Let’s face it-thanks to all the quantitative easing and central bank stimulus intervention shenanigans, as well as interest rate cuts, the amount of places portfolio managers can invest in has become more challenging. We are living in a global investing environment where riskier and riskier assets are actually looking even more attractive. This should not be a surprise. Hedge fund managers are in a desperate chase after returns. They don’t really care where it comes from as long as the returns are there.
Pair this reality with the fact that higher risks often bring higher rewards and you have a potentially dangerous situation where institutional investors are structurally being pushed to riskier and riskier assets. The evidence for this is everywhere. You only need to look at the fact that the average US equity stock is overvalued. Of course, in the beginning, stocks worth investing in are the first to appreciate. Once those are overbought and are maxed out in terms of price-per-earnings ratios, the action then turns to riskier stocks. This opens up a lot of moral hazards and the drive for relentless paper gains can overheat the market.
It is no surprise then that Bill Gross of Janus Capital Group and previously of PIMCO is saying that investors have a tough time in this global low interest rate environment. It has really resulted in an investment war between Europe, the United States, and Japan. The most common denominator of all these economies’ experience with quantitative easing is that it has made risky assets look relatively attractive. While Gross went on to talk about dangers that attend this current situation, it is worth noting that based primarily on a price-per-earnings ratio, the US market is overvalued. He definitely may be on to something. The man did not make his billions by being dumb. Investors can only stand to profit by paying attention to his warnings.
