FT - Study on performance of long-run securities - http://www.ft.com/cms/s/0/506f713c-3634-11e0-9b3b-00144feabdc0.html

• Except for world wars, equities will outperform cash over any 20 year period
• Over the last decade bonds beat equities for the first time since 1930s
• US Treasury Bond yields have been locked in a protracted downward trend since the 1980s, when the FED convinced markets it was prepared to cause real economic pain in its effort to contain inflation
• Long term bond yield - which need to be high if investors think they need to protect against inflation in the future - steadily fell over this period
• Since 1982, avg annual return (price appreciation + interest payments) on long-dated bonds compared to short-date bonds, has been 5.2%. However since 1900, that figure has only been .8%.
  => Unlikely that bond returns will match the period since 1982 and Barclays warns that inflation will return

Why inflation will return

• Will come from emerging world:
  • During Great Moderation, supply of cheap labor exported lower inflation to the rest of the world
  • Emerging market's demand for resources is now exporting inflation, notably in industrial metals and in food
  • central banks would thus raise rates => ie bond yields
• 'Fed Model' holds that bond yields drive equity valuations. Higher yields from bonds will attract investors unless higher earnings yields are forthcoming on stocks.
• When yields are less than 5.2% , rising yields show optimism about growth and do not hinder companies from raising money.
  
• When yields are greater than 5.2%, this relationship flips because central banks have real concerns about inflation and make it materially more expensive for companies to do business
  =>Treasury yields rising above 5.2% triggered the credit crisis in the summer of 2007. If it gets that high again, the ongoing downward trend in yields will have been broken