Jeremy Siegel and Jeremy Schwartz: The Bond Bubble and the Case for Stocks - WSJ.com
Excerpts:
"One market that now makes no sense to us is the popular Treasury Inflation Protected Securities (TIPS), where recent yields should be enshrined in Ripley's "Believe It or Not!" The yield on the benchmark 10-year TIPS turned negative for the first time in history, meaning investors are now lending money to the government with the hope of receiving a sum 10 years from now that is worth less in purchasing power than the dollars they fork over today.
"This astounding situation can only be justified by extraordinary pessimism about the prospects for the U.S. economy. Economic theory predicts that the real yield on long-term TIPS should approximate the real growth in the economy. And when these securities were first floated in 1997, investors received a 3.4% yield, which was very close to the 3.6% average GDP growth over the previous 50 years. The average yield on the 10-year TIPS since it was floated has been 2.5%.
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"Investors have flocked to inflation hedges like TIPS and gold out of fears about out-of-control government debt and deficits. The S&P downgrade of the U.S. credit rating heightened concern that the Fed would turn on the printing presses. But equities, like precious metals, are also real assets whose return has compensated investors for inflation. Per share dividends of the S&P 500 firms have grown at 5% per year over the last half-century, which handily beat the average rate of inflation of 4% during the period. In fact, dividend growth has beat inflation both during the low inflation periods of the 1960s, 1990s and 2000s, and the high inflation periods of the 1970s and early 1980s.
