This post first appeared on The Felder Report Premium on May 2nd:
Everything is overvalued. Stocks are extremely overvalued. An incredible amount of bonds have negative yields; how much more overvalued can they get? Investment-grade and high-yield credit spreads are near all-time lows on top of some of the lowest rates we’ve ever seen! Prices for high-end real estate, art and other collectibles are off the chart. I’ve thought of calling this the “everything bubble,” because looking at each one on its own (outside of small cap stocks which are largely obscured from view) there’s no obvious bubble similar to the dotcom or real estate bubbles. But taken together we’ve never seen anything like this ever before.
I believe the real problem lies in the growth of “price-insensitive buyers,” as GMO recently labeled them. I’ve also called them “value agnostic.” Ultimately, there’s a growing class of investors (though I believe they don’t deserve that term) who are buying assets like stocks and bonds regardless of their valuations. They will buy stocks to the moon simply because their methodology dictates they do so. I’m referring mainly to so-called “passive” investors here.
Then we also have investors who will buy bonds no matter how negative they get because their methodology dictates it. Just look at pension funds, insurers and central banks. Their policies ensure they continue buying bonds even when that means locking in deeply negative returns over long periods of time.
The incredible growth in this class of price-insensitive buyers is responsible for the everything bubble. Just think about the growth of passive investing over the course of just the past five years or so. Buy and hold has gone from being mocked and disparaged only five years ago to the most popular investment style there is. Witness the growth of robo-advisors as evidence. And how long have central banks been buying assets? It’s only been over the past five or six years. This is a wholly new phenomenon in the markets and it’s now become a huge segment.
Make no mistake. The incredible growth of “value agnostic” investors is just another form of mania pushing asset prices to extremes. These investors use their returns over the past five years as proof that their methodology has merit when simple common sense shows that you can’t possibly be an investor while denying the definition of an “investment,” as Ben Graham defined it:
An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.
Buying stocks or bonds today provide neither “safety of principal” nor “adequate return.” In fact, these “price-insensitive buyers” don’t even attempt to begin any sort of “thorough analysis.” For this reason they are nothing more than speculators. That they believe themselves to be otherwise despite the obvious fact that they are just the opposite may be the surest sign there is that this is indeed another mania. Sadly, it will only be evident to them in hindsight.