I am depressed by all the optimism. The story runs that 2009 will be a good year because assets are cheap, cash is piling up on the sidelines and 75% of the credit crisis is over. But it seems to me that the lessons of the credit crisis are the hardest for investors to learn. And they have not yet been learnt.
In my book, 2009 will be a bad year punctuated by sharp rallies in risk assets. For a start, let’s deal with the story of cheap assets. Equities can be construed as being cheap because markets have fallen. Debt, to all but the beneficiaries of bailouts and governments themselves, is horribly expensive for the same reason. Triple-B corporates in the US are paying nearly 10% for their borrowing, and high-yield corporate bonds still trade close to 20%. It is a tough call to consider equities to be cheap unless this changes; what corporation can make money for shareholders if it has to pay creditors rates equal to many times the return on capital?
Tired argument
The other tired cheap-equity argument is that dividend yields are higher than yields on government bonds.