Bonds Or Stocks: Which Bubble Is Bigger? SocGen Answers

One of the more vocal debates of the past several years is whether the bubble in bonds is greater than that in stocks, or vice versa. While it will hardly resolve the ideological debate, in its latest "Risk Premium" report, SocGen presents a matrix showing the relative cheapness, or rather lack thereof, of various asset classes and what returns one may expect.

The conclusion, which will hardly come as a surprise to anyone who has observed the past 7 years and $13 trillion in central bank liquidity injections, is that everything is overvalued.

Quote SocGen's Alain Bokobza:

Rich valuations point to the likelihood of low returns across asset classes. [W]e develop a cross-asset approach to risk premia and implement it across the asset classes. The results show that valuations are rich across the board. This indicates markets may become shaky as we get closer to the first Fed rate hike in nine years.

That's putting it mildly, but perhaps more notable is that when looking at US Treasurys and US equities, at least according to SocGen, both asset classes are equally bubbly, and assure nearly identical negative long-term returns (something Jeremy Grantham also noted about a year ago when he said that the S&P will likely rise to 2250 at which point the bubble will finally burst).

One final thing to note in the chart above: the only asset class which does not appear massively overbought and expensive, are Asian government bonds, equities and junk. Which means that as the world wonders where the last source of monetization will come from for the final buying burst, in the central banks' "all-in" gamble to reflate the final bubble, everyone will soon be looking at the PBOC, just as we suggested last week.

And of course, once China is also monetizing, and in the process exporting epic deflation across the globe, the final reflation burst will also be the simplest one and one Bernanke hinted at long ago in "Deflation: Making Sure "It" Doesn't Happen Here." This one: