So, who do we believe?

Ritchie told us, at length, that UK stock markets are over valued and about to crash.

Citi tells us something different:

The unpopularity of British shares has driven prices down and dividend yields up. The FTSE All Share index has gone nowhere this year and now yields close to 4pc.

The gap between the dividend yield from the FTSE All Share and the yield available from 10-year government bonds (gilts) – known as the “yield gap” – is a popular valuation metric.

A small gap or negative figure (when gilts yield more than shares) may indicate that the stock market is overvalued, as investors are not being adequately compensated with dividends for the additional risk they are taking by investing in shares.

If shares yield appreciably more than bonds, it is an indication that shares may be undervalued. This carries particular weight during times of high inflation, or when there is the threat of rising inflation, when investors are less willing to accept low bond yields.

The yield gap between British shares and gilts has been increasing since 2013 and is currently at 2.2 percentage points, after a peak of 2.4 points in 2017. The only other years on record in which it has been higher than this were during the First World War, two of the interwar years and during the Second World War, according to data compiled by Citigroup, the bank.

Not that I’d wholly buy the Citi story there. But it’s an interesting valuation metric so why the difference? The Senior Lecturer getting such a different answer?

Ah, yes, that’s it. Back in that Pensions for the Future paper with Colin Hines they showed us the return from gilts against the returns from shares. A calculation where they left out dividend income but included interest income.

A 4% yield makes no difference because they don’t include it.

13 comments on “So, who do we believe?

  1. High yield on shares indicates low expectation of future growth/value.

    Ritchie’s position is that the market has discounted the possibility of future losses, when the evidence is that it clearly has not.

  2. “They left out dividend income but included interest income”

    WTF? Why even pretend you’re doing research?

  3. Dear Tim,
    They have only been cheaper *on that yardstick* during the World Wars and two inter-war years.
    They have been cheaper on other yardsticks at different times in my memory (which doesn’t stretch back to 1945) e.g. Christmas 1974.
    Since dividends on quality shares are expected to keep pace with inflation, a more useful measure is “Equity yield – (gilt yield minus inflation/long term inflation forecast)”.
    Despite that academic quibble I agree with you that Murphy is talking rubbish.

  4. Ritchie hates private pensions and wants to destroy them. I’m not sure if this is due to some bad personal experience or just part of his desire to make everyone dependent on the state for every aspect of their lives.

  5. Well, John 77 beat me to it on the inflation point; so another quibble – comparisons are odious. Post-45, there are several distinct periods, high inflation and high interest rates, comparatively low inflation with lower rates, and currently, negligible interest rates and somewhat dubious official inflation rates. And, there are significant differences in the composition of the All-Share – BT, BG and others didn’t exist prior to the mid-Eighties, Lonrho isn’t what it was, and neither are ICI, or GEC Marconi.

  6. Surely anyone on this thread should realise we are dealing with a man who could charitably be described as delusional or more realistically as one of the most megalomaniacal, evil men in Britain if not the world. These errors arise partly from stupidity but also from a profound belief that the state is everything and we all need subordinating to it – The historian A.L Rowse memorably wrote: ‘If history teaches us anything, it’s that the most dangerous men are the half-educated, almost all the Hitlers, Mussolinis, the Cianos, The Lavals, all fall into this category’ – Surey we can classify a man as casual with the freedom of individuals as Murphy in that category l

  7. I’m sure RM was watching the TV show Babylon 5. For the psi corps – the corps is mother, the corps is father. Very dependent and brainwashed into accepting the organisation as the provider of goods and services. As this was in the 1990s perhaps he’s taken it all on board and is trying to make the state mother & father.

  8. I’m sure RM was watching the TV show Babylon 5.

    If he was, he showed better taste than I’d credited him with. I’d forgotten how good it was.

  9. Martin/ Chris Miller

    A:/ I don’t think someone with his level of self- absorption has time for that ‘trivia’

    B:/ And I sincerely hope it’s not true – one of the greatest Aci Fi series ever sullied by contact with a man as close to pure evil as seen on the internet outside the Dark web.

    Say it ain’t so!

  10. Over in Spudland, he’s banging on about the origin of the word ‘Company’ as if its 2,000 year + old derivation ‘proves’ that wealth ought to be shared around.

    I ask him why he took 99% of the profits of TRUK.

    Not published and another alias banned.

    He really is a cunt.

  11. ‘Ritchie told us, at length, that UK stock markets are over valued and about to crash.’

    To an actual, real investor, it would mean the stock markets are about to present a BUYING OPPORTUNITY.

    If it were to actually happen. Every trade has a buyer and a seller.

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