| The
yield on the Vanguard
Prime Money Market Fund is currently 4.98%. 4.98% is higher
than the average yield on REITs (as
of June), almost 3-times as high as the dividend yield on the Wilshire
5000, and nearly as high as the yield
on the 10-year Treasury bond. With these statistics in
mind, I will dare say that many aggressive investors will probably
look back say a year from now and regret that they didn’t stop
trading and simply move into cash in mid-2006.
The
danger with trying to pick which asset class will best 5% in the
coming 12-months is readily apparent: like a sinner standing at
the gates of heaven central banks have started to change their
ways and take liquidity out of the system, which suggests that
speculative forces in the marketplace will continue to be
corralled going forward. And while the obvious response to a
concerted attack by central banks on liquidity is to head into
bonds – something Gross
suggested to do last week – there is nonetheless the risk
that commodity prices will not immediately follow the central bank
game-plan. In other words, interest rates may stay
stubbornly high, even if economic growth slows, unless
commodity prices fall.
When
Uncertainty Abounds...
Guided
by the light of predictable and safe returns, the prudent investor
can only arrive at the conclusion that there are potentially outsized
risks in owning stocks, bonds, real estate, and
commodities today. Moreover, these risks are unlikely to pass by
anytime soon.
Incidentally,
what helps keep the dangerous asset churn going even as central
banks attempt to drain liquidity from the system is, ironically,
that which is being heralded as marking the end of times:
volatility. To be sure, volatility, at least in the near
term, serves to harden the speculators belief that outsized
opportunities exist. For example, a crash in
precious metals represents an opportunity in bonds, falling
emerging market stocks means there is money to be made in US
dollars, falling real estate represents an opportunity in art,
etc…
But
while a pickup in volatility may attract the thrill seekers, it is
not a reason for the average investor to get excited.
Rather, volatility in today’s environment suggests that bubbly
asset classes are fighting for dollars, that investor risk
tolerances have peaked, and that the ‘reflation’ dynamic in
the marketplace since 2003 is about to evolve into another animal.
This action spells only one thing: uncertainty.
Yes,
there are isolated opportunities to be found in the equity markets
and along the curve. Perhaps also the astute real estate investor
can find bargains as the pool of foreclosures increases. But
no, now is not the time to deploy shrewd macro intelligence to try
and pinpoint the undervalued asset class. As the story
goes, cash is king – and it shall remain king until either
commodity prices, stock prices, or both, severely buckle.
© 2006 Brady
Willett
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