Both in absolute terms and relative to equities, most bond markets (notably the Anglo-Saxon) are ridiculously overvalued. Since the risk-free rate has now become the return-free risk, cash now looks like the superior asset class diversifier.

As regards stock markets, price is what you pay, and value (or lack thereof) is what you get. On any fair analysis, the US market in particular is a fly in search of a windscreen. Using Professor Robert Shiller’s cyclically adjusted price / earnings ratio for the broad US stock market, shown below, US stocks have only been more expensive than they are today on two occasions in the past 130 years: in 1929, and in 2000. The peak-to-trough fall for the Dow Jones Industrial Average from 1929 equated to 89%. The peak-to-trough fall for the Dow from 2000 equated to “just” 38%. Time will tell just how disappointing (both by scale and by duration) the coming years will be for US equity market bulls.

David Fuller's view

Here is Tim Price's letter.

If you read the second paragraph of Tim Price’s letter above, how close to the windscreen might that proverbial fly actually be? 

I hope not to be complacent, but I do not think that the metaphorical windscreen cited by Tim is currently in sight.  Interest rates remain low, despite the wind down of QE which continues.  Treasury bond yields are not a problem; in fact, they may be indicating that US GDP growth will only improve gradually and sporadically for the next few years.  That would give the Fed further reason to keep short-term rates low, at least well into next year.   

However, Wall Street’s valuations generally reflect the USA’s advantages of QE, much cheaper energy costs relative to other developed economies, and a growing lead in many technologies.  In other words, today, one is paying a premium for those advantages.  There are much cheaper stock markets from Europe to Asia.  Markets across the Asia Pacific region are back in form, enjoying superior GDP growth. 

Tim Price likes the sterling-denominated Halley Asian Prosperity fund, which was launched in late-2012 and has done well.  However, the Samarang Capital website says that this small fund is closed to new investors having reached its target size of approximately $200 million.  There are plenty of other promising Asian funds listed in the Funds section of our Chart Library.