The total earnings return on equities (calculated as the inverse of the P/E ratio plus dividends) are currently negative for the first time in history. Inflationary pressures and the lowest interest rates in 5000 years have produced this toxic situation for investors.

The factors that have produced the current negative return environment: negative real interest rates and stock markets driven to valuation peaks by unjustified investor expectations are major reasons why we view the current risk/reward prospects offered by markets are less than compelling. The resolution of this problem must involve either a sharp decline by stock markets or an increase in interest rates. The most likely result will be some combination of both. Any scenario will likely eventuallyrequire a significant market decline.

Both macro and micro considerations suggest that we can anticipate a return to a higher volatility investing environment, following the unusually low volatility exhibited by markets over the past decade. Higher volatility will present considerable risks for the unwary, but also great opportunities for the prepared investor.

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