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Steinhardt: Fed's Low Rates Haven't Spurred Economy

Thursday, 12 April 2012 03:36 PM

Investors should avoid bonds and buy stocks in companies paying high dividends, and the Federal Reserve should reconsider its low-interest-rate policy, according to Michael Steinhardt, whose hedge funds returned more than 20 percent a year for almost three decades.

“Bonds are no place to be,” Steinhardt, 71, who is now chairman of New York-based WisdomTree Investments Inc., said in an interview Thursday on Bloomberg Television’s “Money Moves” with Carol Massar. “Equities are cheap by historic standards. Equities that pay high dividends relative to bonds, relative to the stock market, I think that’s a good place to be.”

Phone stocks and utilities offer the highest dividends among 10 industry groups in the Standard & Poor’s 500 Index, with yields exceeding 4.2 percent. That compared with a yield of 2.04 percent in 10-year Treasury notes and 2.02 percent for the entire S&P 500.

The S&P 500 rose 12 percent during the first three months of this year for the biggest first-quarter rally since 1998 as earnings beat analysts’ estimates for a 12th straight quarter. The gauge is trading at 14.3 times reported earnings, below the average since 1954 of 16.4, according to data compiled by Bloomberg. Treasuries slipped 1.3 percent in the first quarter while corporate bonds increased 2.4 percent.

WisdomTree, started in 2005, offers equity ETFs based on proprietary indexes that weight member companies according to cash dividends or earnings. Indexes traditionally weight securities according to market capitalization. The company also offers currency, fixed-income and alternative ETFs.

Steinhardt Management

In 1967, the investor opened New York-based Steinhardt Management Co., a hedge fund that produced returns averaging 24 percent a year for the next 28 years.

The Fed holding rates near zero hasn’t worked to spur economic growth, Steinhardt said. Fed Chairman Ben S. Bernanke has kept interest rates near zero since December 2008 and expanded the central bank’s balance sheet with two rounds of asset purchases totaling $2.3 trillion. He has pledged to keep borrowing costs low through at least late 2014.

The U.S. economy will expand 2.3 percent this year, according to the median of 90 economist forecasts in a Bloomberg survey. While that’s up from 1.7 percent in 2011, it’s less than the 3.7 percent average from 1983 to 2000.

“The economy is really going almost nowhere,” Steinhardt said. “The low interest rates haven’t really accomplished what you could have thought you might have,” he said. Fed policy makers “need to revisit this historic logic that low rates are good and high rates are not so good because it’s not working and the economy can’t gain any zest, can’t gain any vigor and there has been an enormous amount of stimulation,” he said.

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