Economic hypochondria runs rampant among investors now. All bad news is met with nods of understanding and little debate. The "cool guys" these days are the bears. If you are somewhat of an optimist you will be bombarded with a flurry of facts and figures that portend that you do not understand what is happening and that you need to get on the "new normal" bus. The blogosphere sends out a plethora of mixed messages, 24-hour news channels spew tickers and the "Ameritrading of America" lets everyone be a hedge fund manager or star day trader.

The investor class is dying. Buying fractional interests in business for the long run is now deemed silly. Economic prognostications, much like analyst estimates, are notoriously incorrect. So why we spend so much time trying to discern what is going to happen in the economy seems a bit bewildering to me. Besides using the outlook for the economy to predict the direction of the stock market is actually backwards. The stock market is a leading indicator and its behaviour will predict the economy's future. In a period such as the one we live in today, the only real constant is volatility. Uncertainty is high and so is fear.

As a result investors have decided to forego any thought to return ON capital and have instead begun to focus on the return OF capital. Investors are moving more money than ever before out of stocks and into bond funds. They have pulled money from US equity funds in 10 of the 17 months since the start of a rally in March 2009. According to the Investment Company Institute (ICI), $33 billion has flowed out of US share funds this year compared to the $185 billion sent to bond funds. The flows into bond funds are the largest for the first seven months of any year since 1984, when ICI started compiling the data. This spending has helped push the average investment grade bond price to more than 110 cents on the dollar, the highest in more than six years, according to Bank of America Merrill Lynch index data. The 10 lowest-yielding US corporate new issues in history have been sold in the last 14 months. IBM recently issued three-year bonds that yield only one percent per year. Johnson & Johnson just sold $1.1 billion in 10 and 30-year bonds that are at the lowest interest rates on record! Government bonds have rallied so much, you now get paid about 2.57 percent per year for 10 years in the US. You get only 2.90 percent for 30 years in Germany and only 1.58 percent per year for 30 years in Japan! Locking in rates like these for such periods would make it very tough to retire not to mention fund one's current retirement. Part of the allure of bond funds has been their spectacular past performance. Bianco Research has noted that three-month US Treasury bills have outperformed the S&P 500 since May 27, of 1997. In the long end of the bond market, US Treasuries as measured by the Barclay's Capital Long Term Treasury Bond total return index have beaten the S&P 500 year to date, and in the one, three, five, 10, 15 and 20-year time frames. With facts like this how can anyone think stocks are a great investment for the long-term? Ironically this is exactly why they may be for the future. It is almost a market axiom that investments with the worst previous returns, where expectations are low, disgust is high and demand is way down, offer compelling future investments.

These aspects lead us to a very interesting valuation divergence between stocks and bonds. People now seem to be more comfortable overpaying for bonds than underpaying for stocks. Large US blue-chip stocks now offer some pretty compelling valuations. According to Moody's, US non-financial companies are now sitting on the highest amount of cash in over half a century - $1.84 trillion. A recent Credit Suisse Group AG report also notes that free cash flow for American companies excluding banks is about 6.8 percent of market value. This is the highest level compared to corporate yields since 1960 and currently yields about two percent more than investment-grade corporate bonds. The Dow Jones Industrial Average (DOW) now yields 2.74 percent compared to the 10-year US Treasury of 2.57 percent. The key here is the 10-year US Treasury will NEVER improve your income if purchased and held to maturity, while the DOW should slowly increase its dividend payments over the years and offer INCREASING income to investors. Consider this example. If you had bought Proctor and Gamble (P&G) 10 years ago your annual dividend income would have been about 70 cents per share or about a 2.5 percent yield. As of today your income from P&G would have risen 275 percent to about $1.93 per share. How's that for a raise?

The last time some of the best quality companies in the world were this cheap compared to bonds was back in the 1950s. If you are concerned about generating income from that certificate of deposit or bond that has matured, maybe it is time to take a look at high quality dividend paying stocks to compliment your existing portfolio of bonds and bank deposits. This portion of the balanced portfolio should help cushion the blow of any future increase in inflation and offers capital growth over time. Allow me to run through one example. Exxon Mobil now trades below the level it was trading at during the panic March lows and when crude was about $50 per barrel.

Its current yield is more than the 10-year US Treasury, its price-earnings multiple is below that of the market. It has grown its dividend nine percent per year for the past five years.

It also uses its free cash flow to shrink its outstanding shares by about 300 to 400 million shares per year. At this rate it will buy itself up in about 15 years.

Summing up the share shrinkage, dividend yield and growth rate would appear to offer superior returns at this stage to US Treasuries over the next 10 years.

Besides, if Bob Doll from Blackrock is correct, US stocks may return 8.1 percent per year from here and double to 2034 by decade's end. That to me seems more attractive than 2.57 percent per year.