# XAO Bull



## craft

For all those naÃ¯ve optimists like me out there that might be feeling fairly content about long term prospects with the market at 5,000.





A few southerlies here and there requiring a bit of course correction but overall human endeavour to head Nor East seems intact.  Long term I think I'd rather ride then fight that trend.


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## craft

Nothing seems too disturbing here from a Big Picture Australian Valuation perspective.


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## kid hustlr

Nice charts.

Hard to see a capitulation from here given the relatively suppressed levels of the second chart.

Our index is so top heavy - I think this is a factor, perhaps we have a huge period of rotations as the small to mid caps turn to big caps and some of the big caps float away? This could take many years to play out however.


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## Ves

Hi craft

Do you have a long term chart of the XAOAI (accumulation index) to go with the XAO chart?

Cheers


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## craft

Ves said:


> Hi craft
> 
> Do you have a long term chart of the XAOAI (accumulation index) to go with the XAO chart?
> 
> Cheers




No - only back to Sep 2002. 

I believe the base for the accumulation index was =1000, 31/12/1979. so that works out around 11.5% pa compound.

If anybody has the full data set it would be nice to see the chart.


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## skyQuake

craft said:


> No - only back to Sep 2002.
> 
> I believe the base for the accumulation index was =1000, 31/12/1979. so that works out around 11.5% pa compound.
> 
> If anybody has the full data set it would be nice to see the chart.




Yep correct.

Before 1992 t'was the dark ages.



Also, the All Ords Accum index is nearly identical to the ASX200 accum.


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## craft

Thanks SkyQuake
.......




A rebased comparison of the capital vs the accumulation index for the data I have. Even over that time frame the significance of the compounding dividend component to the long term return becomes pretty evident.


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## craft

kid hustlr said:


> Nice charts.
> 
> Hard to see a capitulation from here given the relatively suppressed levels of the second chart.
> 
> Our index is so top heavy - I think this is a factor, perhaps we have a huge period of rotations as the small to mid caps turn to big caps and some of the big caps float away? This could take many years to play out however.




Hi Kid Hustler

The make-up of the index is interesting - We are really seeing in the indexes the result of a system, designed around stock capital weighting and liquidity etc.  How well it really represents the big picture health and return of the wider market and economy at any given time is an interesting question. A lot to be said for adding some breadth indicators to the tool kit.


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## peter2

Oh, Lord, it's hard to be bullish
When the market goes down everyday
I can't look at the end of day chart
'Cause it gets worse in every way

The volatility is rising
and it's hard to stick to my plan
Oh, Lord, it's hard to be bullish
But I'm doing the best that I can.

How I envy those investors
Who can handle the draw down, I can't
This capitulation is trying
And it's no good to complain or rant.

The volatility is rising
and it's hard to stick to my plan
Oh, Lord, it's hard to be bullish
But I'm doing the best that I can.


[with my sincere apologies to Mac Davis)


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## wayneL

peter2 said:


> Oh, Lord, it's hard to be bullish
> When the market goes down everyday
> I can't look at the end of day chart
> 'Cause it gets worse in every way
> 
> The volatility is rising
> and it's hard to stick to my plan
> Oh, Lord, it's hard to be bullish
> But I'm doing the best that I can.
> 
> How I envy those investors
> Who can handle the draw down, I can't
> This capitulation is trying
> And it's no good to complain or rant.
> 
> The volatility is rising
> and it's hard to stick to my plan
> Oh, Lord, it's hard to be bullish
> But I'm doing the best that I can.
> 
> 
> [with my sincere apologies to Mac Davis)




10/10 great stuff


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## Quant

Reduced earnings = negative growth of XJO overall .




With reduced forward earnings multiples slide along with Dividend growth , double whammy ( risk), 10y bond yields on the rise exasperates that risk , todays cheap is becoming tomorrows expensive  . Historically XJO price earnings are still not on the cheap side   . 2012 - 13 was near 13 times , we can go lower and going above 2015 levels in 2016 looks unlikely  

aust 10y  , will dig up some bond/ stock yield spreads at some stage






Will add a longer term earnings multiple charts when I find one in my archives

Found longer TF charts from May




Longer term Earnings (EPS) chart also


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## kid hustlr

Nice.

Apologies for the ignorance quant but are the earnings charts weighted? For example is the P/E ratio of 14 weighted by mkt cap or simply average of top 200?


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## craft

peter2 said:


> Oh, Lord, it's hard to be bullish
> When the market goes down everyday
> I can't look at the end of day chart
> 'Cause it gets worse in every way
> 
> The volatility is rising
> and it's hard to stick to my plan
> Oh, Lord, it's hard to be bullish
> But I'm doing the best that I can.
> 
> How I envy those investors
> Who can handle the draw down, I can't
> This capitulation is trying
> And it's no good to complain or rant.
> 
> The volatility is rising
> and it's hard to stick to my plan
> Oh, Lord, it's hard to be bullish
> But I'm doing the best that I can.
> 
> 
> [with my sincere apologies to Mac Davis)






Headline act for the ASF Christmas karaoke Party I reckon.


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## craft

Thanks for the post Quant, appreciated. 



Quant said:


> Longer term Earnings (EPS) chart also
> 
> View attachment 65294




Longer still.





The long term question seems to me to be one of mean reversion vs sustained slow down in earnings growth. 

Short term the market can do anything. Long term I'd argue buying below trend market earnings has a higher probability of long term financial reward then buying above trend -even if it feels (is) wrong in the short run.


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## Gringotts Bank

Big problem on the weekly chart.  Bear > bull imo.


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## Quant

Gringotts Bank said:


> Big problem on the weekly chart.  Bear > bull imo.
> 
> View attachment 65298




If we pull back to 3 decades of data on a log scale you don't see support under AUG lows till sub 4500 , fundamentals actually support that level " without " the market becoming historically cheap . I look at the earnings data and GDP data and its very concerning for 2016 , the dreaded " R " word rears it's ugly head . With the LIB govt in and reluctant to spend I cant see it being avoided this time , no booking 5% of GDP on the credit card this time . Starting to look inevitable  ...

The naming of this thread is the very definition of ' Optimist '


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## Quant

Simplistic approach here I know but since 2008 , as you can see from RH column GOVT debt to GDP is up almost 25% at roughly 3% a year . Without the government spending put on the CC we would have already been in ' Recession ' . 

With election looming I wonder if Malcolm and crew will pull out the platinum card again to save the day , I actually wonder if it will even help if they do . My super is cash and will be staying that way for the foreseeable future , we live in ' interesting ' times ....


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## Junior

Given the top heavy nature of the ASX200, and poor performance from the top 10 or 20.  I wonder what this means for passive/index style investors?

Perhaps a better way to invest passively is via something like this:

MVW.ASX

Thoughts?


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## skc

craft said:


> The long term question seems to me to be one of mean reversion vs sustained slow down in earnings growth.
> 
> Short term the market can do anything. Long term I'd argue buying below trend market earnings has a higher probability of long term financial reward then buying above trend -even if it feels (is) wrong in the short run.




What is the ultimate underlying drivers of the share market chart going in the North-East direction over the long term? To me they are (in no particular order):

1. Inflation
2. Population growth
3. Productivity gain
4. Increased fund flows into market
5. Index rebalancing
(Probably missed something...)

Over the next 25 years... *taking out my crystal ball and giving it a good rub.
1). will be present to some extent.
2). will it continue? We have aging population so population growth must be replenished via immigration which may or may no be embraced by all.
3). should continue (a separate debate as to whether Australia will lead/lag the rest of the world).
4). Unsure about this one... again, with population demographic changes, we might see net outflow in the foreseeable future.
5. should continue

All in all, I don't have enough faith in the direction of the line to just boldly buy and hold through my investment timeframe. I need to rely on generating my own alpha.


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## shouldaindex

1 reason to be a long term bull, is that the ASX Total Returns has quadrupled your investment within 10 to 30 years at every moment in history (from around 1900 onwards).

At the same time I don't like the cycle phase for the next 2-3 years.  Factors such as Interest Rates, US Market Valuations, US Earnings / Margins / ROE, Australia World Record Years Without Recession, Australia House Prices and Mortgage / Debt to Income Ratio, Bank Bad Debts etc...

I think I'll be an XAO bull in about 2018.


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## fraa

Junior said:


> Given the top heavy nature of the ASX200, and poor performance from the top 10 or 20.  I wonder what this means for passive/index style investors?
> 
> Perhaps a better way to invest passively is via something like this:
> 
> MVW.ASX
> 
> Thoughts?




I was thinking that too - but effectively you are just tilting towards smaller companies, so this is not much different to buying something like VSO ?


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## craft

skc said:


> What is the ultimate underlying drivers of the share market chart going in the North-East direction over the long term? To me they are (in no particular order):
> 
> 1. Inflation
> 2. Population growth
> 3. Productivity gain
> 4. Increased fund flows into market
> 5. Index rebalancing
> (Probably missed something...)




First 3 drive Nominal GDP – if anything is missing it would be split between capital & Labour because that pretty much translates GDP growth to earnings growth. Then there are equity distributions and dilutions components to determine EPS growth. 4 is amongst the technical’s that feed into the earnings multiple along with other psychological points no doubt.  My view is that the earnings multiples are cyclical. 5. I’m not sure if the index rebalancing aspect adds (or subtracts) anything.  





skc said:


> Over the next 25 years... *taking out my crystal ball and giving it a good rub.
> 1). will be present to some extent.
> 2). will it continue? We have aging population so population growth must be replenished via immigration which may or may no be embraced by all.
> 3). should continue (a separate debate as to whether Australia will lead/lag the rest of the world).
> 4). Unsure about this one... again, with population demographic changes, we might see net outflow in the foreseeable future.
> 5. should continue




My crystal ball is stuffed so I’ll defer to your crystal here.



skc said:


> All in all, I don't have enough faith in the direction of the line to just boldly buy and hold through my investment timeframe. I need to rely on generating my own alpha.




