It shouldn't be hard to understand that nearly 90 months of ZIRP has regenerated
the equity and real estate bubbles that first pushed the global economy off
a cliff back in 2007. In fact, the Fed's unprecedented foray with interest
rate manipulation has caused these assets to become far more detached from
underlying fundamentals than they were prior to the start of the Great Recession.
The prima facie evidence for the stock market bubble can be found in the near
record valuation of the S&P 500 in relation to GDP and in its median PE
multiple. But perhaps the best metric to illustrate this overvaluation of equities
is the current 1.8 Price to Sales ratio of the S&P. This is the highest
ratio exhibited outside of the Tech Bubble and is especially absurd given 5
quarters in a row of falling revenue.
Accretive to the prior two bubbles is the creation of the most dangerous distortion
of fixed income values in economic history. Evidence for the global bond bubble
is clearly manifest in the simple fact that $9 trillion worth of sovereign
bonds now offer investors a negative yield. When 30% of the developed world's
insolvent debt trades with a minus sign you know that fixed income has entered
the twilight zone and that bond vigilantes have fallen into a deep coma. In
fact, according to the Bank of America Global Broad Bond Market Index, yields
have now fallen to a record low 1.25%. Not only are global bond yields at record
lows but the duration on these fixed income holdings has reached a record high.
This isn't a problem for creditors; but the holders of long-duration debt get
hurt the most when interest rates rise.
The reemergence of equity and bond bubbles are being debated in the financial
media. But what is less known to investors is the massive amount of forced
hot air that has been blown into the commercial real estate market. For example,
commercial real estate prices have increased by double digits for the past
six years, according to The National Council of Real Estate Investment Fiduciaries.
Also, according to the Real Estate research firm Green Street Advisors, commercial
property prices now exceed the 2007 prior peak by 24% overall. And in cities
such as Manhattan, preferred office buildings and apartment complexes are 60%
higher than what existed during the previous housing bubble. Of course, such
lofty values have driven National Retail cap rates down to the subbasement
of history, at just 6.5%. But this Fed induced famine has caused yield-starved
investors to embrace low income streams in the hopes if they ignore this current
bubble it won't pop in the same manner as it did eight years ago.
In fact, this new real estate bubble has grown so large that it has even caught
the myopic and inflation-blind view of the Fed. San Francisco President John
Williams and Boston President Eric Rosengren have both recently warned about
the rapid rise in commercial real estate prices saying that these inflated
values pose a risk to financial stability.
It should be self-evident that eight years' worth of unprecedented money printing
and interest rate manipulations have caused the greatest distortion of asset
prices in history. Therefore, the inevitable conclusion is for an unprecedented
economic contraction to occur once the party inevitably comes to a close. The
primary questions for investors are to know how to best ride this bubble, when
to get out and how to profit from its collapse.
