28 October 2011 Forever blowing bubbles
A bubble is created when more money flows into an asset than is commercially or structurally feasible or sustainable.
An example of this was the US property market being driven to extreme highs by the radical trick of making mortgages available to those who couldn’t afford them. This appeared to suddenly drive the demand for properties to new exponential high levels – but of course the people who couldn’t afford the mortgages defaulted, the new found new demand dried up and to make matters worse tens of millions of repossessions are now flooding US project markets, simultaneously increasing supply while demand continues to fall.
The most comparable bubble right now may well be in high yielding stocks – a distorted interest rate curve, manipulated by central banks, has forced investors who need yield to take exposure to inappropriate levels of risk.
Like the property bust, this will also end in tears.
High yield stocks (the VHDYX) fell by over 50% doing the GFC. That’s looking odds-on again now.
You know it’s a bubble when every news article, or sell-side research or advert or financial channel on TV or every fund manager touting his wares talks about high yield equities as the latest and greatest on the basis that they pay better yield that bonds, have upside potential and great balance sheets.
Yes they do pay better yield – but then they would need to if we are in the kinds of waters where a risk of 50% fall is more likely than any upside. Cash on balance sheets isn’t always a sign of a healthy economy. Many Japanese companies have more cash on their balance sheets than the value of their capitalization.
These waters are shock-infested!
At least fund manager Jesper Madsen admits that the real reason for investing in dividend stocks is the higher quantum and the smoother delivery of returns over the cycle – not the argument that high dividends are the bargain of the century right now. Jesper’s right about high dividend stocks over the cycle but at the height of a bubble is not the right time to buy any asset.
MBMG Group’s latest research analyses the problems, risks and challenges facing investors who need yield right now.
Guess what? We think it is the best to avoid high yield stocks!