I don't have faith in the direction of the line either – nor do I have I have faith that it will end. So I’m stuck with reacting to what I see, and from my long term perspective things aint broke yet.

Not for a second suggesting people should not chase alpha – I certainly try to as a stock picker. Not forgetting only 50% (less costs) of money chasing alpha can ever achieve it and contrary to popular forum opinion it takes works.  

I’m really not trying to make a prediction here or convince anyone – just a thread to put some perhaps contrary to popular opinion at this time, bullish perspectives.


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## craft

Quant said:


> Starting to look inevitable  ...




But is the inevitable view ever the profitable view? Generally inevitable is priced in already. Its when inevitable doesn't happen that ........




Quant said:


> The naming of this thread is the very definition of ' Optimist '



 True That.


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## Quant

craft said:


> But is the inevitable view ever the profitable view? Generally inevitable is priced in already. Its when inevitable doesn't happen that ........
> 
> 
> True That.




Well its one of those thing that looks inevitable to me , I would suggest its not the case out there in the herd , me being an independent thinker and all  . Nothings impossible but only the probable is my concern , opinions are really of concern to those that hold them for they are the ones that profit or loss from them , externally its just noise . I like to support my opinions with some real facts and I have done so , as inputs change so will my thoughts for i'm not in love with an idea if the inputs change .... markets are dynamic and as participants in its shifting of wealth so must we be so  .... 

Markets are rarely linear


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## skc

craft said:


> First 3 drive Nominal GDP – if anything is missing it would be split between capital & Labour because that pretty much translates GDP growth to earnings growth. Then there are equity distributions and dilutions components to determine EPS growth. 4 is amongst the technical’s that feed into the earnings multiple along with other psychological points no doubt.  My view is that the earnings multiples are cyclical.




So simple when it is broken into the main components. Earnings, and the multiple on those earnings. 



craft said:


> 5. I’m not sure if the index rebalancing aspect adds (or subtracts) anything.




Take the constituents from 1910 of whatever your first chart is actually charting (what it is in 1910?) and I bet you the returns won't be nearly as good. At a guess I'd say 90% of the ASX top 20 didn't exist back in 1910. And they'd never be included if there is no rebalancing.



craft said:


> I don't have faith in the direction of the line either – nor do I have I have faith that it will end. So I’m stuck with reacting to what I see, and from my long term perspective things aint broke yet.
> 
> I’m really not trying to make a prediction here or convince anyone – just a thread to put some perhaps contrary to popular opinion at this time, bullish perspectives.






craft said:


> Long term I think I'd rather ride then fight that trend.




Still something I am struggling with... i.e. taking the long term perspective. It's very hard. I can only have a portion on my money on this. I am reasonably comfortable with not getting very rich from investing for the long term, but I am very uncomfortable with having lots of exposure to the market when it appears to breakdown in the short - medium term.


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## craft

skc said:


> Take the constituents from 1910 of whatever your first chart is actually charting (what it is in 1910?) and I bet you the returns won't be nearly as good. At a guess I'd say 90% of the ASX top 20 didn't exist back in 1910. And they'd never be included if there is no rebalancing.




Hi SKC

Just to take this a little further. Accept everything you say about the rebalancing producing a higher return then a buy and hold of whatever made up the index in 1910 - you would probably be left tracking nothing today.

But I'm not sure that is the point for me. Its more along the lines is the N/E depicted by the index aided by the selection process of the constituents. ie is it giving me a picture of the underlying environment or is capitalisation as a stock selection process adding (detracting) from the picture.

Across the entire market companies come and go - I think the XAO covers a fair proportion of the market movement ~95% of capitalisation at the moment, not sure if it has always been that high. I,m not sure that what it doesn't capture - the 5% where companies are born and die or just plain small would alter the picture significantly and if they alter it at all what's the net effect.


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## craft

Quant said:


> If we pull back to 3 decades of data on a log scale you don't see support under AUG lows till sub 4500



Ok so here’s the 3 decades of data on a log scale.




If 4500 has significance as support then too perhaps does a regression channel of the data. Not forgetting we are in the long term investing part of the forum, the issues around breadth,and index make up and how CAPE type valuations are fairly supportive – I think there is some justification for a long term investor to be paying attention for buying opportunities.  IF we end up at the bottom of that channel in 30years we get a compound annual capital growth return of 5% at the regression extension its 6.3% and at the top its 8%. Add to that the current grossed up market dividend yield of ~6%. What’s your cash rusting at? 

Of course the channel may not be valid in the future but that can be dealt with if it happens. 

Now if you’re not an investor and instead your available money is actually tied up as working capital in a trading business then forget the long term. Or if your financial circumstances dictate you shouldn’t be taking volatility risk, forget the long term but otherwise you have to be careful that you don’t lose perspective of the big picture and let near term noise turn you into a dick for a tick (note for self). 



Quant said:


> My super is cash and will be staying that way for the foreseeable future , we live in ' interesting ' times ....




Given that Super should be a 40-60+ year investment if you are blessed with good health and possibly generational if your any good at this game then perhaps given cash's long term track record (worse than bills) maybe you could do with a little more optimism. 






Quant said:


> The naming of this thread is the very definition of ' Optimist '


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## Quant

craft said:


> Given that Super should be a 40-60+ year investment if you are blessed with good health and possibly generational if your any good at this game then perhaps given cash's long term track record (worse than bills) maybe you could do with a little more optimism.
> 
> View attachment 65320




LOL I am not a pessimist either , I've been proactively managing my super and in 2015 I am 15% outperformance on the average fund  , I cashed at 6000 , was in a bear etf for a while (not long enough) currently 100% cash . I like clichÃ©s and here's another one , very apt once again ... 






found some data on global earnings/ earnings multiples ... XJO is not alone


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## Junior

Quant said:


> LOL I am not a pessimist either , I've been proactively managing my super and in 2015 I am 15% outperformance on the average fund  , I cashed at 6000 , was in a bear etf for a while (not long enough) currently 100% cash . I like clichÃ©s and here's another one , very apt once again ...
> 
> 
> View attachment 65329
> 
> 
> 
> found some data on global earnings/ earnings multiples ... XJO is not alone
> 
> 
> View attachment 65330




So you cashed out at the very top and shorted the market.  Congrats if true!


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## Quant

Junior said:


> So you cashed out at the very top and shorted the market.  Congrats if true!




Cashed out the last of my stock holdings , I wasn't fully invested at 6000 , if I had been my outperformance of av fund would be closer to 30% , nevertheless I'm pretty satisfied , you will never get every % on the table ...

FWIW    selling in April/May on high forward earnings will never backfire on you ....


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## craft

Quant said:


> I like clichÃ©s




Yep, I suspected as much.


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## craft

Quant said:


> View attachment 65329




So what are you trying to say on this thread? A long term optimistic stance is not realistic because YOU have a short term bearish opinion based on analysts forward earning estimates?  Or am I missing your point?


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## Quant

craft said:


> So what are you trying to say on this thread? A long term optimistic stance is not realistic because YOU have a short term bearish opinion based on analysts forward earning estimates?  Or am I missing your point?




Sorry i'm rocking your Bullish boat , in 30 years you will be fine which is great if you like sitting on your hands , I will cease and desist , I actually thought I was adding relevant information that might help explain recent market movements and possibly give some insight where it actually might head and where a value spot to invest may be .  

I apologize   ..... I will not interfere again


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## craft

Quant said:


> Sorry i'm rocking your Bullish boat , in 30 years you will be fine which is great if you like sitting on your hands , I will cease and desist , I actually thought I was adding relevant information that might help explain recent market movements and possibly give some insight where it actually might head and where a value spot to invest may be .
> 
> I apologize   ..... I will not interfere again




Hmm I do like sitting on my hands......

Not rocking my boat. Your 'opinion' is as welcome as the next persons, just trying to understand what you meant by the realist clichÃ©.


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## Quant

craft said:


> Hmm I do like sitting on my hands......
> 
> Not rocking my boat. Your 'opinion' is as welcome as the next persons, just trying to understand what you meant by the realist clichÃ©.




My last entry in ' here '   Hope it helps  

http://philosiblog.com/2012/11/23/t...ts-it-to-change-the-leader-adjusts-the-sails/

" I am responsible for what I spoke, but not for what you understood. "


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## craft

Quant said:


> My last entry in ' here '   Hope it helps
> 
> http://philosiblog.com/2012/11/23/t...ts-it-to-change-the-leader-adjusts-the-sails/
> 
> " I am responsible for what I spoke, but not for what you understood. "




You do answer in riddles. But Hey I think I've worked it out. If I just share your opinions I too can be a realist. I sooooo want to be a realist - maybe one day I could even become a critical thinker too.


twit!


Yep - time for a holiday

Merry Christmas everybody.


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## fraa

Hi Craft,

If you do not mind, lets flip the question around - say in the next year some new information (fundamental or technical) becomes available.

Hypothetically, what would the information/news have to be for you to have no view or become bearish long term on the XAO ?

i.e. if the XAO wanders outside of the channel you drew for example ? (i know the channel was not in your first post, just an example), or deviates from the long term trend you drew ?

or if we have a severe property downturn that hits the banks hard ? 

