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Changes

August 16, 2010 – 5:00 pm

The Dow Jones 30 industrial stocks yield more than the 10 year treasury. That was a headline this morning along with China now exceeding Japan in economic strength making them the second largest economy in the world.

What do these data points mean? First, this is only the second time in history that the DOW yield has exceeded the yield on a 10 year treasury. The competition for invested dollars has always been between the safe U.S. treasury and the more risky stock market. Usually, that risk has always meant that the higher yield for the risky stock market the less risk you are taking when comparing the lack of risk in government bonds. Investors today are saying that buying growth is not important; they do not want risk. However, at what level is taking risk worth it? That is the issue. Since in over 100 years this is the second time this has happened it is hard to guess what it all means for the future. One thing seems certain: this inversion of yield will not stay this way. Either stocks will go up in price, treasury’s will go down in price (up in yield), or both. Stocks could go down as well which would push the yield on the DOW even higher in comparison to treasuries. That outcome means a fall into a Depression – possible just not probable.

China’s emergence is just that, a breakout of a world economy. That certainly is a strong positive to the world economy as that emergence is spread over such a large population while Japan’s population is small and not growing. The average age in Japan is much higher and increasing faster than almost any other country in the world. They are not going to be a dynamic economy. China and India are young and large both in population and land mass. The future lies there.

Good Trading
Steve Peasley

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