CNBC on Tuesday, July 8, 2014: “Watch out for asset bubbles developing: Sternlicht.” I read this with some interest considering Starwood Capital’s AUM ($36B) and focus on real estate. “[…] watch out for tail risk,” warned Barry Sternlicht, company chairman and CEO, who also said there is complacency risk among investors because there is such a dearth of yield.
Since there’s no yield … in corporates or governments — everything whether it’s farmland, timber — everything is yield proxies.
“Yield proxy” is an interesting term. I know all about “chasing yield” having watched and invested in Japan for so long (remember the yen carry trade) and seen the shitty products that banks sell their customers (10yr JGB yield: 0.53%, see Bloomberg bond tables). What really caught my eye in this CNBC piece (originally in video) is this admission by Sternlicht:
We represent many sovereign wealth funds that invest with us, and they’re anxious to put that cash to work in something, anything. (Sternlicht)
Yield proxies and desperation, ultimately a dangerous mix. Interestingly, SWFs seem to hardly exist of late, compared to the last bull run.
Real estate is a beneficiary, as is the stock market, and “they are taking money out of the debt markets,” added Sternlicht. His last point is interesting considering the widespread low yields in government debt and corporate paper (if SWFs are selling, someone is buying). Anyway, like we’ve all heard others warn, Sternlicht brings up the “crowded trade” risk, but concludes that he doesn’t think rates are going anywhere globally because the world’s economies aren’t strong enough.
While some investors such as SWFs, pension funds, and retirees may absolutely need portfolio income, value investors and those that have long-term horizons with no immediate need or preference for income ought to ensure margin of safety first (that goes without saying, to which I will add opportunistically watching for compounders at very reasonable prices … as few as there are today) and then highly consider companies that are increasing their earnings and dividend payouts (as opposed to offering a “high” though rather stagnant payout or one that varies significantly; intelligent stock repurchases are welcome, of course). Further, dividend reinvestment may be wise for a lack of better investments, otherwise to simply add to one’s cash position and enjoy the summer is not a bad thing at all.