Something just does not feel right. There are times when I just feel crazy for seeing the insane value proposition of stocks versus bonds, then there are times like today when I feel like the grind up is extraordinarily fake. I hate bonds right now because the Federal Reserve wants me to borrow money and invest in risky assets. Now we are facing the dilemma where no security investment seems attractive. I am not going to do the analysis about how the nonstop grind up in equity prices is rare, especially after following such negative sentiment and volatility, but I think it is self-evident from the tight slope upward YTD:
In 2011 there was insane fear about Greece and the Eurozone, even though we knew about Greece and the Eurozone in 2010. Now, as it was at the beginning of 2011, we no longer seem to care about Greece and the Eurozone. Even more frightening is that it seems to me that the leaders of the Eurozone are preparing to eject Greece out of the EU monetary union under the premise that “Greece is a one off problem”. In the past, I thought that the leaders of the EU would suck it up, bail everyone out, then make them pay later while admitting that the Euro was a mistake. Now it seems like they believe that the contagion effects between the European sovereigns can be “ring-fenced”. I highly doubt it. If Greece is allowed to fail, then everyone is going to pull their money out of Portugal, Spain, and Italy. Good luck with that.
I do not feel that the EU debacle is going to unravel the global financial system, but I surely think that it is going to produce more volatility than the 8% that we saw in January. For now I am sitting on the sidelines, neither long or short. I will let inflation eat away at my cash rather than put capital at risk for what certainly seems like a very asymmetric payoff. It could be cited that the VIX exchange traded products are driving the VIX futures’ price action, but I feel that it is more likely VIX futures are showing uneasiness by those who trade it. Take a look at 5 year implied volatility – not dropping a bit.
What does look attractive for those willing: residential real estate with 12%+ ROE’s and inflation protection