Three months after Chicago-based investor Sam Zell said he believed the US equity market might extend its rally for another year or two thanks to the spike in business optimism unleashed by President Donald Trump, the legendary investor told CNBC that he’s not keeping most of his money in cash, largely because low inflation has made carrying cash much less expensive.
In an interview with CNBC, Zell reiterated his dim view of the stock market, pointing out that a handful of stocks - most notably the FANG stocks - have been responsible for most of the main benchmarks’ gains over the past year. The broader market, Zell argues, doesn’t look so great.
"I think if you look at the growth we’ve had in the stock market this last year and you eliminate the fang stocks the growth ain’t so terrific. Generally speaking, when you get to the Russell 2,000 and mid-tier stocks, they’re not nearly as frothy....The Russell 2000 is hitting highs but from a much lower base."
Zell has long been skeptical of tech megacap valuations. As he pointed out during an interview with Goldman Sachs last year, in order to justify the multiple that Amazon trades at today, the company would have to be worth 25% of the US economy five years from now.
Indeed, the current situation, Zell said, “seems like irrational exuberance,” echoing a warning that then-Federal Reserve Chairman Alan Greenspan famously issued in 1996 about the market environment.
Several years ago, Zell said the US expansion was in the eighth or ninth inning of the cycle. But Zell said late last year that the election of President Trump has changed things. There is more optimism in the business sector now, Zell said, which means the expansion will probably have "extra innings."
What he means is that, with Trump in office, the real economy could continue to rack up a few consecutive quarters of 3% growth, Zell said.
"I think the opportunity for the country to grow at 3% is real. I think the current situation seems like irrational exuberance," Zell said.
And since we’ve never experienced eight straight years of 2% growth, nobody has any frame of reference to suggest how long this cycle could last.
Zell believes the cycle could drag on for a while yet.
"I think one of the arguments is if you deferred over 1% of growth through over regulation etc. growth may in fact dispute the cycle. Maybe if eight of it is at 2% growth, that’s much longer than we’re used to," Zell said.
"We’re dealing with something we don’t know about. We’ve never had 8 years of 2% growth. We’ve had a period of time where growth has been impeded by regulation by over-involvement of government by an anti-business White House."
Zell says with asset valuations are high across markets following years of central banks pumping cash into the financial system. There are few opportunities left, Zell said.
"It’s very frustrating as somebody who’s spent his whole life taking risks, making investments…all of a sudden there’s relatively few to bet on in a very low inflationary environment like this. The burden of carrying cash is nothing like it was when rates were at 8% or 10%."
Years ago, Zell said, the Fed’s quantitative easing would’ve been called something else: debasing the currency.
"We have flooded the world with money...every other time we didn’t call it quantitative easing we called it debasing the currency and it resulted in the dollar going down. We just did it, and it didn’t happen. Will it happen? I don’t know."
In summary, now is a good time to hold cash. Wait for equity and real estate prices to plunge, and be ready to try and catch that falling knife.