Thirteen years ago, investors were not remotely worried about losing money in technology stocks because everybody thought that they could only go up. Seven years ago, real estate was the asset which could only go up.
Today of course it’s high-yielding REITs, high-yield bonds, dividend-paying stocks, utilities and consumer staple companies that have been going up to insane values. This time the reasons for the escalation are that these big firms have been around for decades or more. Therefore the mass thinking is that nothing could possibly go seriously wrong with them.
This type of reasoning serves as a catalyst for such assets to lose a significant percentage of their current values. These assets, which have been the favorites in the quest for steady yields, will soon begin a decade of underperformance.
While investors, brokers, and hedge funds have been piling into high-yielding securities of all kinds they have been dumping commodity shares and related risk assets. Hence, most high-yielding assets have doubled from their lows of July 2009 while commodity producers have barely budged. Emotionally, this encourages investors to buy the outperforming high-yielding shares, and to sell their underperforming raw material stocks (cyclical assets). Hedge funds and other institutional money managers may or may not be less emotional, however, their computer software tells them to buy and sell almost identically to whatever is the most emotionally charged route.
Sooner than later a major shift from defensive assets into cyclical and risk assets will take place. When this cycle is in full force then it will be too late to get in. However, that will be the time the media will show a great deal of interest, hence the old “buy high and sell low” adage will be in full force.