A new gold rush is on among the nation’s most affluent, only it’s not just gold and silver this time. Investors are pouring billions into tangible assets including multi-family homes, commercial real estate, farmland, timber and agricultural commodities.
To be sure the wealthy have always understood the value of working for assets, and the difference between a good asset and a bad one. Ever since we abstracted paper money away from any association with anything of value, the smartest people in the room when it comes to money understood that paper money is only worth something if you can trade it for something of tangible value. The rich have always understood the value of appreciating assets but that doesn’t totally explain the mad scramble right now. What’s driving the shift we’re seeing in full swing today?
Disappointed by Hedge Funds
They’re called “family offices,” an insider term for small investment firms that work for the ultra-wealthy. Lately we’ve seen these family offices shifting money out of hedge funds as the rich increasingly doubt the ability of equity-driven assets to produce earnings. This skepticism is magnified by the high fees and limited trading options provided by most hedge funds. Family offices can’t just let money sit around and many of them are looking at high quality hard assets for their clients as alternatives to the high fees of hedge funds.
The Electron Global Fund was up 2% for September, bringing its third-quarter return to -1.7% and its year-to-date return to 8.5%. Meanwhile, the MSCI World Utilities Index was down 7.2% for September, 1.7% for the third quarter and 3.3% year to date. The S&P 500 was down 4.8% for September, up 0.2% for the third Read More
Changes to Index Components
At the close of trading on Friday, real estate will become its own sector in the S&P 500 market index. The rearrangement moves REITS and other real estate based instruments into an entirely new heading. That means every index fund, ETF and mutual fund on the planet that’s tied to the S&P 500 will need to adjust its asset allocation to compensate for the new market sector. Some of the flood of money we’re seeing into the commercial real estate market is part of the adjustment to the changes in the underlying market index.
In a healthy market one would expect corporate debt to increase at about the same rate as GDP. If companies are borrowing money to expand infrastructure and build new facilities, one would expect to see growth. Not only are we not seeing growth but we’re seeing corporate debt expand five times faster than the GDP. The view that balance sheets are healthy is challenged by the sheer weight of corporate debt. Debt is a drag on forward earnings, particularly if that money is being used to do something other than make productivity investments. What we’re seeing today could be signaling decades of stagnant corporate earnings
Cash has always been king in the U.S. economy but lately the king has been dethroned by the ongoing folly of central bank interventionism. Zero interest rate policies apparently weren’t crazy enough, so a handful of central banks around the world tried negative interest rates, which threw the normally boring currency markets into chaos. Wealthy investors are now forced to cast a skeptical eye on the mountains of cash most have sitting in money market accounts. The ultra-rich often keep as much as thirty percent of their wealth in cash or cash equivalents and that adds up to a lot of money. When the value of that currency is already being eroded by inflation, and then central banks add further devaluation uncertainty on top of that, it can tip the decision point for many of the world’s wealthy. Not being able to trust cash means a shift to high quality liquid hard assets.
Between an inherent preference for assets, over-leveraged corporate balance sheets and instability in currency markets the wealthy are rushing to convert paper money into more tangible assets and for good reason. Even smaller investors should be following their lead right now.