Not asking for specifics etc - just wondering how severe the news will have to be to convince you that "things really are different this time".

Thanks


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## craft

fraa said:


> Hi Craft,
> 
> If you do not mind, lets flip the question around - say in the next year some new information (fundamental or technical) becomes available.
> 
> Hypothetically, what would the information/news have to be for you to have no view or become bearish long term on the XAO ?
> 
> i.e. if the XAO wanders outside of the channel you drew for example ? (i know the channel was not in your first post, just an example), or deviates from the long term trend you drew ?
> 
> or if we have a severe property downturn that hits the banks hard ?
> 
> Not asking for specifics etc - just wondering how severe the news will have to be to convince you that "things really are different this time".
> 
> Thanks




Hi Fraa 

Flipping the question – That's worth answering.

Market Pricing.
The index price channel doesn’t hold much significance to me – the channel moves depending on where you start the chart.  Though a sustained excursion outside a channel starting when the A$ was floated would have me taking notice so would a sustained level below 2011 Lows.

Earnings.
I take much more notice of earnings – particularly the trend of earnings rather than just current or forecast earnings.  I’m not too much concerned with the inflation component no matter what it does – because my measure of investment success is purchasing power (or what my real return is) 

If the long term productivity component fell through the floor I would be bearish.  I don’t see that happening – in fact I see some innovation starting to slowly come back into our economy after the mining boom and some dud leadership.

If the population component fell through the floor because of war, disease etc I would be bearish.

If the division of profits swung massively away from capital because we got a very socialist/communist style government I would be bearish.

If there was a major fiat monetary crisis *AND* we reverted to a physical monetary standard I would be bearish.

A property downturn wouldn’t really turn me bearish long term – we’ve had them, they are expected.
Between 1931 & 1951 property value to GDP more than halved. Peak to peak or trough to trough capital growth on the XAO over the same period was around 5%pa. plus whatever dividends were at the time. Peak (1929) to trough (1952) i.e. worst timing you could have managed was still 2.5%pa capital plus dividends.   
I’ve avoided banks for some time, probably to my detriment because I think a property valuation downturn will hurt their profitability but I don’t really see a high probability of an economy destroying bust from the banks exploding under a property downturn.  In fact the banks more vigorously looking for growth outside of low productivity existing residential property may be good for the economy as it would help facilitate some more productive risk taking.

The biggest thing that would turn me bearish is earnings above long term averages and high earnings multiples based on those elevated earning levels.

Observation not prediction of the long run economy is what would send me bearish.

Sorry no graphs to back up anything here – don’t have the data with me.

Cheers and Merry Christmas


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## Junior

Good post Craft.  Some food for thought.

Reading the business section...tends to make you obsessed with mining/energy, or property.  But they are only components of our economy.  On the whole things aren't so bad.  

Turnbull has injected some positivity too, which is refreshing.


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## McLovin

Good opinion piece in the AFR today by Martin Wolf. Be frightened of wars, inflation and financial crisis. Everything else is just noise in the long run. Personally I'm more worried about ISIS than financial crisis, and I'm not that worried about ISIS. And the beat goes on...



> There is a great deal of ruin in a nation. Thus did the wise Adam Smith rebuke a correspondent's worry that ruin was bound to follow reversals in the war against the North American colonists. If there is a great deal of ruin in an individual country, there is even more ruin in the world economy. Somehow, it keeps on going.
> 
> Measured at purchasing power parity, the world economy has grown in every year since 1946, even (albeit barely) in 2009, in the wake of the global financial crisis. The period between 1900 and 1946 was more unstable than the era of managed capitalism that succeeded it. Even so, the world economy grew in all but nine of those years.
> 
> The innovation-driven economy that emerged in the late 18th and 19th centuries and spread across the globe in the 20th and 21st just grows. That is the most important fact about it. It does not grow across the world at all evenly - far from it. It does not share its benefits among people at all equally - again, far from it. But it grows. It grew last year. Much the most plausible assumption is that it will grow again this year.
> 
> The world economy will not grow forever. But it will only stop when the economics of Thomas Malthus overwhelm those of Joseph Schumpeter - that is, when resource constraints offset innovation. We are certainly not there yet.
> 
> Since 1900, the world's output has grown at a rate of just over 3 per cent a year. Such is the power of compound interest that world output has expanded more than 30-fold over this period. Output grew relatively slowly in the early part of the 20th century and relatively fast between 1947 and the early 1970s. Intriguingly, it grew a bit faster under postwar Keynesian economics than under the conservative revival launched by Margaret Thatcher and Ronald Reagan in the 1980s.
> 
> Now consider the pattern of volatility. The marked volatility between 1914 and 1919 was due to the first world war; that of the 1930s to the Great Depression; and that of the 1940s to the second world war. The instability of the 1970s and early 1980s was due to the oil shocks, triggered (or augmented) by war (the Yom Kippur war of 1973 and Iraq's 1980 invasion of Iran). Inflationary financing of the Vietnam war generated the inflationary backdrop to the instability. Ultimately, that led to disinflation by the Federal Reserve, under Paul Volcker.
> 
> The slowdown in 1990 and 1991 was again due to disinflation and the first Gulf war, which followed Saddam Hussein's invasion of Kuwait. The slowdown in 1998 was triggered by the Asian financial crisis, that in 2001 by the bursting of a huge stock market bubble and that in 2009 by the western financial crisis.
> 
> This picture of the past indicates the kind of events one should worry about. In brief, there seem to be three: wars; inflation shocks (perhaps linked to wars or jumps in commodity prices); and financial crises. These phenomena can be linked: wars will trigger inflation if their finance is by inflationary means.
> 
> In this light, let us consider current risks. Some analysts have been convinced for years that high inflation must result from the expansion of central-bank balance sheets. They are wrong. It is quite possible for central banks to control the effects of their policies upon the expansion in credit and money.
> 
> A second set of risks, again ceaselessly promoted, is that of financial crisis. The biggest risks seem to be in emerging economies. But these risks are likely to be contained or prove manageable at the global level. If the worst came to the worst, the results are likely to be more like those of 1998 than of 2009.
> 
> The third set of risks is that of geopolitical upheaval and conflict. We can identify a daunting list of worries: the massive overloading of the EU's capacity to act; the possible exit of the UK from the EU; the hollowing out of the western alliance; the rise of populist pressures in high-income countries, shown in the success of Marine Le Pen and the rise of "Trumpism"; uncertainty about China's economic and even political future; the rise of global jihadism, and particularly of Isis, the "world's most powerful terrorist organisation"; Russian revanchism; disputes among great powers, notably between Russia and the US and China and the US; friction in the Middle East, notably between Iran and Saudi Arabia; state failure; floods of refugees; and US retreat from its hegemonic role.
> 
> Beyond this is a decline in the legitimacy and effectiveness of many high-income democracies, the fragile self-importance of many other powers and the chaos in large parts of the world. Yet all this comes at the same time as a need for effective global governance in an integrated and interdependent world.
> 
> If one wants to worry, there is plenty to worry about. Yet, from the economic viewpoint, what matters is not so much whether the world will be well managed: it will not be. What matters more is whether a disaster will be avoided.
> 
> What would such an event look like? A war among great powers could be one. Election of a bellicose ignoramus to the US presidency could be another. A war between Iran and Saudi Arabia would be a disaster. The replacement of the Saudi regime by ISIS would be another. A nuclear war between India and Pakistan would be another. Collapse of the EU could prove yet another.
> 
> The cumulative chance that at least one of all such disasters will occur is greater than the chance that any one of them will do so. Nevertheless, the likelihood that none of them will occur is surely bigger. Remember: there is a great deal of ruin in the world economy.




Read more: http://www.afr.com/opinion/why-economic-disaster-is-an-unlikely-event-20160105-gm03iq#ixzz3wQTLqjVo


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## Craton

Thanks McLovin, food for thought right there especially for those with a long term view.


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## craft

XAO & lots of other markets are looking reasonably grim - yet I'm still happy holding and adding under 5000. Actually regard current environment as a lucky return from holidays but when I'm so out of sync with the market I know its time to really start examining my Biases. 



DeepState said:


> Just BTW, that thread might want to consider the imbalance between the shape of the Australian economy and the earnings in the index before drawing tight outcomes from the analysis and macro settings like GDP/Capita etc.  Need to allow for resource demand not being Aust sourced and additional capital requirements for banks etc. Might already be obvious to them.




A snippet pulled from DS thread relevant here. Good points hope it generates discussion.

Has been thought about by me (short story, if you include currency a lot is already priced in for AUS - not worst case, but a lot and currency will do more work if necessary)  A unexpected steep increase in bad loan provisioning is the biggest thing that could require more index adjustment IMO. But now is not the time for me to be re-enforcing my opinions so that's about as far as I'll elaborate. 

thoughts anybody? Selfishly seeking alternative perspectives to quietly think about.


----------



## shouldaindex

There's a whole heap of potentially mean reverting (in a negative way) key metrics for the dominant sectors and large caps on the ASX (Big Banks, Property and Commodities).

However I'm not sure they will be come home to roost until the next global recession hits, which U.S indicators suggest is not happening anytime soon.  So based on that, I see a 4500-4800 XAO type floor until new factors come into play.

But at some stage those key metrics including bad debts (reversion to the mean bad debts ratio would take off about 15% EPS for the big banks) will happen with the appropriate trigger.


