It just tells you that two years ago, we had a full-blown adult-size bubble. And blowing up the bubble still hasn't taken us to cheap. If you could get between 3% and 7%, I think you're supposed to be a happy camper.
Within the bond complex itself, you probably would get your best returns on a normalized basis over the next five years from the corporate sector, because corporate spreads to Treasuries are exceedingly wide. Now, that doesn't come without risk, obviously, but we've already priced in a lot of risk in the corporate sector, which has had an absolutely nefarious run this year.
If I look at bonds versus stocks, the intriguing one for me right now is corporate bonds versus corporate stocks. I look at corporate bond yields versus equity dividend yields. And I look at corporate CEOs trying to de-lever, and I think that unambiguously favors corporate bonds over corporate equities.
Remember, when CEOs are going for growth, that's good for equity. When they're going for survival, that's good for debt.
Simonoff: Are hard assets the place to be for the next decade? Some people are saying real estate's beginning to build a bubble of its own. Others look at the dynamics of growth of the third world and problems of the Middle East and like energy and other commodities, as well.
McCulley: Yes. With respect to real estate first, which is really not traded on a global basis, I think we have an adolescent bubble in real estate nationwide here in America. And I stress the word "adolescent." It's not an adult-sized bubble. I think that we might get to an adult-sized bubble in the next three to five years. In fact, my valuation work indicates that the median-priced home in America could rise 30% over the next five years cumulatively and still not be more richly valued than it was in 1979.
At the margin, American households will continue to put additional savings money into the property market in part because they've been severely beat about the head and shoulders in stocks. Property has never been more tax advantaged as it is now-that the first $500,000 of gains on property every two years is tax-free also helps.
That was a change in the tax law three years ago. So I think property will continue to do well. I don't look at that so much as an investment per se, because it's a means of people covering their natural short of not having a roof over their head.
From the standpoint of other, more "exotic" investment opportunities, I think the dollar is going down over the next three to five years, notably against Europe. So I think that the international class unhedged, particularly probably European equities, will be an interesting area. And unhedged, people conceptually could get to double-digit returns there because I think the dollar should come down quite meaningfully against the euro in the years ahead.
With respect to commodities, it probably makes sense for people to have a slice there, as well. We've had 20 years of a secular bull market in the dollar. That's over, and I think a weaker dollar should put a floor underneath commodity prices.