Why is it so hard to find good investments lately?
Usually if some asset class is overvalued, other asset classes will be undervalued because there is only so much money to go around. For example, in 1999 tech stocks were highly overvalued while bonds and gold were very cheap. But now it seems like all asset classes are expensive.
We are in an asset price bubble caused by a combination of:
1. the massive increase in the money supply by the FED
2. the cautious spending habits of consumers in the wake of the global financial crisis and sovereign debt crises.
Basically, the expansion of the money supply is causing price inflation, but because consumers are putting their extra money into investments rather than consumer goods, the price inflation is occurring on investments rather than consumer prices.
Increases in the money supply usually cause across-the-board price increases as more money is being used to bid for the same goods and services. However, this is not always true. For example, if the money supply was increased, but all the new money was secretly buried underground, then nobody would know about it and there would be no way for it to cause any inflation. The inflation only occurs as people utilize the new money to bid for goods and services. In the current climate of economic uncertainty, people are plowing the new money into investments, which bids up investment prices while leaving the CPI and consumer prices largely unaffected.
The situation may be exacerbated by the fact that the new money is accumulating more in the pockets of the wealthy than the poor since the wealthy put a larger share of their money into investments.
Even though apparently it is possible for all asset classes to be overvalued, it is still true that it’s not possible for everything in the economy to be overvalued. Right now, it is consumer goods that are undervalued. Unfortunately, that doesn’t help too much for savers and investors.
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