----------



## craft

craft said:


> XAO & lots of other markets are looking reasonably grim




Memo today from Howard Marks: *What Does the Market Know?*

https://www.oaktreecapital.com/insights/howard-marks-memos


----------



## sinner

shouldaindex said:


> However I'm not sure they will be come home to roost until the next global recession hits, which U.S indicators suggest is not happening anytime soon.




Which data are you looking at that suggests this?

Snippet from the latest Hussman WMC:
http://hussmanfunds.com/wmc/wmc160118.htm



> Since October, the economic evidence has shifted from supporting a growing risk of recession, to a guarded expectation of recession, to the present conclusion that a U.S. recession is not only a risk but an imminent likelihood, awaiting confirmation that typically only emerges after a recession is actually in progress. The reason the consensus of economists has never anticipated a recession is that so few distinguish between leading and lagging data, so they incorrectly interpret the information available at the start of a recession as “mixed” when, placed in proper sequence, the evidence forms a single, coherent freight train.
> 
> While I’m among the only observers that anticipated oncoming recessions and market collapses in 2000 and 2007 (shifting to a constructive outlook in-between), I also admittedly anticipated a recession in 2011-2012 that did not emerge. Understand my error, so you don’t incorrectly dismiss the current evidence. Though not all of the components of our Recession Warning Composite were active in 2011-2012, I relied on an alternate criterion based on employment deterioration, which was later revised away, and I relied too little on confirmation from market action, which is the hinge between bubbles and crashes, between benign and recessionary deterioration in leading economic data, and between Fed easing that supports speculation and Fed easing that merely accompanies a collapse.
> 
> Much of the disruption in the financial markets last week can be traced to data that continue to amplify the likelihood of recession. Remember the sequence. The earliest indications of an oncoming economic shift are observable in the financial markets, particularly in changes in the uniformity or divergence of broad market internals, and widening or narrowing of credit spreads between debt securities of varying creditworthiness. The next indication comes from measures of what I’ve called “order surplus”: new orders, plus backlogs, minus inventories. When orders and backlogs are falling while inventories are rising, a slowdown in production typically follows. If an economic downturn is broad, “coincident” measures of supply and demand, such as industrial production and real retail sales, then slow at about the same time. Real income slows shortly thereafter. The last to move are employment indicators - starting with initial claims for unemployment, next payroll job growth, and finally, the duration of unemployment.




Most macro data that people follow to forecast recession is lagging, not leading, as noted above. I do advise clicking the link for more references, charts and links to previous WMCs digging deeper into the topic.


----------



## sinner

craft said:


> Memo today from Howard Marks: *What Does the Market Know?*
> 
> https://www.oaktreecapital.com/insights/howard-marks-memos




I sat down and read this and while most of it is commonsense market understanding that people should absorb, I actually disliked the article.

So OakTree went long in 2008 lows based on their assumption the market was over-reacting and it paid. Good for them. But the way the article portrays it is as if this was anything other than a big fat assumption (read: *gamble*) and that it made more sense than following along in the panic.

Of *course* Mr Marks can say that kind of thing now, and appear a brilliant contrarian stoic in the face of the average investor hobbled by crowd psychology.

Unfortunately, Mr Marks glosses over the large subsidy paid into his coffer by the Government bail outs, pump ups, guarantees and changes to the rules of the game. Where would he be if FASB had not suspended mark to market? Probably not enjoying an audience for newsletters of his carted out fund. Does he really believe that it is a coincidence that the day of the rules of the game being changed is precisely the same day that risk bottomed and reversed to form a 5 year low?

I call horse**** on that whole attitude, which IMHO should be significantly less smug and significantly more cognisant of the massive role of the Government sector in influencing outcomes.

As someone with some experience in quantitative analysis, who has looked over the evidence, I also think the dismissal of "basing ones actions on what the market knows" is equally horse****. The market knows *plenty* and there are reams of supporting evidence for such a claim.


----------



## shouldaindex

Hussman has been calling for it for 5 years.

He could possibly be right (I do believe in a lot of the indicators he uses) but his timing has shown to be terrible.

Not saying I know any better, but track records are what they are.


----------



## qldfrog

shouldaindex said:


> 1 reason to be a long term bull, is that the ASX Total Returns has quadrupled your investment within 10 to 30 years at every moment in history (from around 1900 onwards).
> 
> At the same time I don't like the cycle phase for the next 2-3 years.  Factors such as Interest Rates, US Market Valuations, US Earnings / Margins / ROE, Australia World Record Years Without Recession, Australia House Prices and Mortgage / Debt to Income Ratio, Bank Bad Debts etc...
> 
> I think I'll be an XAO bull in about 2018.



fair and I will add oil debt default so 2018 target probably right 
It takes a while for people to sell their IP at major loss, see the banlks go down and get in panic mode, in the meantime, cash with currency  protection


----------



## sinner

shouldaindex said:


> Hussman has been calling for it for 5 years.
> 
> He could possibly be right (I do believe in a lot of the indicators he uses) but his timing has shown to be terrible.
> 
> Not saying I know any better, but track records are what they are.




This is covered, ad nauseam, in almost every single one of his weekly market comments since about 2013. Track records are what they are, and what they are not is a useful basis to dismiss evidence based findings. The painful post GFC track record is the result of things that have nothing to do with the evidence based findings. 

Here's a WMC devoted purely to the topic of his track record:
http://www.hussmanfunds.com/wmc/wmc140512.htm


> In late-2008, with the market down more than 40%, we made an initial shift to a constructive position, though still advising a line of index put option defense, which helped enormously in what followed (see Why Warren Buffett is Right and Why Nobody Cares – and read that piece carefully if you incorrectly believe I am a “permabear”). That shift was based – not surprisingly – on a significant retreat in valuations coupled with an early improvement in market internals. The problem was that measures of “early improvement in market internals” which proved quite reliable throughout the post-war period proved to be inadequate during the credit crisis of late-2008. As we discovered when we took our methods to Depression-era data, they performed fine overall, but they were repeatedly whipsawed in that data and allowed intolerably deep - if temporary - drawdowns along the way (as did popular trend-following methods).
> 
> So our partial shift to a constructive position was followed by an awkward stress-testing transition to ensure that we could navigate Depression-like outcomes (we called this our "two data sets problem" at the time). The immediate effect was a significant “miss” in the interim that both our pre-2009 methods and our present methods – had they been available at the time – could have captured. That transition was further complicated by quantitative easing, which required us to essentially reintroduce certain bubble-tolerant features of our pre-2009 methods. That said, nothing in the historical record indicates that we should be tolerant of present extremes.
> 
> The reason we repeatedly discuss our stress-testing challenge earlier in this cycle is not to excuse the missed returns that resulted. Rather, the point is to underscore that investors should not infer, based on that miss, that present market risks can be safely ignored. I’ve got very thick skin for criticism of what I viewed as a fiduciary duty to stress-test our methods earlier in this cycle. Go at it, but understand that none of those criticisms alter objective historical market evidence, or make the present situation any less likely to result in deep stock market losses.


----------



## craft

sinner said:


> I sat down and read this and while most of it is commonsense market understanding that people should absorb, I actually disliked the article.
> 
> So OakTree went long in 2008 lows based on their assumption the market was over-reacting and it paid. Good for them. But the way the article portrays it is as if this was anything other than a big fat assumption (read: *gamble*) and that it made more sense than following along in the panic.
> 
> Of *course* Mr Marks can say that kind of thing now, and appear a brilliant contrarian stoic in the face of the average investor hobbled by crowd psychology.
> 
> Unfortunately, Mr Marks glosses over the large subsidy paid into his coffer by the Government bail outs, pump ups, guarantees and changes to the rules of the game. Where would he be if FASB had not suspended mark to market? Probably not enjoying an audience for newsletters of his carted out fund. Does he really believe that it is a coincidence that the day of the rules of the game being changed is precisely the same day that risk bottomed and reversed to form a 5 year low?
> 
> I call horse**** on that whole attitude, which IMHO should be significantly less smug and significantly more cognisant of the massive role of the Government sector in influencing outcomes.
> 
> As someone with some experience in quantitative analysis, who has looked over the evidence, I also think the dismissal of "basing ones actions on what the market knows" is equally horse****. The market knows *plenty* and there are reams of supporting evidence for such a claim.




I guess one mans horse**** is another mans gold (and visa versa)


----------



## fiftyeight

Is the low in?

My very basic understanding in this area makes it think it is for the medium term.

ASX heavily weighted to the resource industry and the banks. Commodities appear to be finding support and the "housing bubble" seems like it may never pop.

A few big IF's, but appears the falls in commodities are priced in and there is little downward pressure on the banks. Until something changes like a new credit squeeze the low is in......maybe. 

Looking at a chart I get a very different feeling


----------



## craft

fiftyeight said:


> Is the low in?
> 
> My very basic understanding in this area makes it think it is for the medium term.
> 
> ASX heavily weighted to the resource industry and the banks. Commodities appear to be finding support and the "housing bubble" seems like it may never pop.
> 
> A few big IF's, but appears the falls in commodities are priced in and there is little downward pressure on the banks. Until something changes like a new credit squeeze the low is in......maybe.
> 
> Looking at a chart I get a very different feeling





Interesting that the XAO chart got its break down on Monday 18th.  Which seemed to bring out all the chart based predictions of lower prices – but the market didn’t play ball in any substantial way (yet?)

The prevailing mood was negative the charts were negative yet the price action didn’t capitulate down to a lower price level.  Significant???


----------



## sinner

fiftyeight said:


> Is the low in?




