We’re forever blowing bubbles…


A bubble is created when more money flows into an asset than is commercially or structurally feasible or sustainable.

An example of this was the US property market being driven to extreme highs by the radical trick of making mortgages available to those who could not actually afford them. This appeared to suddenly drive the demand for properties to new exponential high levels – but, of course, the people who were not able to afford the mortgages defaulted. The newly found new demand dried up and, to make matters worse, tens of millions of repossessions are now flooding US project markets, simultaneously increasing supply while demand continues to fall.

The most comparable bubble right now may well be in high yielding stocks – a distorted interest rate curve, manipulated by central banks, has forced investors who need yield to take exposure to inappropriate levels of risk.

Like the property bust, this will also end in tears.

High yield stocks (the VHDYX) fell by over 50% during the Global Financial Crisis. That is looking odds-on favourite again now.

You know it is a bubble when every news article, or sell-side research or advert or financial channel on TV or every fund manager touting his wares talks about high yield equities as the latest and greatest on the basis that they pay better yield than bonds, have upside potential and great balance sheets.

Yes, they do pay better yield – but then they would need to if we are in the kinds of waters where a risk of 50% fall is more likely than any upside. Cash on balance sheets is not always a sign of a healthy economy. Many Japanese companies have more cash on their balance sheets than the value of their capitalization.

These waters are shock-infested!

At least fund manager Jesper Madsen admits that the real reason for investing in dividend stocks is the higher quantum and the smoother delivery of returns over the cycle. It is not the argument that high dividends are the bargain of the century right now. Jesper is right about high dividend stocks over the cycle. However, at the height of a bubble, it is not the right time to buy any asset.

MBMG Group’s latest research analyses the problems, risks and challenges facing investors who need yield right now. Guess what? We think it is the best to avoid high yield stocks and we will leave ‘Forever Blowing Bubbles’ to the West Ham fans.

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]