hands up whos in for consolidation, page-12

Calvo,

By a remarkable coincidence, I am a trained economist, having my Masters thesis, by even greater coincidence, entitled: "Correlations Between Bond Yields and Equities for Developed Ecomomies as Functions of the Economic Cycles Between 1890 and 2000".

So, if I may, I'd like to take the liberty of believing that I might be able to contribute to the debate, in full anticipation of healthy rebuttal and robust counter-debate.

In simple terms, the core findings of that thesis, which my tutors, professors, and their moderators all endorsed, are that yield curves flatten as equities rise. Put another way, short-term rates rise faster then long-dated yields as asset prices increase. Always. Repeat: Always.

Not only that, but short yields tend to rise BEFORE asset values do. Overwhelmingly most of the time, such that it is today widely-held conventional wisdom among seasoned managers of asset classes, that the bond market is far better at predicting the economic cycle that the equity market.

Unless it's somehow "different this time", yield rise, not to choke economic recovery, but BECAUSE of economic recovery. Definitively and unequivocally.

And given just how low yields are currently, I'd say headroom for further exapnsion exceeds the chance for further downward compression.

Every week and every month that economic data in the US shows that it has largely stopped deteriorating (even if it is not improving in leaps and bounds), provides scope for yields to rise. Sure, if the 10-Year yield was already close to its historical average (even excluding the inflationary 1980s) of 6.5%, then I'd say that the bond market was fairly priced, but we are today at a level many standard deviations away from the mean. And I am a big believer in Reversions to the Mean.

Admittedly, while the GFC means that historical averages are no longer relevant reference points, I put it to you that nor is the height of the GFC, and yet yields today are not far off peak-GCF levels.

Assuming the US economy continues over the next two years to take two steps forward, and one step backwards, then I'd say somewhere between GFC crisis levels (~2.6%) and "normal" levels (~6.5%), - ie., 4.5% - is where the 10-year yield will settle.

And I can assure you that not one QBE analyst will have that outcome factored into his earnings forecasts for the stock. The Recency Phenomenon simply doesn't permit it.

Prudent and Informed Investing!

Cameron