Tea leaves indicate a rally from technical oversolds until mid March, but declining from there until mid April:

http://www.mcoscillator.com/learnin...llar_cot_says_ugly_drop_is_still_ahead_of_us/

Assuming lagged Eurodollar commercials positioning still leads the market and that XAO follows global equities:


(h/t barchart.com)

BBB spreads are almost as wide as they were in 2011, so far no sign of narrowing though. AU BBBs seem to track global BBBs closely.


----------



## Triathlete

fiftyeight said:


> *Is the low in?*
> 
> *My very basic understanding in this area makes it think it is for the medium term*.
> 
> ASX heavily weighted to the resource industry and the banks. Commodities appear to be finding support and the "housing bubble" seems like it may never pop.
> 
> A few big IF's, but appears the falls in commodities are priced in and there is little downward pressure on the banks. Until something changes like a new credit squeeze the low is in......maybe.
> 
> Looking at a chart I get a very different feeling





XAO is still in a downtrend at the moment nothing has been confirmed as yet that the move down has completed. 

Although we have also been  moving in a sideways pattern as well starting back in August 15 and trading in a range of 4900 and 5400.

As Craft also mentioned that it did break lower but did manage to close above the 50% retracement level.

My view at this stage is that we need to stay above a close of 4896 for the XAO and close above 4880 on the XJO otherwise we will head lower.


----------



## craft

Triathlete said:


> XAO is still in a downtrend at the moment nothing has been confirmed as yet that the move down has completed.
> 
> Although we have also been  moving in a sideways pattern as well starting back in August 15 and trading in a range of 4900 and 5400.
> 
> As Craft also mentioned that it did break lower but did manage to close above the 50% retracement level.
> 
> My view at this stage is that we need to stay above a close of 4896 for the XAO and close above 4880 on the XJO otherwise we will head lower.




Downtrend?

You must be lost and not realise you’ve wandered over to the long term threads.  A little change of perspective and you might just spot a century plus uptrend.

A counter-trend to the uptrend – perhaps I could concede that.

A little while ago breaking of the August lows was the signal for all the chart predictors to call for lower prices (and we may still get them) – but in watching the price action instead of trying to predict what’s next, I find its resilience here in the face of lots of gloom and a technical chart break that was seen as significant at the time (before it didn’t follow through) as interesting.  But maybe I’m just searching out confirmation of my reasonable value at these levels bias. 

Some significant buying against the prevailing mood must have occurred to have price return to the range - why would they do that if the only thing that matters is the "current" trend is down? Oh wait there- its because its technically oversold of course - that's why I bought.


----------



## Triathlete

craft said:


> Downtrend?
> 
> You must be lost and not realise you’ve wandered over to the long term threads.  A little change of perspective and you might just spot a century plus uptrend.
> 
> *A counter-trend to the uptrend – perhaps I could concede that.*
> 
> A little while ago breaking of the August lows was the signal for all the chart predictors to call for lower prices (and we may still get them) – but in watching the price action instead of trying to predict what’s next, I find its resilience here in the face of lots of gloom and a technical chart break that was seen as significant at the time (before it didn’t follow through) as interesting.  But maybe I’m just searching out confirmation of my reasonable value at these levels bias.
> 
> Some significant buying against the prevailing mood must have occurred to have price return to the range - why would they do that if the only thing that matters is the "current" trend is down? Oh wait there- its because its technically oversold of course - that's why I bought.




Hi Craft,
            My view is at this moment in time we cannot tell if we are going to move back up or it breaks further down. Looking at my own chart I am sitting on the sidelines until I can make a more informed decision but that is just me...


----------



## sinner

craft said:


> A little while ago breaking of the August lows was the signal for all the chart predictors to call for lower prices (and we may still get them) – but in watching the price action instead of trying to predict what’s next, I find its resilience here in the face of lots of gloom and a technical chart break that was seen as significant at the time (before it didn’t follow through) as interesting.  But maybe I’m just searching out confirmation of my reasonable value at these levels bias.




As you mentioned, this is a (your) long term thread, so I'm wary of derailing. However, some care is needed when qualifying the aggregate statements "for all the chart predictors". Personally I watch the US markets (especially S&P500) as global risk proxy so most of my analysis (re breadth, vols, etc) are in that regard, even though I'm holding only a small amount of US stocks relative to mostly AU stocks. 

It's pretty clear at this point that things aren't moving in lockstep. e.g.:
NASDAQ-100: Jan lows a full 5% above Aug lows.
S&P500: Jan lows pierced the Aug lows and held.
Russell 2000: Broke down pretty severely from the Aug lows in Jan by more than 10%.
S&P ASX 200: Jan lows pierced the Aug lows less severely than the S&P500 and held.
Nikkei 225: Jan lows about 10% lower than Aug lows and lots of intervention jawboning from BoJ.
FTSE China 25: Jan lows also down about 10% from Aug lows.

etcetera. So in some cases the "gloom" was less misplaced than in others and the significance of the Aug lows depended entirely on which chart, but you are reading it all and interpreting through the lens of your own portfolio which probably resembles most indices in only a minor fashion.

Obviously in that instance the utility of a random selection of ASF predictions will be quite low for you, especially in providing any form of confirmation of anything.



> Some significant buying against the prevailing mood must have occurred to have price return to the range - why would they do that if the only thing that matters is the "current" trend is down?




Do you mind explaining why it must be significant buying? Why not a cessation of selling pressure and drift higher? Or short covering which must necessarily abate? Or whatever. Strange to hear you referencing a mystical "they" after reading the OakTree note you linked which tries to hammer home the point of aggregate market pricing. 



> Oh wait there- its because its technically oversold of course - that's why I bought.




FWIW, in the interest of clarity, I define "oversold/overbought" rather simply as the position of current closing price in relation to the 20, 2.0 bollinger band and look at that across 3 timeframes (daily, weekly, monthly). It's a useful technical description of the location of the current price. 

What one does with that description is entirely a matter of the strategy employed - a quantification, not a prescription - OB/OS will be close to breakout levels for some, a fade entry for others, signal to rebalance for some and ignored completely by others.


----------



## craft

sinner said:


> As you mentioned, this is a (your) long term thread, so I'm wary of derailing. However, some care is needed when qualifying the aggregate statements "for all the chart predictors". Personally I watch the US markets (especially S&P500) as global risk proxy so most of my analysis (re breadth, vols, etc) are in that regard, even though I'm holding only a small amount of US stocks relative to mostly AU stocks.
> 
> It's pretty clear at this point that things aren't moving in lockstep. e.g.:
> NASDAQ-100: Jan lows a full 5% above Aug lows.
> S&P500: Jan lows pierced the Aug lows and held.
> Russell 2000: Broke down pretty severely from the Aug lows in Jan by more than 10%.
> S&P ASX 200: Jan lows pierced the Aug lows less severely than the S&P500 and held.
> Nikkei 225: Jan lows about 10% lower than Aug lows and lots of intervention jawboning from BoJ.
> FTSE China 25: Jan lows also down about 10% from Aug lows.
> 
> etcetera. So in some cases the "gloom" was less misplaced than in others and the significance of the Aug lows depended entirely on which chart, but you are reading it all and interpreting through the lens of your own portfolio which probably resembles most indices in only a minor fashion.
> 
> Obviously in that instance the utility of a random selection of ASF predictions will be quite low for you, especially in providing any form of confirmation of anything.
> 
> 
> 
> Do you mind explaining why it must be significant buying? Why not a cessation of selling pressure and drift higher? Or short covering which must necessarily abate? Or whatever. Strange to hear you referencing a mystical "they" after reading the OakTree note you linked which tries to hammer home the point of aggregate market pricing.
> 
> 
> 
> FWIW, in the interest of clarity, I define "oversold/overbought" rather simply as the position of current closing price in relation to the 20, 2.0 bollinger band and look at that across 3 timeframes (daily, weekly, monthly). It's a useful technical description of the location of the current price.
> 
> What one does with that description is entirely a matter of the strategy employed - a quantification, not a prescription - OB/OS will be close to breakout levels for some, a fade entry for others, signal to rebalance for some and ignored completely by others.




Hi Sinner

It is a thread about the XAO (more broadly - representative of *Australian *stocks) in the long term section.

"They" is just a word I used to describe those buying in the market - I described the buying as significant because it overcome what ever selling was there on a day where all the news flow was gloomy and the XAO had broken a support level. The reference to oversold was to indicate that some buying pressure may come from technical signals to fade but I suspect that most of the volume fading the break was on the perception of value around these levels. But like I said that interpretation might just be my bias. Regardless of its cause, I read the false break as one small piece of bullishness which is out of sync with the rest of the generally prevailing mood.


----------



## sinner

craft said:


> I guess one mans horse**** is another mans gold (and visa versa)




I spotted the following 2009 article linked on ZH today and immediately thought of my horsegold rant.

Will just leave this here...feel it applies just as equally to the likes of Mr Marks/OakTree.

http://blogs.reuters.com/rolfe-winkler/2009/08/04/buffetts-betrayal/


----------



## craft

sinner said:


> I spotted the following 2009 article linked on ZH today and immediately thought of my horsegold rant.
> 
> Will just leave this here...feel it applies just as equally to the likes of Mr Marks/OakTree.
> 
> http://blogs.reuters.com/rolfe-winkler/2009/08/04/buffetts-betrayal/




I reckon it applies just as equally to me. An underlying assumption of my equity investment is that the real businesses I invest in won't get blown to hell by a systematic liquidity freeze - I have an expectation that the institutions set up to protect the real economy from the financial economy in a financial crisis will do what it takes. If I didn't have that belief I would probably invest in gold and build a bunker rather than invest in productive assets that are structurally reliant on a liquid financial system. 

