Every day is Friday the 13th
In the spirit of these spooky times, value investor Ian Lance, joint fund manager at equity income fund RWC Enhanced Income, has come up with 13 bizarre goings-on in financial markets that should strike terror into investors.
Given the debt mess Western governments are in, you would think they couldn't borrow money at any price. Yet they have never paid lower rates of interest. The US has 3.3 times more debt than a decade ago, but the yield demanded by the market has plunged from 6.1% to just 2.0%, Lance says.
Investors can't get enough of corporate bonds. They are lapping up 10-year bonds from Procter & Gamble (NYSE: PG - news) just 2.3% and 30-year bonds from McDonald's at 3.7%. Mysteriously, many are simultaneously offloading the same company stocks, even though they offer well-covered equity dividend yields that beat the bond yield.
Bond yields below 2% indicate that "there is a very low probability of inflation and a high probability we are turning Japanese", Lance says. In other words, we're heading for a double lost decade. Yet the gold price has been soaring, as investors bet that central bank money printing will spark inflation.
Bond yields have hit all-time lows and still nobody wants to borrow money. Yet central banks are spending billions to force rates down just a little bit more.
Warren Buffett, Seth Klarman and Jeremy Grantham are some of the smartest investors in the world and they think bonds are hideously overvalued. So why are pension funds piling into bonds? And why do bonds continue to top the best-selling from tables?
Corporate earnings are at an all-time high, yet they are "strongly mean reverting and in the long run grow at about 5% a year", Lance says. So why are fund managers and strategists pricing in 10% growth and talking about how cheap equities look, based on their one year forward P/Es?
In the 1950s, the average holding period for UK stocks was 10 years. Today, it is 22 seconds. Prime Minister David Cameron wants shareholders to exert greater influence on management pay. As Lance points out, owning a stock for 22 seconds makes attending the AGM quite tricky.
The European Central Bank is lending money to European banks at 1% so that those banks can either lend the money to sovereign states by purchasing government bonds or dump it back on deposit with the ECB. "Everyone seems to think this is great, but when Bernie Madoff did it he was arrested," Lance says.
Articles about how sky-high hedge fund fees swallow up 85% of their client's investment gains continue to appear alongside articles about how investors plan to increase exposure to... hedge funds.
Before the credit crunch, the ratings agencies rated over 50,000 subprime collateralised debt obligations (CDOs) as AAA. Yet the markets still hang on the agencies every word.
When times are hard, people stop buying luxury goods and stick to the basics. Not this time. Tesco (LSE: TSCO.L - news) has just posted its worst sales for 20 years, while Burberry sales grow 20% and orders for new Bentleys rise 50%.
The more embarrassingly bad economists and strategists become at predicting the future, the more belief they have in their forecasting abilities. Lance quotes Jerome Booth, who wrote in the Daily Telegraph on 19 February 2012 that "a Chinese hard landing is as likely as a comet destroying the earth".
You have a choice. Pile A contains enough gold to fill a baseball pitch in-field. Pile B includes all the farmland in America, 16 ExxonMobils and $1 trillion of cash. Which pile would you choose? According to this year's letter from Warren Buffett, most investors would choose Pile A because "gold is the only true store of wealth".
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