Chris Lau - Seeking Alpha

Tuesday, November 24, 2009

Notes on a 0.01% Returns

'Anything but 0.01%,' Gross stated the desire to earn more than 0.01% also meant the potential return for investors in accepting higher risks:

That 0% yield is not a joke. Almost all money market accounts – totaling over $4 trillion dollars (...) – yield close to nothing, so close to nothing that I mistakenly did a double take when reviewing my monthly portfolio statement. “Yield on cash,” read the buried line on page 15 of the report, “.01%.”
Remember: one component for arriving at the market value of company will depend on whether to assign an optimistic or pessimistic P/E multiple. When there is an appetite for risk, this multiple expands and therefore stock prices rise (if justified by the accompanying earnings growth rates). The stock market's return is a function of these three variables: earnings growth/decline plus change in P/E + dividend yield.

My point is to recognize, and to hope that you recognize, that an effective zero percent interest rate, as a price for hiding in a foxhole, is prohibitive. Like the American doughboys near France’s future Maginot line in WWI – slumping day after day in a muddy, rat-infested pit – when the battalion commander finally blew his whistle to charge the enemy lines, it probably was accompanied by some sense of relief; anything, anything but this! Anything but .01%!
Gross makes a very important point here:

The Fed is trying to reflate the U.S. economy. The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks. Once your cash has recapitalized and revitalized corporate America and homeowners, well, then the Fed will start to be concerned about inflation – not until.
h/t marketfolly. Full original newsletter may be downloaded here.

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