Smithers: ‘There’s no reason to hold bonds’

Posted by Gwen Robinson on Dec 22 13:39.

Economist and commentator Andrew Smithers (of Smithers & Co) — famed for some of the decade’s more bearish (yet accurate) calls — leaves us with a very clear cut view on for 2010.
In short, while stocks remain overvalued, there’s no reason at all to buy bonds. As his his latest World Market Update surmises (our emphasis):
● The world economy is picking up with sufficient strength to make a return to recession in 2010 or 2011 unlikely. The main risks now are for a rapid recovery with rising inflationary expectations and a further rise in asset prices.
● Fortunately we think that a relatively slow recovery is more likely, with demand constrained by tight credit conditions due to the continued reluctance of banks to expand their balance sheets.
● US equities are overpriced and more so than shares in other major markets. We suggest that investors should underweight the US in equity portfolios.
● US profit margins are at record levels. This is unusual for a recession and will no doubt produce claims that “this time it’s different” and that profit margins are not mean reverting but have moved to a permanently higher level.
● While almost anything is possible in economics, this seems extremely unlikely and a bad bet for investors to make.
● The record high levels of US margins are particularly exceptional in finance. This reflects unusually low interest rates, central bank subsidies via quantitative easing and monopolistic profits.
● While less exalted, non-financial margins are also high. This is probably due to recent exceptional cuts in employment, the weak dollar and low contributions to pension funds.
● US profits are therefore likely to disappoint expectations over the next few years as margins fall back. There is a strong chance that this will start in 2010.
● The sharp cuts in employment, which have been much more marked in the US than in other G5 countries, seem likely to be followed by a stronger bounce in US employment and wages.
● Productivity has improved much faster in the US than in other G5 countries and this is likely to reverse as the recovery strengthens.
● We see no reason for investors to hold bonds.
So would that be an inflationary or deflationary view then Mr. Smithers?

Related links:China: The heat is on - FT Alphaville