Everything Boom

Reading this article the other day got me thinking: Welcome to the Everything Boom, or Maybe the Everything Bubble

What to do in an overall low return environment? We can just go to cash and earn basically zero returns. Buying short duration treasuries will get you to the same place. 10 yr. yields at 2.6%, near its lowest ever–so you can get some ‘safe’ yield of 2.6% but not without bearing big interest rate/duration risk as the central banks tighten and raise rates. It is worth noting that you could have said the same thing 10 years ago: in 2004 with 10 year yields at 4%–lowest since the 60s–rates have nowhere to go but up right? they have been in steady decline since. Who is to say that we can’t get another 10 years of currency debasement and nominal 10-yr rates dropping to 1.5%? where does that leave real rates? Either way, the last 10 years were a good time for fixed income.
Equities are about as expensive as they were in 2007, and we can’t even argue about ‘normalized profits’ with profit margins higher than ever. The Price/Sales multiple of the S&P 500 stands at 1.77x–at the peak of the market in 2007 it was 1.52x. You have to go back to the crazy days of the tech bubble in 1999/2000 to see levels like we see today.
Real Estate is also expensive and getting bid up based on cheap financing. Furthermore, Real Estate is not an asset class that has delivered long term return, with the exception of the latest bubble. It is a good inflation hedge, and ‘buying low’ following crises has been a good strategy, but hard to argue you would be doing that now. Commercial real estate is arguably ‘cheap’ today, but you have to wonder if the structural demand for retail (especially low-middle end retail, like malls) is ever going to come back given how much shopping is done at home/online. Blame the weather all you want, but last Christmas season may have well-marked a turning point. Teenagers don’t hang out in malls any more (See: all teenage specialty retailers which are really struggling: Abercrombie (ANF), American Apparel (APP), Aeropostale (AEO), etc.). High end / ‘experience’ retail may be here to stay, but I think that kind of ‘fifth ave.’ retail is not cheap (not really sure if there is a good vehicle to invest in that specifically).
I am sitting here with 30% of my assets in cash and maybe that is the right thing to do. I have 37% of my assets in passive index funds (pretty much the S&P 500), and I guess I have to be OK with the possibility of losing 50% of this value over a year (As happened in 2008). The remaining 32% is in actively managed , which could lose significant value as well. In the long term it should beat just holding cash and we will never do well timing the markets.
Howard Marks said it best: “You can’t predict. You can prepare” or more specifically: “We may never know where we’re going, or when the tide will turn, but we had better have a good idea where we are.” So here I am trying to think of what is a sensible investment opportunity in this market, besides just buying defensive stocks (I am loaded up in consumer goods and dividend payers and also a little too much technology but mostly old names that look more like services/consumer companies like Xerox, IBM and–dare I say–Apple).

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