which is right.
Personally I am pretty long equities b/c dividend yields still look pretty attractive compared to bonds and I am still far enough from retirement I don't have to worry about a short-term drop in stock prices. YMMV.

[mongers]

JR, what else is priced into the markets ?
How sustainable are the current levels of indexes given the long term prospects for growth in the West ?

If i had any clue what future growth prospects were going to be, I would be doing something else.
There are good bull and bear arguments for equities right now and damned if I know which is right.
Personally I am pretty long equities b/c dividend yields still look pretty attractive compared to bonds and I am still far enough from retirement I don't have to worry about a short-term drop in stock prices. YMMV.

Thanks for that, though I wasn't thinking so much about ones own financial future, but from wider perspective, is it possible to say that continued East Asia/developing world growth can be seen as supporting/propping up Western indexes ?

[alfred russel]

Personally I am pretty long equities b/c dividend yields still look pretty attractive compared to bonds and I am still far enough from retirement I don't have to worry about a short-term drop in stock prices. YMMV.

The problem is if bond yields move up, the discount rate used to value equities also moves up causing equity values to fall. You are risking losing real capital chasing a 2.5% dividend yield.

[PJL]

Personally I am pretty long equities b/c dividend yields still look pretty attractive compared to bonds and I am still far enough from retirement I don't have to worry about a short-term drop in stock prices. YMMV.

The problem is if bond yields move up, the discount rate used to value equities also moves up causing equity values to fall. You are risking losing real capital chasing a 2.5% dividend yield.

I doubt JR is holding shares worth as little as a 2.5% divided yield. There are plenty of examples (at least in the UK) of shares with a good consistant dividend of over 4% and a cover of 2 or nore (under 50% payout ratio).

[alfred russel]

I doubt JR is holding shares worth as little as a 2.5% divided yield. There are plenty of examples (at least in the UK) of shares with a good consistant dividend of over 4% and a cover of 2 or nore (under 50% payout ratio).

I think that is about the blended S&P 500 payout. Probably a bit high actually.

[OttoVonBismarck]

In my TSP and self-directed IRA I have pretty conservative investments, but it's all heavy on equities. I think if you're going to be in the workforce another 20 years that's the only way to go. Some people I know moved 60-80% of their TSP into the F Fund (the TSP has 10 alphabet letter funds that correspond to things like Total Bond Market Index Funds, International Index Fund, Small-Cap, Large-Cap etc--F is the bond fund.) I think that's a terrible move in any case, but in the face of moderate inflation that could go from being stupid to catastrophic.

Outside of my retirement accounts I've always liked utility companies. Water, gas, electric companies operate as government-sponsored monopolies, have decent asset appreciation and most have div. yield > 3.5%.

I'm heavily invested personally in local real estate ventures which are intrinsically high risk, so I am much more conservative in my market activities than most people are (or should be, at least at my age.)

[The Minsky Moment]

The problem is if bond yields move up, the discount rate used to value equities also moves up causing equity values to fall. You are risking losing real capital chasing a 2.5% dividend yield.

Not really risking capital - just opportunity cost - i.e. the opportunity to buy the same shares cheaper in the future. 
In any event, the same problem is even worse with bonds.

[The Minsky Moment]

Thanks for that, though I wasn't thinking so much about ones own financial future, but from wider perspective, is it possible to say that continued East Asia/developing world growth can be seen as supporting/propping up Western indexes ?

It's possible to say.
Actually I will go farther out on a limb and say it is actually happening at present.  The question is sustainability.

[mongers]

Thanks for that, though I wasn't thinking so much about ones own financial future, but from wider perspective, is it possible to say that continued East Asia/developing world growth can be seen as supporting/propping up Western indexes ?

It's possible to say.
Actually I will go farther out on a limb and say it is actually happening at present.  The question is sustainability.

Yes, that's the worrisome big question that concerns me.