At this weekend’s Berkshire Hathaway annual meeting, Warren Buffett commented that when he started out he had many ideas but little capital. Today the reverse is true. Perhaps it’s a sign of the times. Most global markets are awash in liquidity created to prevent a post-crisis debt deflation. Thankfully that threat has receded as financing terms are possibly the easiest ever.
The FT reports high yield bonds now yield under 5% for the first time ever, having dropped below 6% earlier this year. About 5-years ago, risk-free 10-year US Treasuries yielded roughly the same. But while current yields are compressed, it is also true that investors in nearly all fixed income securities have made a lot of money by holding on to their paper. And equity deals financed long-term at today’s low rates will have highly attractive economics for years to come. Witness the recent nearly $10 billion deal to take BMC Software private.
With a few more years of QE expected, perhaps securities that produce regular cash flows will continue to rally. Risky assets as disparate as low grade “triple C” credit and biotechnology companies are all buoyant in today’s post-crisis liquidity. One of the few areas not performing is natural resources, especially precious metals. Junior gold miners are off by 50% or more in the past year. Gold prices have fallen this year, perhaps on the expectation that ending QE will be as easy as starting it.
The trick today would seem to be owning productive assets but being ready for turmoil when, one day, we move back to normal interest rates. Mr. Buffett was quoted on Bloomberg as supporting Fed policy including QE. No doubt we would be much worse off without it. Though Mr. Buffett also went on to say, “I’d be interested to see how he (Mr. Bernanke) unwinds.” Indeed when asked how the Fed should unwind, Mr. Buffett apparently replied, “I don’t know. That’s why I’d be interested.”