My disdain for the efficient market hypothesis came about by observing the difference between the stock and bond markets.  It was apparent that the Fixed Income traders were of a “rational” mindset so often lacking in the equity world.

Indeed, I have frequently called Bonds the market that acts as “Adult Supervision.”

So I got a kick out of Mike Santoli’s reminder this morning in Barron’s:

“It’s for good reason the stock market was dubbed “the bond market’s idiot kid brother.”

Mike also points out an interesting data point regarding the Industrial’s dividend yield:

“Telling a similar story in a different way, the dividend yield of the Dow Jones Industrial Average components, at 2.65%, is essentially equal to the 10-year Treasury yield. The folks at Morgan Stanley note that over the past 50 years the Dow’s yield has exceeded that of the 10-year Treasury for only one period—the end of 2008 into early 2009, as the financial crisis climaxed.”

Idiot kid brother indeed.

Category: Dividends, Markets, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

21 Responses to “Stocks vs Bonds”

  1. But you know when the bond markets start acting like bratty kids on a sugar high, it’s katie bar the door time.

    Above-the-fold in today’s Wall Street Journal:

    Junk Bonds Hit Record

    U.S. companies issued risky “junk” bonds at a record clip this week, taking advantage of keen investor appetite for returns amid declining interest rates and tepid stock markets.

    The borrowing binge comes as the Federal Reserve keeps interest rates near zero and yields on U.S. government debt are near record lows. Those low rates have spread across a variety of markets, making it cheaper for companies with low credit ratings to borrow from investors.

  2. franklin411 says:

    The problem is, Barry, that younger siblings live longer and accumulate more wealth through their lifetimes than older siblings. At the end of the day, does it really matter if the man who dies wealthy at 100 is dubbed an “idiot,” while the man who dies poor at 50 is not?

  3. call me ahab says:


    you make less and less sense every day

    speaking of debt BR- what of this?

    It suffices to say that we need a new economic plan – a plan that doesn’t invite governments to print their way out of economic turmoil. Keynesian theory enjoyed a tremendous run, but is now for all intents and purposes dead… and now it’s time to pay for it. Literally.

    give it a read if you haven’t already

  4. franklin411 says:

    You must not have read that Sprott letter very thoroughly, or you would have noticed this ridiculous assertion:

    “All that spending was justified by the understanding that it would generate sustainable underlying growth. If it turns out that that assumption was wrong, have the governments made a fatal mistake?”

    Actually, no. First of all, a good hunk of the “spending” they point to actually wasn’t spent at all. The TARP program was a loan, half of the loan funds were never disbursed, and the other half is well ahead of its repayment schedule–with interest.

    Second, the money was never lent or spent to stimulate the economy into prosperity. It was meant to keep the economy from plunging into a depression–and it worked. TARP was designed to keep the banking system from collapsing due to general panic. The so-called stimulus was designed to ameliorate the worst of the crisis (1/3 went to relief, 1/3 went to tax cuts for the poor so they wouldn’t starve, 1/3 went to investments like education and infrastructure).

    The money was used to prevent a second Great Depression, to avoid massive cuts on the state and local level that would have led to mass starvation, and to prevent us from eating our own seed-corn by slashing education and investment in the future.

    The authors’ entire argument rests on this faulty assumption, so the rest of their letter is moot.

  5. call me ahab says:

    BR- also- what of your 900 call on the S&P (as heard on Kudlow)-

    900 seems to be a particularly rosy scenario

    f411 says – 1/3 went to tax cuts for the poor so they wouldn’t starve

    hahahahahahaha- you’re always good for a laugh there Franklin

  6. franklin411:
    Do you include the AIG bailout in TARP? Because as BR has pointed out before, good luck getting repaid by them!!

  7. franklin411 says:


    AIG was only a small part of TARP, and most of the AIG bailout money was from the Fed. In aggregate, we’ll only “spend” a small amount on TARP–and in fact, the Obama admin has embraced a TARP recovery tax on the big banks. It probably won’t get through Congress (certainly not if the GOP makes inroads), but nobody can blame the admin for not trying to zero out the burden on the American taxpayer.

  8. wildebeest says:


    “Keynesian theory enjoyed a tremendous run, but is now for all intents and purposes dead…”

    I’m not an economist so I guess I get surprised by how often people trash talk Keynesian theories. I always thought that when it is correctly applied governments run surplus in good times and deficits in bad times (yes/no?). Presumably is also assumes a degree of competency in government and in the Fed. So when has Keynesian theory actually been applied through the complete cycle? So what seems to take place in Keynes name doesn’t seem to be Keynesian to me. Sure people want to borrow to kick the can further down the road but the other side of the theory — responsible government in times when there is no crisis — is never applied. If governments fuck things up in the (apparent) good times it is hardly surprising that theories don’t work so well when the shit hits the fan.

    Australia is the only country I can think of in the last 20-30 years that has run surpluses in the good times.

  9. First there’s not an iota of difference between whether money comes from the Fed or the fisc. It still represents a claim on the earnings of future taxpayers.

