Tags: Wien | Slow | Growth | economy

Byron Wien: Brace for ‘Prolonged Period of Slow Growth’

Wednesday, 02 May 2012 07:54 AM

Blackstone's Byron Wien is bullish about the economy for the rest of this year, but says growth will slow significantly after that.

"I think the future will be different than the past and that we are in for a prolonged period of slow growth and deleveraging while the federal deficit is brought down," Wien writes in a market commentary reported by the Business Insider.

"That may mean more modest returns for equities in future years, but for 2012, I still believe we have higher highs ahead of us. Apple paving the way for a greater focus on dividends will help the indexes move ahead."

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

Wien, who has been forecasting higher rates for some time and been wrong, now believes we have reached an inflection point that will cause 10-year Treasury rates to move higher between now and year-end, perhaps reaching 3 percent.

“The question is what impact that will have on the equity market,” says Wien, who for a good part of his career maintained a “dividend discount model” that related the fair value for the S&P 500 to the 10-year Treasury yield.

“The model served me well into the late 1990s when it showed the market to be egregiously overvalued,” he says, but broke down when fear around the world drove the 10-year yield to what Wien considered aberrationally low levels.

“Based on the principle that stocks compete with bonds, (that model) would argue that today the S&P 500 should be over 2000,” Wien says. “There is an overarching view among investors that the market is mean-reverting, so perhaps the model will someday work again, but I am skeptical.”

Economist and fund manager John Hussman says the problem for the stock market is that the 13-year journey of underperforming T-bills — with wicked collapses and break-even recoveries — is most probably not over.

“Stocks remain overvalued on the basis of the probable long-term stream of cash flows they will deliver to investors, though the extent of this overvaluation is obscured by unusually high (but reliably mean-reverting) profit margins, which make current and forward P/E ratios seem pleasantly digestible,” Hussman writes in a note to investors.

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

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