Bond/Equity Divergence

There is no doubt that the public has been rejecting stocks in favor of bonds over the last five years. The equity markets are seen as "risky" and the bond markets as "safe", and with so much economic uncertainty around the world, investors are opting for "safe".





But history tells us that there is also no doubt that this pattern cannot continue. It will reverse at some time. And when it does, it will do so rapidly -- just like the tech stock reversal in 2000 and the housing investment reversal in 2007. The timing is what is unknown, and with investor mindset increasingly short-term, that's an important question. Remember the famous "call" by economist Robert Shiller that stocks were "irrationally exuberant"? It was made in 1996 -- four years before the market peak. I suspect equity weakness will continue until the prospects for growth appear much better, and that won't happen until governments stop draining the private sector to support the unsustainable and uneconomic levels of spending they have adopted over the last 25 years. When will that happen? We'll get one clue for the US in November and another when the EU reaches a true crisis point.