The Forest and "Cheap" Trees

I will tell you a personal secret: I become rather anxious when asset prices rise far and fast. This is partly because I hold the opinion that coordinated asset price rises are somewhat self-extinguishing in an environment of already leveraged households, already appreciated assets and rather largely indebted governments. But it is also because I hold some non-hard asset financial assets (because of what I believe to be the elevated probability of the above), and so become relatively poorer with each additional upwards vault. And as behavioural finance researchers have shown, it is indeed one's relative performance that produces anxiety.

And as I look around today, I see all asset prices doing moonshots: Global shares of virtually all sectors; Credit spreads at cyclically narrow levels; real estate of all manner in most countries at post-war peaks in terms of affordability multiples, while cap rates for commercial real estate the world over are near all-time lows. So dire is the cap rate conundrum, and perhaps so certain that the rates won't go up and that the only way to earn an incremental nickel is to lever up that Morgan Stanley recently launched the largest aggressively-leveraged real estate Fund ever seen by mankind. Art from van Gogh, Klimt to Jackson Pollock is valued in the triple-digits of millions, while even some mickingly absurdly modernist art is changing hands in the millions. Undeveloped land is raging. Media content such as recording and film libraries too are garnering impressive valuations, as is agricultural land and orchards. Infrastructure is booming (also with copious amounts of leverage). Antiques, too, are on a rampage, as anyone who's watched Antiques Roadshow can attest. Stamps, coins, curio collections of dubious pedigree, vintage cars, sports memorobilia all gallopping. Commodities of all sorts from precious & metals to softs and foodstuff are up up up.

But my realm is Japan, in general, and Japanese public equities in particular. And here, too, I will share another secret with you: despite raging asset prices the world over in every asset class, in virtually every region (except perhaps North Korea, Zimbabwe & Moldova), slightly more than 30% of listed Japanese public companies are trading south of stated "Book Value" as reported at the end of the latest fiscal year. This is approximately 1225 enterprises out of perhaps approximately 3800, not including those with negative book values. By way of comparison, the US market is, as of last night, sporting nearly 250 listed companies out of nearly 6,800 (using a $50mm market cap cut-off to avoid Chap-11 reorgs). This is a miniscule 3.7% of US listed companies trading sub-book.

Now there remains some caveats: some of these companies are really shitty, detroying shareholder value as prodigious rates. Others are merely illiquid - so illiquid that it might an entire year to acquire but a few percent of the shares outstanding. Another calss are small...in some cases really small...so small that many a hedge fund manager could buy them with their credit card! (ok this is an exaggeration). Yet others have small floats and /or concentrated ownership that they are little more than listed holding companies, and being a shareholder in a Japanese enterprise is trying enough, even before having to countenance being a minority shareholder in a Japanese Company.

To be fair, American companies all suffer from many of the same shortfalls. And perhaps, because the "best and brightest" and the "smartest guys in the room" are engaged in finance rather than engineering, the market is more picked-over, so the probability that a company that is trading sub-book is, in fact, defective is much higher than in Japan, where it is likely to be suffering from inattention, insufficient affection, and general benign neglect.

Nevertheless, 1225 (33%!!) is a large number, so this patch of forest must contain, if nothing else, a lot of assets. And since assets are such the rage these days, the question arises as to how long such potential bargains will remain, especially with money supplies the world over run amok, real rates near zero or negative on any kind of realistic inflation measure NOT calculated by the US BLS?

So perhaps next week, I will introduce a new investment fund called "Assets-'r-Us", and we will blindly buy the entire 100-acre wood, dregs and all, under the mantra: "I don't know, and I don't care, but if it's an asset, lift the offer....". Of course, these assets perhaps should be cheap, and the anomaly could very well be that all other assets are poised to collapse under the weight of their own prices and, the tighter monetary polciy that is imminent, and the contractionary effect of the inevitably deterministic rise in US energy adn income taxes.