When Markets Only Go Higher

by JT McGee

Can you smell that smell?

It’s free money all around you!

Bernanke’s Boom

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:

Yield Craze

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.

{ 3 comments… read them below or add one }

DividendGarden April 4, 2013 at 14:51

Wow, one of the best articles I’ve read in a long time.

Reply

American Debt Project April 6, 2013 at 02:41

Agreed, great post. Also supporting your theory, the savings rate has dipped again, about 2.6% down from 4 or 5%. I know GDP is 70% consumer spending, but I liked it when everyone was buckling down. Feels like college and I’m still at one party, even though everyone’s already moved on to the party at the next house. “Hey where’d everybody go?!”

Reply

Evan April 11, 2013 at 14:44

JT – I think you are spot on. It almost feels like 2006 all over again when the indexes were hitting new records daily. The question is what will bring it back down? and how far down will it go?

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