Investors stuck with "kicking the can" Clowns to the left of me, jokers to the right, stuck in the middle with you Scottish folk rockers Stealers Wheel inadvertently came up with the perfect message for investors. The market is stuck in the middle of a political mess, and going nowhere fast. In the past fortnight two deep dislocations have again been on show. First came the eurozone summit, which, say investors, showed once again that European leaders were not yet ready to make big decisions. The summit did just enough to stop the region falling apart, but not enough to fix the problem. On Thursday came the second: monetary easing by Britain, the European Central Bank, China and Denmark, as the world economy slows. Add in the scale of indebtedness in the biggest developed economies, and a picture emerges of a market, and economy, stuck with nothing but sideways shifts for years. The apparent inability of politicians to address the fundamental problems of their indebted economies leaves them little option but to patch up problems as they arise. A big drop is prevented by the central bank "put," the idea that if the economy slows, it will be juiced up with more money. Since this works primarily by boosting asset prices, it limits falls in equities. An equally important issue is the cap on the potential gains. If the economy grows strongly, pushing up inflation, central banks will withdraw the monetary octane, or even start to tighten. The effects of such action were clear in 2010 when the first round of quantitative easing from the US Federal Reserve came to an end, and equities tumbled. Sharp drops in shares each time central bankers discuss ending their special measures show just how much investors rely on monetary fuel. Further limiting the chance of a bull run is the likelihood of governments slapping on extra taxes if the economy seems to be recovering. With debt approaching 100 per cent of output in the US and UK, governments will be under immense pressure to reduce their structural budget deficits if the economy returns to something close to steady growth. "The global monetary authorities have protected the downside," says Steven Einhorn, deputy chairman of New York hedge fund Omega Advisors. The US fiscal cliff [next year's automatic fiscal tightening] and the eurozone constrain the upside. They will kick the can down the road. Investing in this environment means avoiding assets dependent on growth. Instead, income looks attractive. The problem, as always in investing, is the price of entry. Mr Einhorn thinks investment grade corporate bonds are "toxic" because yields are so low, although he sees opportunities in higher-yielding junk bonds. As the chart shows, the average yield on a US BAA-rated bond, the bottom end of investment grade, is the lowest since 1965, thanks to the near-record low yields on safe assets such as US Treasury bonds, gilts or German Bunds. Others disagree. BAA bonds pay 3.5 percentage points more than Treasuries. True, they have been far higher, with these spreads almost double the current level in 2008 and more than that during the Great Depression. But corporate bonds remain far cheaper on this measure than the past century's average of just over 2 points, and nothing like the situation in the mid-1960s, when they were the most expensive ever relative to Treasuries. The big worry for investors in corporate bonds is whether they will get their money back. In a diversified portfolio, this makes them a bet that there will not be a dire economic outcome. "Credit is about tail risk, and that's exactly what the government is taking away," says one London hedge fund manager. High-dividend stocks are another option, but look expensive compared to other shares. The price/earnings ratio of the fifth of US shares with the highest yields is approaching that of pure growth stocks, the fifth with the lowest yields. Far from being a gauge of value, as yield always has been in the past, shares with high dividends are now expensive on measures including price to earnings and price to book. Just as in corporate bonds, the reason is that investors hungry for yield have already piled in. This has led to higher-yielding stocks far outperforming through the recent crisis (see chart). Yet, fans of steady dividend payers - typically stable defensive shares - look at their value another way. Paul O'Connor, head of asset allocation at Mercer's investment management arm, says: "They've gone sideways for the past three years so there's no obvious euphoria there. Relative to bonds they look cheap. It's only relative to growth stocks that they look expensive. It is always dangerous to follow the herd. But in betting that nothing goes very right in the next few years investors would merely underperform rising markets if somehow governments find a way to kick-start the economy. Betting that nothing goes very wrong, at least for a few years, relies on central banks not allowing the economy to slide into deflation. For the medium term that seems like a decent bet, at least in the US. In the long run even the best central bankers might find themselves unable to stop indebted economies sliding into a ditch - but investors who want to protect against this with safe government bonds will get returns below inflation.