Recap 3-21-12

Main Items:

  • US Existing Home sales declined to 4.59mm SAAR in Feb vs 4.61 exp and 4.57 prev
  • MPC Minutes: “Overall, the Committee judged that the recent data had evolved in line with its expectations and that there had been little change to the balance of risks to UK activity and inflation”

Overseas:

  • Swiss M3 growth slowed to 6.4% YoY in Feb vs 8.2% prev.

Upcoming Data:

  • Wed: Japan Merchandise Trade Balance, BoE Minutes
  • Thurs: EU Flash PMI’s, US Jobless Claims
  • Fri: Canada CPI, SNB quarterly bulletin

Commentary:

Goldman released a research piece entitled “The Long Good Buy” yesterday, proposing that equities are at the best buying levels in a generation. Ironically, it came out the day after GMO published a piece detailing their view of why they strongly believe corporate profits, as a percentage of GDP, are likely to mean revert from all time highs. I won’t go into a detailed discussion of either paper here. But I do think that what Goldman has wrong is the assumption that the market does not adjust for either duration risk or credit duration risk. Equities are in a sense a perpetual, low grade bonds with a coupon somewhere around the expected nominal GDP growth rate. Given that the demographic with the largest percentage of investable assets, the baby boomers, are at or near retirement, the duration mismatch between equities and bonds explains a large part of the high ERP. Ergo, though equities are cheap vs bonds over a long term horizon, in the intermediate term equities are value traps.

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