Michael Milken once said “It isn’t okay to leverage to buy overvalued assets,” and I have been sticking to that adage for a while. Maybe the buying window is about to open, and maybe it is not, but Alan Greenspan has certainly become very chatty about asset price euphoria. I recollect a trader friend of mine saying that houses are trading like bonds, and if you read the article above closely, you’ll see that Greenspan might just think so too.
What’s the catch?
Many surmise that our consumer economy has been driven the last few years by housing wealth. I agree, mostly because all my friends keep refinancing their homes and buying new cars with the cash-outs. Then, in the midst of some new records for housing sales, we get hit with some unexpected twists. A couple of hurricanes, and record energy prices, and now it seems consumers are getting scared. Are these surprises the root cause of the sudden turn, or just the “tipping point” of exhaustion for a horse that has been running way to long?
My first inclination is the latter, but that opinion there really doesn’t matter. It seems regular interest rate hikes will be necessary to keep a gallon of gas below six bucks, and a two-by-four under $10 – the ten-year treasury yield won’t stay tame much longer because some of these rising prices are beyond natural control. And all those interest-only loans and HELOCs start maturing right around the corner. If you didn’t catch the omission above, Milken also said that leveraging assets was worse when the cost of capital reached double digits. If you take a look at the amortization schedule of a 5-year IO mortgage after maturity, you’ll now get the point.
If there is indeed a tumble in asset prices, those that are liquid will likely see some great buying opportunities, even if it is at someone else’s expense.
“Chance favors the prepared mind.” – Louis Pasteur