Where the line is on who gets saved and who doesn't as a by-product of securing the physical economy is a valid area of debate - especially when it comes to banking loses - not a debate I want to have though and I have not enough information to know if Buffet got favouritism or just played the expectations and probabilities like the rest of us do. 





craft said:


> I read the false break as one small piece of bullishness which is out of sync with the rest of the generally prevailing mood.




Yesterday seems to put paid to that little ray of sunlight - wrong again.


----------



## Trembling Hand

craft said:


> Yesterday seems to put paid to that little ray of sunlight - wrong again.




I like the setup. False breaks are more bullish than solid support IMO.


----------



## shouldaindex

Bear Markets have occurred within 5 calendar years of the last about 15 times in a row since 1960 and we were up to 4 (2012-2016) so it was likely to happen around this time.

Now that we've hit -20%, the good news is that there is nothing else that comes after a Bear Market apart from a Bull Market (and vice versa) so it's just a matter of time.


----------



## sinner

A little early in the month for me, but if these levels stick around for another week or two I will probably be pushing some cash and gold into the ASX to keep my allocations aligned - would be the first serious rebalancing in over a year.

Of course, if there is a rally in stocks and fade in gold I won't have to touch anything


----------



## gartley

shouldaindex said:


> Now that we've hit -20%, the good news is that there is nothing else that comes after a Bear Market apart from a Bull Market (and vice versa) so it's just a matter of time.




Well we will probably start a counter trend rally early next month. I think -20% is just the tip of the iceberg and until 3050 (GFC low) is at least re tested and probably broken through there is no point thinking about a bull market.

There is nothing great on the horizon, mining capitulated, manufacturing will be next to nothing within the next 1.5 years as 200,000 both directly and indirectly lose their jobs from the auto industry fallout, banks are getting smashed and more than likely property will follow in the years ahead to make the game complete.

When faith,confidence, and hope are completely annihilated within the masses, that's the time to get back into the markets.


----------



## shouldaindex

Fun times.


----------



## Junior

gartley said:


> Well we will probably start a counter trend rally early next month. I think -20% is just the tip of the iceberg and until 3050 (GFC low) is at least re tested and probably broken through there is no point thinking about a bull market.
> 
> There is nothing great on the horizon, mining capitulated, manufacturing will be next to nothing within the next 1.5 years as 200,000 both directly and indirectly lose their jobs from the auto industry fallout, banks are getting smashed and more than likely property will follow in the years ahead to make the game complete.
> 
> When faith,confidence, and hope are completely annihilated within the masses, that's the time to get back into the markets.




A lot of the above has already played out, or has already been playing out for years, and yet Australia's economy continues to grow.  Despite commodity prices falling largely back to where they were pre-boom, Australia continues to supply a large proportion of the world's ore, gas and coal.  Low prices, yet still massive volume.

As far as there being nothing great on the horizon, in this technology era, new booms and industries can come from nowhere....if we could see it coming, investing would be all too easy.

Maybe you're right, but I think you are focussing a little too much on the negatives here.


----------



## sinner

craft said:


> Nothing seems too disturbing here from a Big Picture Australian Valuation perspective.




Hi craft,

Looking back on the start of the thread missed this chart. Appreciate the effort that must have gone into compiling the AU CAPE. Some questions just for my own edification.

* Is it calculated by yourself or from a resource?
* Is your AU CAPE for which index or universe? 
* Are the component earnings weighted by market cap?
* Are you using the monthly average or monthly closing price for the P component? AFAIK Shiller uses the monthly average which provides a smoother metric.
* Would you mind providing the average CAPE across the timeseries?

In return I proffer the following for trade 

There is a CAPE chart I keep in my notes which came from 
http://www.australiancentre.com.au/...ralian Shiller PE based on AED data_Final.pdf that goes back to 1975 but stops at 2012. One can approximately impute the forward values from there if desired but it looks like their 2011ish value matches close to yours eyeballed.


(h/t The Australian Centre - australiancentre.com.au)

The AU CAPE as measured by StarCapital (German hedge fund AFAIK) almost exactly the same day as your post above has CAPE measured at 15.5. My guess is because they are tracking the MSCI Australia which has less stocks than your universe (about 80 IIRC).
http://www.starcapital.de/research/stockmarketvaluation - FWIW, On a relative basis we are near the undervalued end of the spectrum of global indices.

The "Retirement Investing" blog had ASX200 CAPE at 15 on the dot in early 2013:
http://www.retirementinvestingtoday.com/2013/01/the-asx-200-cyclically-adjusted-pe-aka.html but further updates were not forthcoming.


----------



## gartley

Junior said:


> Maybe you're right, but I think you are focussing a little too much on the negatives here.




That's I was told last year in April  when the market was trading at 5900. Everything looked rosy back then.
Irrespective of current economic numbers we are set to follow the rest of the world down in an epic decline.You gonna get people continually buying the dips in search of bargains only to get burnt. Too much technical confluence for anything otherwise. 
Precious metals are the only real money so the safest place to be is there, selected gold stocks or cash.
Sure there will rallies and opportunities but need to be very good to consistently win.


----------



## sinner

gartley said:


> Sure there will rallies and opportunities but need to be very good to consistently win.




Apparently one doesn't need to be very good at all, we have gartley around, he has told us exactly how all of this is going to unfold


----------



## explod

Junior said:


> A lot of the above has already played out, or has already been playing out for years, and yet Australia's economy continues to grow.  Despite commodity prices falling largely back to where they were pre-boom, Australia continues to supply a large proportion of the world's ore, gas and coal.  Low prices, yet still massive volume.
> 
> As far as there being nothing great on the horizon, in this technology era, new booms and industries can come from nowhere....if we could see it coming, investing would be all too easy.
> 
> Maybe you're right, but I think you are focussing a little too much on the negatives here.




Not too sure.   The effects of lower commodity prices and the turn downs in manufacturing have not really filtered into annual figures yet.  The other is the growing oversupply of residential units and warehouses. Only the last few months are second hand car dealers and wreckers starting to close.  

We used to have 182 million sheep and 70 millioncattle,  today 32 million and 18 million respectively,  our recources saved us here.   We can talk about new ideas and technology,  but what and what of productivity generated by our people,  don't see it. 

And all the associated businesses and support services takes time to be recorded. 

The next 12 months will see a clearer picture and when we add the darker international scene things are not going to be pretty in my view.


----------



## gartley

sinner said:


> Apparently one doesn't need to be very good at all, we have gartley around, he has told us exactly how all of this is going to unfold




  If you have anything constructive to contribute do it......


----------



## sinner

gartley said:


> If you have anything constructive to contribute do it......




Feel free to go back across nearly 3000 posts of contributions since 2008. Certainly more there to chew on than a throwaway paragraph which provides crystal ball forecasts on everything from property to manufacturing with nary a chart showing a little (let alone too much) technical confluence or substantiating source on any macro claims to be seen


----------



## gartley

sinner said:


> Feel free to go back across nearly 3000 posts of contributions since 2008. Certainly more there to chew on than a throwaway paragraph which provides crystal ball forecasts on everything from property to manufacturing with nary a chart showing a little (let alone too much) technical confluence or substantiating source on any macro claims to be seen




Maybe quantity but certainly not quality if they are anything like personal attack of #69....


----------



## sinner

gartley said:


> Maybe quantity but certainly not quality if they are anything like personal attack of #69....




You seem a little confused, to clarify it for you, a personal attack would be if I had claimed you were fat, or stupid or a fat, stupid, asshole. Sarcastically pointing out that a person can't predict the future is not a personal attack. It's merely fact.


----------



## gartley

sinner said:


> You seem a little confused, to clarify it for you, a personal attack would be if I had claimed you were fat, or stupid or a fat, stupid, asshole. Sarcastically pointing out that a person can't predict the future is not a personal attack. It's merely fact.




Maybe one can't predict the future all the time.  But sometimes the market can be predicted with a high probability given  reliable patterns of trend, time cycles and price levels. If you deny that then you are both ignorant and stupid. Back in Feb-April last year such conditions presented themselves, and the most likely terminal to such conditions is a re test of the GFC low. The market is trending down, there is absolutely no technical evidence it will change course any time soon. If you look the pattern of trend of the XAO when it's finished the most logical result is a pattern that looks like either oil or BHP ATM...

All you have to do is look over historical forecasts/predictions on this site made by numerous posters over the years. Every dog, including you will have his day at some time or another.
You prove to us here that no one can EVER predict the market. Even YOU think you can otherwise you would not be in the game.... IPDE (Identify, Predict, Decide, Act)


----------



## Smurf1976

Junior said:


> A lot of the above has already played out, or has already been playing out for years, and yet Australia's economy continues to grow.




It could also be argued that there's a time lag with the effects due to borrowed money and consumption keeping the economy going.

It's like saying we entered a major drought. The crops and grass keeps growing for quite a while as the ground is still moist. Then the grass does eventually stop growing but it still takes quite a while for the animals to eat what's already there. Then we take the hay out of the barn to keep things going for a while longer. Only once that's gone are we faced with no choice other than to send the entire herd off to the butchers and it takes even longer for the dams to run out and the irrigation of crops to come to a halt. So the whole thing takes quite some time to play out, agriculture doesn't suddenly stop the moment it stops raining, but if it's not raining the ultimate outcome is inevitable in due course.

I see the economy as broadly similar. If you cut off or reduce a source of income then it takes quite some time for the effects of that to fully materialise. Jobs weren't cut in mining the day after the spot price hit the peak, it took quite a while, and those who did lose their jobs generally wouldn't have defaulted on any debts the very next day. Etc. It all takes quite a while to go through the system.


