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
could not actually afford them. This appeared to suddenly drive the demand for
properties to new exponential high levels - but, of course, the people who were
not able to afford the mortgages defaulted. The newly 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% during the
Global Financial Crisis. That is looking odds-on favourite again now.
You know it is 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 than 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 is not 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. It is not the argument that high dividends
are the bargain of the century right now. Jesper is right about high dividend
stocks over the cycle. However, at the height of a bubble, it 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 and we will leave ‘Forever Blowing Bubbles’
to the West Ham fans.
|
The above data and research was compiled from
sources believed to be reliable. However, neither MBMG International Ltd
nor its officers can accept any liability for any errors or omissions in
the above article nor bear any responsibility for any losses achieved as
a result of any actions taken or not taken as a consequence of reading
the above article. For more information please contact Graham Macdonald
on [email protected] |
