Can you smell that smell?
It’s free money all around you!
Awhile ago, I wrote about Bernanke’s Boom – a boom caused by cheap money and the desire for returns in excess of inflation. Bernanke’s boom is still going on – and it seems to be picking up the pace. Just take a look at what’s going on in finance:
- Single-family homes are rising in value at a pace not seen since 2006. Blackstone is spending $100 million a week to buy homes to rehab, rent, and eventually sell. The first true pure-play on single family homes also went public.
- Dividend paying companies are tearing it up, juicing dividends and attracting an investor that usually stayed in cash and fixed-income investments.
- Home Depot, and countless others, are taking on cheap money to repurchase shares. CFOs know that the quickest way to juice EPS is to borrow at X and acquire shares with an earnings yield of X+Y. (I actually like Home Depot as a long term play, but you’ll probably get a chance to buy it cheaper.)
- Companies rated junk are finding no difficulty raising capital, thanks for the appetite for high-yield debt securities. Junk borrowers are finding capital at the lowest rates in history, and paying a small spread of 4.8% over US Treasuries.
- Japanese stocks are getting love again, even though I think they’re uninvestable. Monetary stimulus was enough to grab the world’s attention and investment capital.
In a world where savings accounts ensure you only get poorer, everything else looks like a steal. Is a company really overvalued as a perpetuity if it has a PE of 50? I mean, 2% earnings yield beats .001% in a savings account, yeah?!
Risk on for yield!
And there lies the problem. I’m not finding bargains in stocks like I could find in 2010 or 2011. Junk bonds are trading above par by a huge margin. I’d venture to guess that real estate investors in the hottest markets (Phoenix, Atlanta, and California as a whole) aren’t finding cash flow bargains, either.
I hate to call this market peak a top. Making a call on the broad market usually makes you look like a fool, but I’m scared. Retail investors are coming back. Everyone is increasing their 401K contributions. Everyone is buying cash flow positive assets. Even my sister, who couldn’t even spell Dow Jones if her life depended on it, was on my case over Easter weekend about finally rebalancing her portfolio. Hell, my friends, irresponsible 20-somethings to the highest degree, want to start saving and investing. When everyone else is doing something, I like to be doing the opposite. I think if you’re buying here, you have to be prepared for lower returns.
I could be dead wrong – I probably will be. And no I won’t be dumping the positions in the portfolio I have because, at the end of the day, I think they’re valued at prices lower than the broad market. But things look far too rosy. Massive unemployment is still a thing. Americans are still really broke, even though low rates make it easy to consume far too much, far too often.
Bernanke’s boom is fun until it turns to bust.