----------



## craft

sinner said:


> Hi craft,
> 
> 
> * Is it calculated by yourself or from a resource?  meself.
> * Is your AU CAPE for which index or universe?  XAO
> * Are the component earnings weighted by market cap? Yes
> * Are you using the monthly average or monthly closing price for the P component? AFAIK Shiller uses the monthly average which provides a smoother metric. Monthly close - too lazy to go to the detail of monthly average*
> Would you mind providing the average CAPE across the timeseries? Average is 16.8 median is 16




...


----------



## shouldaindex

Just a counter point to the long term trend for ASX Earnings on page 1:

When Inflation Adjusted from 1983, we're above instead below long term trend:

http://2.bp.blogspot.com/-g10Hya513TU/UBRrt35XE_I/AAAAAAAAA3E/dcEWhzHDlag/s1600/120728-2.jpg

That's the beauty of different points of view.


----------



## Newt

I enjoyed this read from Robert Gotliebsen.  What are people's thoughts on the readiness of super funds to lend shares to shorters?

https://www.google.com.au/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwip-7746PHKAhUCX5QKHWY0BRsQqQIIIDAA&url=http%3A%2F%2Fwww.businessspectator.com.au%2Farticle%2F2016%2F2%2F10%2Fmarkets%2Fforces-driving-markets-wild-gyrations&usg=AFQjCNG89hgHD4IRMCM1qnhqr9o6k-c7lQ&sig2=P3LchSKLu4FcYLjlmgb0zg

Hopefully accessible for a single read.


An earlier post this year with same theme if above not accessible:
http://www.theaustralian.com.au/business/opinion/robert-gottliebsen/why-global-shorters-are-trashing-australian-shares/news-story/c0c4df74df949137119912b5bf933868


----------



## craft

shouldaindex said:


> Just a counter point to the long term trend for ASX Earnings on page 1:
> 
> When Inflation Adjusted from 1983, we're above instead below long term trend:
> 
> http://2.bp.blogspot.com/-g10Hya513TU/UBRrt35XE_I/AAAAAAAAA3E/dcEWhzHDlag/s1600/120728-2.jpg
> 
> That's the beauty of different points of view.




I think if you updated that chart as it is constructed it would not show us currently above average. for a perspective on "real" earnings I prefer Nominal GDP Regressed earnings (avoids problems with interpretation of CPI as an inflation measure and helps put earnings in context of what seems to be a structural slowing of nominal GDP growth)  we are below average on that basis, but not at historical deviations. 

The Cape10P/E graphs are also constructed as inflation adjusted.


----------



## sinner

craft said:


> ...




Doff my cap to thee sir!


----------



## DeepState

Newt said:


> What are people's thoughts on the readiness of super funds to lend shares to shorters?




If you are in net positive inflow, would you want prices to be determined only by those who can buy/hold (causing upwards bias), or would you prefer the market to reflect a more complete balance of buyers and sellers?  If the short sellers push the prices down unreasonably, their long only active managers are in a position to spot it and capitalise on it.  If it is having a gross impact on an entire market, their asset allocators will step in.

If you like a stock, buy in, lend it, and the short seller pushes the price down...aren't you happy to have the opportunity to buy the burger you like at a lower price?

The key problem with the shorts is that they can break a market.  Malicious shorting can put an otherwise healthy company into difficulties simply by tightening its financial conditions.  We have seen such actions in the banking stocks in the GFC.  We also see it in currency markets when a country becomes distressed, for example.

Super funds can always recall their stocks on loan. It often happens when the stock is in some special situation. Governments have stepped in to ban short selling where this has become unhealthy.

Overall, the funds hold pretty much the index.  If the shorts want to pay borrow and help defray the cost of administering a super fund whilst helping to avoid long-side bubbles and generally helping to price stuff more accurately by adding selling pressure as needed, why not.  From time to time, this will be unhealthy. That is the case with financial markets in general too, even without short selling. On balance, it's likely to be net beneficial for the super funds in aggregate.


----------



## Newt

DeepState said:


> If you are in net positive inflow, would you want prices to be determined only by those who can buy/hold (causing upwards bias), or would you prefer the market to reflect a more complete balance of buyers and sellers?  If the short sellers push the prices down unreasonably, their long only active managers are in a position to spot it and capitalise on it.  If it is having a gross impact on an entire market, their asset allocators will step in.
> 
> If you like a stock, buy in, lend it, and the short seller pushes the price down...aren't you happy to have the opportunity to buy the burger you like at a lower price?
> 
> The key problem with the shorts is that they can break a market.  Malicious shorting can put an otherwise healthy company into difficulties simply by tightening its financial conditions.  We have seen such actions in the banking stocks in the GFC.  We also see it in currency markets when a country becomes distressed, for example.
> 
> Super funds can always recall their stocks on loan. It often happens when the stock is in some special situation. Governments have stepped in to ban short selling where this has become unhealthy.
> 
> Overall, the funds hold pretty much the index.  If the shorts want to pay borrow and help defray the cost of administering a super fund whilst helping to avoid long-side bubbles and generally helping to price stuff more accurately by adding selling pressure as needed, why not.  From time to time, this will be unhealthy. That is the case with financial markets in general too, even without short selling. On balance, it's likely to be net beneficial for the super funds in aggregate.




Thanks for taking the time to write this up Deepstate.  Having only been a systematic trend trader for 3 years, current prolonged volatility and price action is unusual against the "history" I've experienced.  2011 and 2008 only recent guideposts to compare (where VIX has spiked up but not trended down over coming weeks).

Technically, I'm still inclined to be a long term optimist as per crafts XAO accumulation graphs.  

Valuable insights there on the benefits and effects of large scale shorting.


*Example of VIX spiking, with "settling" downward trend (2015 VIX Daily):*




*Recent VIX daily, with large spike followed by UPWARDS trend:*


----------



## skc

Newt said:


> Thanks for taking the time to write this up Deepstate.  Having only been a systematic trend trader for 3 years, current prolonged volatility and price action is unusual against the "history" I've experienced.  2011 and 2008 only recent guideposts to compare (where VIX has spiked up but not trended down over coming weeks).




I think since 2007 to now (~8.5 years), the period between mid 2012 to mid 2015 were the unusual periods - a lack of volatility and a lack of significant pull back... 2014 was significantly boring market-wise.

Between 2008 to 2012, there was an "end of the system" threat almost every year. Looks like we could be returning to those times.

Whether any of these threats turn out to be the real big one... who knows? Kind of like living in an Earthquake zone I guess.


----------



## craft

gartley said:


> If you look the pattern of trend of the XAO when it's finished the most logical result is a pattern that looks like either oil or BHP ATM...




Why?  

Both mining and manufacturing only represent approx. 7% each of National output. The currency is also at play absorbing some of the downturn in these two trade exposed industries. To some extent Aus suffers from the "Dutch Disease" when commodities are booming - what about the recovery from that?


----------



## Trembling Hand

Trembling Hand said:


> craft said:
> 
> 
> 
> Yesterday seems to put paid to that little ray of sunlight - wrong again.
> 
> 
> 
> 
> I like the setup. False breaks are more bullish than solid support IMO.
Click to expand...



And there we have it. A nice bullish false break.


----------



## Newt

Trembling Hand said:


> I like the setup. False breaks are more bullish than solid support IMO.




I'm not worthy - please explain more TH.   (please ignore Wayne's World reference)
Wouldn't the bearish pushes on that graph look just as bullish if flipped?


----------



## craft

Newt said:


> I'm not worthy - please explain more TH.   (please ignore Wayne's World reference)
> Wouldn't the bearish pushes on that graph look just as bullish if flipped?




If I looked at that flipped, I would be wondering what's holding it back? Two clear breaks now above consolidation yet it hasn't got on with it. 

Flip it back - what's holding it up? how much clearer technical signal does it need to get on with the job and find a lower trading range if it actually wants to go there?

The context for this thread was reasonable valuations for Aus equities, given that context false breaks or even a weak down trend has meaning for me.


----------



## sinner

Newt said:


> I'm not worthy - please explain more TH.   (please ignore Wayne's World reference)
> Wouldn't the bearish pushes on that graph look just as bullish if flipped?




Without putting words in the mans mouth, I believe TH is only saying that in his opinion (which one would often lose money ignoring), future returns of the right hand example will generally be more certain than future returns of the left hand example.

TH is much more a fan of "fading" (betting against) a breakout than going along with it and these days the anticipation that many breakouts end up as "false breaks" (i.e. right hand example) usually is correct.


----------



## PinguPingu

Ahh, but what if it's a 'false ''false'' ' break out? That is, it 'false 'breaks below, bullish week or two to draw in buyers (say to 5100-5200), only to fail again and get  slammed down to 4500-4600.  

It seems both the ASX and S&P are range bound, just enough to stop traders out or get them to cover.


----------



## Toyota Lexcen

Yeah it looks like it PP, until the hysteria clears over world banks I feel that is how things are going to roll


----------



## fraa

quick thought to the original post, given the introduction of superannuation and the forced inceased inflows into equities via default "Balanced" Plans, would the long term xao trend line then be somewhat distorted then otherwise dictated by just the market ?

probably wont make a diff unless a case can be made that super is going away, but I was just wondering if a significant distortion was introduced and as the trend illustrated is somewhat "straight", that if super was not introduced the end part of that trend should be "Bent" Lower then it currently is (Ie more purely subjected to market forces).


----------



## craft

Bump

Maybe the XAO Bull concept might get a little more sympathy with a bit of traction under the belt. 

