Taken together, stocks and bonds have never, in over 100 years of history, been as expensive as they are today. If it is true, as Warren Buffett says, that “the price you pay determines your rate of return” then investors paying the highest price on record for financial assets are very likely standing at the brink of the worst returns in history. That’s the bad news…
‘It has seldom been the case that equities, bonds and credit have been similarly expensive at the same time.’ https://t.co/JKP5H0TRbU pic.twitter.com/GvAimFcOxY
— Jesse Felder (@jessefelder) November 29, 2017
…but here’s the good news: At the same time, real assets (commodities, real estate and collectibles) have never been cheaper relative to financial assets than they are today. Thus, relative returns here could be some of the best on record over the coming years.
Real assets at all-time lows relative to financial assets – via @Macronomics1 pic.twitter.com/ALSoJbPYjh
— Jesse Felder (@jessefelder) October 17, 2016
Because real estate and collectibles have actually performed very well over the last few years, the message is even more dramatic when you isolate the commodities-to-stocks ratio.
Equities vs. Commodities via @TruthGundlach ht @LukeGromen https://t.co/DLbAat63xD pic.twitter.com/GQ468HlUZN
— Jesse Felder (@jessefelder) December 6, 2017
Beyond valuations there is also compelling macro case to be made for favoring real assets over financial ones going forward. Demographics trends, which have supported the latter for the past 35 years or so, are now shifting to headwinds, which are supportive of the former.
Demographics tailwind to become a headwind for prices of financial assets https://t.co/cNXrcg8jzr pic.twitter.com/ENhfFtQzE7
— Jesse Felder (@jessefelder) November 7, 2017
My point is not that you should go out and sell all of your stocks and bonds and put the funds into commodities. But most investors own some sort of spin on a 60/40 portfolio that neglects real assets altogether.
In contrast, every one of the most successful assets allocators in the business maintains significant exposure to real assets at all times, whether it be real estate, gold, TIPS or commodities.
Considering all of the above, there is a compelling case to be made that value-conscious investors should now overweight real assets. And focusing entirely on financial assets to the exclusion of real ones could prove to be a very painful mistake.
PS – No, Bitcoin doesn’t count as a “real asset.”