Juggling Dynamite

Sam Zell effectively rips the marketing wrapper off the investment sales puff in this one simple statement: “What’s the definition of safe?  That the stock doesn’t go down.” That is the way real people think about “safe” but it is certainly not what risk markets at today’s record valuations offer.

Sam Zell, Equity Group Investments Chairman, provides perspective on current investing trends, and explains why he thinks a correction is likely. Here is a direct video link.

With stock and corporate bond prices back at cycle peaks, those holding them and thinking their money is anywhere within the realm of “safe” are setting up for a very rude awakening. Particularly those who have retired too early in the past few years or are about to, thinking they are now “conservatively invested” with their savings in stocks and mutual funds in order to live off the dividend income. The next downturn is likely to send many back looking for work to fund their living expenses and build back up their savings. Freedom 75 or 85, maybe?

At least Fed members like Janet Yellen will have a very generous government pension to live on. And they can collect speaking fees in retirement explaining why they tried their best theories and the third devastating asset bubble since 2000 was not anyone’s fault.

Over the past 24 months the Fed’s Q’Ever injections have battled rational expectations for the hearts and minds of would-be investors.

As capital was gradually enticed out of safe havens toward riskier markets, 5 year treasuries were sold off and their yields rose through most of 2013.  For about a year, the long end 30 year notes went along for the ride, also selling off into late  2013.

But then something happened on the way to growth nirvana.  The real economy turned down and 30 year bonds broke faith with QE-hype:  long bond prices began to rally as 5 year prices flat-lined over the last 12 months.  The result has been an epic 143% increase in the 5 yr over 30 yr yield ratio.  Using history as a guide, if credit expansion and demand has in fact topped out this cycle, then the 30 year bond should continue to rally (and its yield will fall) and the 5 year yield will also give up its naive QE faith and follow its longer more sober brother lower as it did from the cycle top in both 2000 and 2007.

Stocks are always the last to catch on to reality…but eventually they get the memo.

After 6 years of being scared out of risk, in the wake of violent capital losses in 2007-09, over the past 2 years individual investors have been gradually seduced back to equities like June bugs to a bug zapper just as risk-reward probabilities have rarely been worse in human history. As shown below, households, otherwise known as the tragic “retail” investors, are now holding the lowest fixed income and highest equity allocations since the prior stock market peaks of 2000 and 2007.  The Fed QE sales pitch has finally accomplished its mission:  banks bailed out, households duped into holding the bag once more.

Meanwhile, a recent survey by Koski Research found that 77% of investors over 50 who had more than 250K of savings said that their primary objective was to not lose their principle.  Holding 60% of one’s savings in egregiously over-valued stocks is very likely to deliver the opposite of this stated goal.