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Reports of the Death of Equities Have Been Greatly Exaggerated

Guest hellsten

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Guest hellsten

A new white paper, "Reports of the Death of Equities Have Been Greatly Exaggerated: Explaining Equity Returns", has just been published on GMO's website:



We will begin with a summary of our basic points:

1) GDP growth and stock market returns do not have any particularly obvious relationship, either empirically or in


2) Stock market returns can be signifi cantly higher than GDP growth in perpetuity without leading to any economic


3) The most plausible reason to expect a substantial equity risk premium going forward is the extremely inconvenient

times that equity markets tend to lose investors’ money. 

4) The only time it is rational to expect that equities will give their long-term risk premium is when the pricing of

the stock market gives enough cash flow to shareholders to fund that return.

5) Disappointing returns from equity markets over a period of time should not be viewed as a signal of the “death of

equities.”  Such losses are necessary for overpriced equity markets to revert to sustainable levels, and are therefore

a necessary condition for the long-term return to equities to be stable.


Bill Gross comments on "the cult of equity":



​The cult of equity is dying. Like a once bright green aspen turning to subtle shades of yellow then red in the Colorado fall, investors’ impressions of “stocks for the long run” or any run have mellowed as well.

Now in 2012, however, an investor can periodically compare the return of stocks for the past 10, 20 and 30 years, and find that long-term Treasury bonds have been the higher returning and obviously “safer” investment than a diversified portfolio of equities.

Unfair though it may be, an investor should continue to expect an attempted inflationary solution in almost all developed economies over the next few years and even decades. Financial repression, QEs of all sorts and sizes, and even negative nominal interest rates now experienced in Switzerland and five other Euroland countries may dominate the timescape. The cult of equity may be dying, but the cult of inflation may only have just begun.

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Food for toughs... Would declining wage as % of GDP explain the high corporate profit margins?




Not for the most part.  The forced ultra low interest rates explain about two thirds of the recent high profits, ironically in a super cycle slowdown.

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