    AIG is an $80 billion hole. Fannie and Freddie, so far, almost double that. But this:

    “The money was used to prevent a second Great Depression, to avoid massive cuts on the state and local level that would have led to mass starvation, and to prevent us from eating our own seed-corn by slashing education and investment in the future.”

    Mass starvation? Really? You been to a Wal-mart or Costco lately? There’s enough food in your average Wal-mart to feed a small city for a week, and many of the patrons appear as if they’ll try to get it down in might shorter time than that. I’ll leave it at that. I can’t see how you could really be serious that we faced mass starvation. We not only produce enough food to feed ourselves, we export more food than any country on earth.

    So far as the fiscal and monetary stimulus preventing the next Great Depression, I’d say that the verdict is not yet in. This thing ain’t over. Not by a long shot. But not to worry. We won’t starve. We just won’t buy as many iPads.

  10. franklin411 says:

    How soon we forget. America is a land of plenty in 2010. America was a land of plenty in 1930. America is one of the world’s greatest grain exporters in 2010. America was one of the world’s greatest grain exporters in 1930.

    And yet…because people lost everything in the Depression, because state and local welfare programs were non-existent in 1929, and because charities were overwhelmed, Americans starved in a land of plenty. I have literally sheaves of newspaper stories and editorials in my files from 1929-1933 reflecting the very real fear of Americans that the army of hungry would be driven by desperation to revolution. So don’t tell me that people can’t go hungry in a land of plenty. Those are famous last words that ought to be inscribed above a guillotine somewhere.

  11. StatArb says:

    . . . ” over the past 50 years the Dow’s yield has exceeded that of the 10-year Treasury for only one period—the end of 2008 into early 2009, as the financial crisis climaxed.” …

    just before a 70% rally in stocks – - – - – interesting

  12. constantnormal says:

    sooooo … either the stock market is going to run into decreasing profits and cut dividends accordingly, or the bond market is going to begin to experience increasing defaults, and see rates rise accordingly … or both … or neither.

  13. Bob_in_MA says:

    Mike Santoli, once again, shows his lack of insight.

    For the 30 years before 1960, during a period of deleveraging and QE, it was generally the other way around, with dividends often twice as high as Treasury yields.

    Which period is most like ours?

  14. ACS says:

    Sure, I trust Uncle Sam with my money for 10 years. I’m certain it will be returned at the end and the principal worth just as much in real terms as now. Also, I expect the interest on that money will remain above the inflation rate between now and then. How can I lose?

  15. scharfy says:

    I think the sane older brother has gotten drunk and is acting up…

    The bond market has lost its mind…


    Credit market quite possibly insane

    worthy reads…

  16. maynardGkeynes says:

    ACS, check out 10 year TIPS.

  17. druce says:

    Bob_in_MA hits the nail on the head… should one be shocked that stocks yield more than bonds, merely because it’s been the case for a long time? From the 30s to the 50s stocks yielded more than bonds.

    Clearly stocks are more risky and need to return more overall. Whether one believes in Modigliani-Miller, which states that dividend policy shouldn’t impact stock valuation, or one believes in signaling impact of dividend policy, there is no reason why a big part of that return should not come ad dividends.

    If reinvestment opportunities are not particularly great and the tax advantage of dividends vs. capital gains is unclear, why should risky stocks not pay out at a higher rate than government bonds?

  18. @F411:

    If people were starving, literally starving, during the Great Depression, then why did Roosevelt have the crops plowed under and the cattle slaughtered? Was Roosevelt really that cruel? Why was the poor farmer in Wickard v Filburn prevented from growing crops for his own consumption?

    Contrary to your sheaves of newspaper articles and your illusionary interpretations of them, there was no mass starvation in the US during the Great Depression. There were people that occasionally went hungry, sure, but mass starvation? If that were the case, then Roosevelt’s policies aimed at increasing food prices by destroying excess food supplies were surely on a par with Mao’s Great Leap Forward, which did in fact result in many millions of Chinese-for the first time in their two thousand year history–starving to death.

    It’s truly incredible how powerful is the human capacity for self-delusion.

  19. Captain Jack says:

    “It is difficult to get a man to understand something when his salary depends on not understanding it.”
    – Upton Sinclair

    “The most common of all follies is to believe in the palpably not true. It is the chief occupation of mankind.”
    – H.L. Mencken

    “Men willingly believe what they wish.”
    – Julius Caesar

    “A man hears what he wants to hear and disregards the rest.”
    - Simon & Garfunkel

  20. DeDude says:

    I think people are getting a little scared of commodities (economy may stall) and now are piling into bonds instead. There is way to much investment money out there compared to the real investment opportunities. They are all chasing the illusive yields that will deliver a comfortable life. It is time to tax some of all that destructive capital out of the system to take the pressure out of the pressure cooker.

  21. Bokolis says:

    It’s hard to consider the bond markets sane when the room contains the same jokers that, 5 years ago, were scrambling for yield. As people are wont to do, faced with the same problem of having nothing to do with their money but still smarting, they have over-corrected in the opposite.

    This is more like the little brother in the latter stages of a coke run, looking to score some stepped-on shit after his quality stash has run out.