I'm enough of a traditionalist to believe that the older a person becomes, the more experience and hopefully wisdom they accumulate. That's why I put a great deal of faith in the comments of market gurus like Richard Russell (aged 84) and Peter Bernstein (89).

Both are still sharp as tacks and this week Bernstein has produced some insightful analysis of two ignored yet significant features of the markets and the US economy. He recalls 1958 when, for the first time in living memory, the average yield from shares at 3.3% fell below the government stock rate of 3.8%.

"When this inversion occurred, my two older partners assured me it was an anomaly. The markets would soon be set to rights, with dividends once again yielding more than bonds. That was the relationship ordained by Heaven, after all, because shares were riskier than bonds and should have the higher yield. Well, as I always tell this story, I am still waiting for the anomaly to be corrected," Bernstein says.

One reason for this change was that the concept of 'growth shares' was coming into popularity and investors began to rely on share price appreciation for their returns rather than dividend yield.

These days, thanks to the credit squeeze and market collapses, the situation is close to reversing itself. It is possible that yields from shares will again be higher than those from bonds.

He also notes that until 1982, the rate of unemployment and the length of time people were out of work moved up and down together very closely. Since 1982, however, the duration of unemployment has increased dramatically.

He also notes that 1982 was also the point at which the growth rate of real compensation began to lag significantly and persistently behind productivity.
"These facts have high importance for investors at the present time. Congress has just passed a bill that 'bails out Wall Street'. The recent failures and mergers of investment banks have been accompanied by breath-taking bonuses to departing executives responsible for much of the mayhem they leave behind.

"Under these circumstances, and regardless of when the black clouds on the horizon finally begin to brighten, we would put low odds on a renewed bull market with ebullient price/earnings ratios and declining dividend yields," he concludes.

The lessons from these findings are that you cannot predict the future by assuming past conditions will stay the same. Those who waited for share yields to rise back to their historic premium above bonds would have been wrong for 50 years.

On the other hand, those who expect the markets to regain their past levels in short order may also prove to be wrong for an extended period. I believe the solution is to stick with high quality companies that have a resilient business and which are priced by the market to generate returns equal with the government stock rate.

Yield shares should pay that rate out in dividends while growth ones should generate an 'owner return' based on total earnings per share.

The good news is that share prices are currently so low that there are many dividend yields and owner returns higher than government stock - some are in double digits. Even though we are in for some volatility, this is not a bad time to lock in some decent yields.

David McEwen is managing director of Investment Research Group. He can be reached by email at david@irg.co.nz or by mail care of this newspaper. A disclosure statement is available free of charge on request by calling 0800 474669 or visiting the website www.irg.co.nz