From Jeremy Siegel:

The major reason for the dramatic drop in these real yields is the unprecedented – and in my opinion unwarranted – level of pessimism and risk aversion that has gripped investors since the financial crisis.

Siegel argues for stocks, as he typically does. The problem is what to buy in a world of low real interest rates. In principle, anything that will increase its nominal value ought to do well. But commodities are already high. Real estate? I can understand why some hedge fund managers are looking at farmland, which seems like a safer bet than commercial real estate.

Relative to the market, I would describe myself as less pessimistic but more risk averse. For me, I have an unusually high share of my portfolio in money market funds. That share was much lower two years ago. If I were reasonably risk tolerant, I probably would take Siegel’s approach and load up on stocks.

I would note that if the general pessimism were to lift and interest rates were to rise, the Fed would be stuck with huge embedded capital losses on the long-term bonds it is buying as part of QE2. Freddie and Fannie probably would take big hits as well.