NYT: Everything Boom, or Bubble?
Welcome to the Everything Boom, or Maybe the Everything Bubble
In Spain, where there was a debt crisis just two years ago, investors are so eager to buy the government’s bonds that they recently accepted the lowest interest rates since 1789.
In New York, the Art Deco office tower at One Wall Street sold in May for $585 million, only three months after the going wisdom in the real estate industry was that it would sell for more like $466 million, the estimate in one industry tip sheet.
In France, a cable-television company called Numericable was recently able to borrow $11 billion, the largest junk bond deal on record — and despite the risk usually associated with junk bonds, the interest rate was a low 4.875 percent.
Welcome to the Everything Boom — and, quite possibly, the Everything Bubble. Around the world, nearly every asset class is expensive by historical standards. Stocks and bonds; emerging markets and advanced economies; urban office towers and Iowa farmland; you name it, and it is trading at prices that are high by historical standards relative to fundamentals. The inverse of that is relatively low returns for investors.
“We’re in a world where there are very few unambiguously cheap assets,” said Russ Koesterich, chief investment strategist at BlackRock, one of the world’s biggest asset managers, who spends his days scouring the earth for potential opportunities for investors to get a better return relative to the risks they are taking on. “If you ask me to give you the one big bargain out there, I’m not sure there is one.”
But frustrating as the situation can be for investors hoping for better returns, the bigger question for the global economy is what happens next. How long will this low-return environment last? And what risks are being created that might be realized only if and when the Everything Boom ends?
Safe assets, like United States Treasury bonds, have been offering investors paltry returns for years, ever since the global financial crisis. What has changed in the last two years is that risky assets, like stocks, junk bonds, real estate and emerging market bonds, have also joined the party.
Want to buy shares of American companies? At the current level of the Standard & Poor’s 500 index, every dollar invested in stocks buys you about 5.5 cents of corporate earnings, down from 7.4 cents two years ago — and lower than just before the global financial crisis in 2007-8.
Prefer a more solid asset? The price of office and apartment building has risen similarly; office space in central business districts nationwide costs $300 per square foot on average, up from $147 in early 2010, according to Real Capital Analytics. In Manhattan, an investor in an office building can expect rent payments after expenses to add up to only a 4.4 percent return, known as the capitalization rate, lower than even in 2007, the top of the last boom.
What about overseas investments? Spain and other Southern European countries that were the nexus of the European debt crisis are not the only places where bond rates have plummeted (even Greece was able to issue bonds at favorable rates earlier this year). Emerging markets, which generally have higher interest rates because of higher inflation and less political stability, are offering record low interest rates as well. Bonds issued by the governments of Brazil and Malaysia, for example, are currently yielding only around 4 percent.
The high valuations now aren’t as extreme as those of stocks in 2000 or houses in 2006; rather, what is new is that it applies to such a breadth of assets. In 2000, when the stock market was, with hindsight, a speculative bubble, other assets like bonds, emerging market investments and real estate looked reasonable.
The Everything Boom brings obvious economic risks. In the most pleasant outcome, global economic growth would pick up, causing today’s expensive assets to begin looking more reasonably priced. But other outcomes are also possible, including busts in one or more markets that could create a new wave of economic ripples in a world economy still not fully recovered from the last crisis.
There are two principal reasons behind this low-return environment, though people might dispute which is the cause and which is the effect.
Global central banks have been on an unprecedented campaign of trying to stimulate growth through low interest rates and of buying assets with newly created money. If the Federal Reserve keeps its short-term interest rate target near zero until next year, as most officials of the central bank expect, it will have maintained the zero-interest-rate policy for seven years. The Fed held $900 billion in assets in August 2008; now that number is $4.4 trillion and counting, with the third round of asset-buying set to expire at the end of the year. Central banks in Britain, Japan and the euro zone have pursued similar policies.
In a view widespread in the capital markets, the low returns are a byproduct of those low rates. The Fed and other central banks have siphoned off trillions of dollars’ worth of the supply of global investments, and private investors are having bidding wars for whatever is left.
“Interest rates are so low,” said Peter J. Clare, a managing director and co-head of the United States buyout group at private equity firm the Carlyle Group. “There are few other attractive places where investors can direct their money, so it drives investor money into equity markets. It’s just the most basic of supply and demand equations: When there’s more demand, it drives up the price and pushes valuations where they are today.”
But while central banks can set the short-term interest rate, over the long run rates reflect a price that matches savers who want to earn a return on their cash and businesses and governments that wish to invest that savings — whether in new factories or office buildings or infrastructure.
In this sense, high global asset prices could be the result of a world in which there is simply too much savings floating around relative to the desire or ability of businesses and others to invest that savings productively. It is a reassertion of a phenomenon that the former Federal Reserve chairman Ben Bernanke (among others) described a decade ago as a “global savings glut.”
But to call it that may not get things quite right either. What if the problem is not too much savings, but a shortage of good investment opportunities to deploy that savings? For example, businesses may feel that capital expenditures are unwise because they won’t pay off.
Mr. Bernanke himself has been wrestling with the possibility that the original framing of a global savings glut got the problem in reverse. “I may have made a mistake in trying to assign a name,” Mr. Bernanke, now at the Brookings Institution, said in an interview. “A glut means more than is wanted. But it doesn’t necessarily arise because people want to save more. It can be because they invest less.
“It’s entirely possible that if you look at the world, you have slow-growing advanced economies, China cutting back on capital investments, that the rate of return is just going to be low.”
If this analysis of the world is correct, investors have an unpleasant choice: consign themselves to returns lower than the historical norm, or chase evermore obscure investments that might offer an extra percentage point or two of return.