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Michael Jones, Riverfront Investment Group CIO, on the current bond market and why he is switching back to stocks.
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-- great rotation is -- he says.
Those stocks are still on the value joining us now Michael Jones riverfront investment group chairman and CI.
Oh Michael thank you for -- joining -- reading your notes you say that -- To you bombs are a mystery at this point you've -- long maturity investment grade bonds and about -- emerging market debt -- all -- -- portfolios.
So is the big rush just into equities at this point.
Well I think the rush is just beginning.
-- if you go back of that mystery in bonds offering I understood why rates crashed down into what I call the panic -- below 2% on the ten year treasury back in 2011.
You know we've been spending about three years between one and -- happen for -- is to between two and a half and four thanks to zero interest rates and QE.
And then when the ECB backed off funds and supporting Spain when we had our near default based on the debt ceiling fiasco okay it makes sense to go into panic zone dropped down to one and a half to 2% on the ten year.
Fast forward eighteen months we've resolved the debt ceiling issues and the fiscal cliff to boot.
The ECB he's done -- 180 on supporting Spain.
They equity markets have more than fully recovered and yet bonds are still mired down at one and a half to 2%.
I think this is a year people wake up and say those rates are too low for the conditions but do you still believe these stocks markets are undervalued so many we hear a -- -- -- 52 week high some all time -- for you still think there's value.
Yeah we look at long term 140.
Year trends in the equity markets and based on that analysis we're still about fifteen to 20% undervalued.
On the large cap stock markets -- people get obsessed with numbers like 1550 on the essence because -- remember that that was where we peaked back in 992000.
They assume that it must be overvalued there because it was overvalued then.
On our price matters back and nine united 2000 that was a 100% overvalued.
And that's happened about four times in history every time that's happened you spend about twelve to fourteen years -- and sideways we're now getting to the end of that.
On that same -- 1550 type level we're now thinking it's about ten to 15%.
Undervalued.
And why would that -- -- earnings have more than doubled in that thirteen year period.
So where I'm an investor I'm getting out of bonds I wanna slice of this action where -- -- put my money.
What -- we put good chunk of our incremental dollars is and developed international.
-- somewhat been left behind in the big rush to US equities.
And there's some reasons for that obviously Japan is as -- debt troubles for twenty years Europe has its unique debt crisis.
But we believe that some of those policies are rapidly changing importantly in Japan with the recent leadership change at the Bank of Japan.
Everybody in Japan is onboard for a weaker yen.
And that means a higher Nikkei.
If you going to Japan on a currency hedge basis we did that about three months ago after being underweight Japan for years it's been a great trade we think it has a long way to run.
Europe is one of the cheapest markets out there based on our price matters framework.
And you're starting to see real movement on labor market reform there.
Even -- -- who is the biggest committed.
You know socialist and did but -- some of the old labor policies.
He's losing in his in his confrontations with -- amid -- and with Peugeot.
Michael we've got about thirty seconds left you also like the high volatility US large cap equities what what what what are you talking about.
Well these are basically all the stocks that have an objective measure of just their high -- they're very risky distance to be financials it tends to be industrials materials and so forth.
These -- the names that in all the economic uncertainty have been unloved for the last three or four years in the rally while people been more focused on dividend oriented things like say utilities.
There are very undervalued on our analysis and if we're right about the economic environment starting to stabilize and that some of that under valuation -- close in the coming year.
Very get lots of information Michael Jones thanks so much for joining us we appreciate it.
My pleasure.
