With US stocks hitting another high yesterday it is harder and harder to be a bear, and yet logically the end of the rally must be coming closer with each new advance. We remember how the Nasdaq felt like this in November 1999 and yet only finally crashed in March 2000. Momentum is one thing, business economics are another.
For how long can total US company profits stay at an all-time high in relation to GDP? Even the bullish analysts of Wall Street have barely any profit advance pencilled in for 2013. The charts are already indicating a crash (click here).
Mean reversion
Today’s buyers are forgetting a simple fact of life: everything always reverts to the mean. Fat profit margins can therefore never last. They are a transitory phenomenon. And as profits fall so do share prices. Stock prices are only discounted future profits, after all.
You could view this as a binary competition between stocks and bonds for the prize of least ugly looking investment. If interest rates rise then bonds fall in value and stocks may fall by less and less fast.
But in the real world stocks and bonds are not the only game in town. What about real estate and other real assets like gold, silver, art, and diamonds?
At the moment the stock rally has investors transfixed by past performance. But the outlook for profits suggests that performance is truly in the past. After a three year plus rally in equities that is hardly surprising. Only an idiot buys in year four.
So if bonds are also looking ugly, and the return on them is now so low that any fool can see this unpleasant reality, and equity values are peaking then where should investors be turning next? Driving equities to further overvaluation is one course but it becomes more dangerous by the day.
Real assets
No, it is the real assets segment that will provide the best returns in the next rotation of the investment universe, and the best returns will come in the assets with the most limited supply.
There is a lot of real estate inventory still left from the last bust, so the upturn potential is more limited although we are already seeing it across the US and Dubai. Gold, diamonds and especially silver are where the supply bottlenecks will be most accute.
How long will this process take? That’s impossible to say with pin-point accuracy. But when you can see something as inevitable it most always often happens.
-- Posted Wednesday, 20 February 2013 | Digg This Article | Source: GoldSeek.com
comments powered by DisqusPrevious Articles by Peter Cooper About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in
1999 to complete his first book, a history of the Bovis construction group.
Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East's leading English language business news website.
Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.
He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.
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