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Low Bond Yields Are a Big Red Flag for Equities: Dempsey

You have to squint to see it but taken as a whole U.S. economic data is gradually improving. Yes, the move is glacial in pace and there are those who question the numbers but consumer confidence is rising, GDP is still on the happy side of zero, and jobs are being added to the economy.

According to economic theory, bonds and stock yields should both be moving higher as money floods into higher risk assets. It's not happening that way. Stocks are weak and yields remain depressed, suggesting investors remain content to earn something close to nothing on risk-free money rather than roll the dice on stocks.

Ed Dempsey, chief investment officer at Pension Partners says the yields in particular are a red flag for equities. The confluence of factors are "indicative of a shrinking economic pie," notes Dempsey. In a globalized economy a shrinking pie means the best most investors can hope to do is break even. That's not a formula for rising equities.

A positive resolution to the fiscal cliff (meaning we don't hit a fiscal cliff), rising stocks and rising yields would make Dempsey inclined to start taking some risks. Specifically he wants to get long via what most consider the riskiest of assets: Emerging market stocks.

You can hear Ed Dempsey make his case for going abroad in Part II of our interview later this afternoon.

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