What's next?  Range?  Smash back to new lows? new post GFC high?  Nothing has really changed in my mind to move my value zone from around 5000 but I don't know what the market will do in the short term - What do you all think? What do the charts say?


----------



## CanOz

I'll participate with charts tomorrow!


----------



## Triathlete

craft said:


> Bump
> 
> Maybe the XAO Bull concept might get a little more sympathy with a bit of traction under the belt.
> 
> What's next?  Range?  Smash back to new lows? new post GFC high?  Nothing has really changed in my mind to move my value zone from around 5000 but I don't know what the market will do in the short term - What do you all think? What do the charts say?
> 
> 
> View attachment 66516




My view from the Technical side is that in both price/percentage and time the market has not come back far enough in my opinion.

I believe we are in a C wave and from this perspective am expecting the market to still come back towards 4500 towards the end of the year.

Although I must say that it has been holding up well around the 5000 level on any pullback.


----------



## CanOz

First the SPI.

SPI200 (XJO Futures)

I have highlighted the main value area. I suspect we'll run-out of steam soon at the 5384-5403 area. If we do not find sellers there, then i would target 5440 for sellers. If we can consolidate at 5440, this would be a very positive sign for a move higher....However if this area gets firmly rejected, along with 5400, then we could be headed to the lower side of the value area, 3500. We should be able to see this play out in the next few weeks because we are relatively close to those levels now.


----------



## CanOz

The XAO

The main value area is from 4000-5700

If we do not find sellers at the high now (5415) then we should push higher where we could find sellers 5530. Above 5640 and particularly 5712 and we could challenge the highs. However, if we start to see a topping pattern at these levels then i would expect a move back to 5000, and lower if that did not attract buyers.


----------



## Gringotts Bank

CanOz said:


> The XAO
> 
> The main value area is from 4000-5700
> 
> If we do not find sellers at the high now (5415) then we should push higher where we could find sellers 5530. Above 5640 and particularly 5712 and we could challenge the highs. However, if we start to see a topping pattern at these levels then i would expect a move back to 5000, and lower if that did not attract buyers.




What's the value area if zoomed in?  

Thanks CanaAussieUK.


----------



## CanOz

Gringotts Bank said:


> What's the value area if zoomed in?
> 
> Thanks CanaAussieUK.




What do you mean sorry?


----------



## Gringotts Bank

CanOz said:


> What do you mean sorry?




I was just wanting to see what it looked like when the volume-at-price is set per month, for example.  Zoomed in to the last year or so.


----------



## CanOz

Gringotts Bank said:


> I was just wanting to see what it looked like when the volume-at-price is set per month, for example.  Zoomed in to the last year or so.




If i did exactly what you're requesting you'll get a lumpy profile. If you tell me what you want to see specifically then i might be able to pull something up for you, eg. levels based on a long term chart, but sown with high granularity on an intra-day chart?


----------



## craft

CanOz said:


> First the SPI.
> 
> SPI200 (XJO Futures)
> 
> I have highlighted the main value area. I suspect we'll run-out of steam soon at the 5384-5403 area. If we do not find sellers there, then i would target 5440 for sellers. If we can consolidate at 5440, this would be a very positive sign for a move higher....However if this area gets firmly rejected, along with 5400, then we could be headed to the lower side of the value area, 3500. We should be able to see this play out in the next few weeks because we are relatively close to those levels now.




Looks like some of the levels you discussed here might come into play. Does the small pull back & Recovery since this post change anything in your reading of things?

Cheers



Triathlete said:


> My view from the Technical side is that in both price/percentage and time the market has not come back far enough in my opinion.
> 
> I believe we are in a C wave and from this perspective am expecting the market to still come back towards 4500 towards the end of the year.
> 
> Although I must say that it has been holding up well around the 5000 level on any pullback.
> 
> View attachment 66518




What would it take to change your mind? Do you have a 'if' 'then' sort of read on the market like CanOz described or are you confident that the market will abide by your view?


----------



## CanOz

craft said:


> Looks like some of the levels you discussed here might come into play. Does the small pull back & Recovery since this post change anything in your reading of things?




Yeah i posted that i was bullish from the clear rejection with volume on the 6th. XAO Banter thread i think. 

The Market has seen some great momentum, today we're at the 5400 level with some resistance at 5425. We're getting close to the top of the channel, so we could expect some resistance there. 

That said, this market is not showing any signs of slowing down and is rapidly accepting value higher. IT would take an abrupt end to the auction to change our minds now, that would involve a large volume rejection of these levels.

5340 would be my line in the sand sort of level, if we can continue to accept value above that then i'm still bullish


----------



## Joules MM1

seems not everyone so enamored by the bull

cfd on cmc front month contract has
80% sells on A200 ($XJO front month contract)
91% sells on spx ($SPX front month contract)

......just.can't.quite.pick the right emoji to go with that


----------



## craft

She don't come round that often and she's typically late but I think the old Cow might be onto the scent of a Bull.


----------



## Value Hunter

Craft where will the earnings growth come from to support a bull market? Or will it just be a case of above average p.e. ratios getting even higher?


----------



## Newt

craft said:


> She don't come round that often and she's typically late but I think the old Cow might be onto the scent of a Bull.
> 
> View attachment 66864




Egad!  Is that an indicator (Coppock) on that graph?  I'd be curious how many indicators you've kept in your normally FA/value orientated world craft?

There do seem to be some bullish hints for the Aussie market when you step out and look at the weekly or even monthly picture.  Recent higher volume "bullish" months off the lower end of price channels.  American markets still seem near upper limits (all time highs and upper price channels), albeit off what is a more devalued currency, which could translate into headwinds for continued Aussie optimism.  Would be nice to see some evening up in performance between Aus and US however


----------



## Value Hunter

Share market returns have three components: dividends, earnings per share growth and changes in the price to earnings ratio. For the overall sharemarket (index fund) in Australia dividend payout ratios are already very high therefore without earnings growth there is not much room for dividend growth. The earnings outlook for Australian companies generally is not good as reaources and banking stocks which are the biggest sectors of the market are both facing cyclical headwinds over the next rew years. Price to earnings ratios are already abive average by historical standards even more so given the subdued earnings outlook. I just do not see it as likely that the All Ordinaries will move up strongly in thenext year or two.

I am interested to hear your reasons for being bullish on the market Craft.


----------



## craft

Newt said:


> Egad!  Is that an indicator (Coppock) on that graph?  I'd be curious how many indicators you've kept in your normally FA/value orientated world craft?




Yep its the Cow-poke (Coppock). I'm afraid that pretty much exhausts my arsenal of indicators. Although I do keep a reasonably close eye on market breadth and occasionally I might pull up a momentum oscillators (don't care which one)  to check for divergence.  But largely my charting package is wasted on me these days except I do like to look at just the plain charts (Full history in Equicandle format) of the stocks I'm interested in. A picture paints a thousand words.


----------



## craft

Value Hunter said:


> I am interested to hear your reasons for being bullish on the market Craft.




Have you read the thread?  Basically I was Bullish at/below 5000 because of my perception of value and because most other people were not. 

The higher the price goes, the less value I see on offer and the more I see people get on Board the more my Bullishness will wane.  I'm just filling time until the real bulls arrive to take over the thread one day.


----------



## Value Hunter

craft said:


> Yep its the Cow-poke (Coppock). I'm afraid that pretty much exhausts my arsenal of indicators. Although I do keep a reasonably close eye on market breadth and occasionally I might pull up a momentum oscillators (don't care which one)  to check for divergence.  But largely my charting package is wasted on me these days except I do like to look at just the plain charts (Full history in Equicandle format) of the stocks I'm interested in. A picture paints a thousand words.




I did not realise you were closet technician


----------



## CanOz

Value Hunter said:


> I did not realise you were closet technician




He's just a smart guy, one of the gems on ASF.


----------



## Wysiwyg

craft said:


> She don't come round that often and she's typically late but I think the old Cow might be onto the scent of a Bull.



The daily Coppock for S&P 500 crossed below zero in March this year for the first time in over 6 years. The weekly Coppock for S&P 500 turned down in December last year for the first time in over 7 years. There is divergence in price and Coppock weekly. Just noting because if U.S. goes down we follow to a lesser or greater extent. Terrible lag. :frown:


----------



## craft

Value Hunter said:


> I did not realise you were closet technician



Oh dear you have found me out - yes I like to look at naked charts, sometimes I even run scans on price data Oh, I feel so dirty.


CanOz said:


> He's just a smart guy, one of the gems on ASF.



No one has ever called me smart before, well not without adding another for letters, you'll make me blush.


Wysiwyg said:


> The daily Coppock for S&P 500 crossed below zero in March this year for the first time in over 6 years. The weekly Coppock for S&P 500 turned down in December last year for the first time in over 7 years. There is divergence in price and Coppock weekly. Just noting because if U.S. goes down we follow to a lesser or greater extent. Terrible lag. :frown:




Interesting sniping, Coppock was designed to work only on index's, only on monthly data and only for bottoms, the signal is a up turn below zero. And yes by design it will lag.


----------



## systematic

craft said:


> Oh dear you have found me out - yes I like to look at naked charts,




At first, I thought it read, "I like to look at charts naked"...which is probably taught in some obscure Gann course.  Hey, whatever works!

Whilst it's confession time...I'll come clean, too.  Whilst I have zero need to look at a chart as far as my plan goes, I still do it from time to time.   I can't help myself.  90% of investors do it, I'm sure...and the other 10% are lying.  

Random funny:


----------



## cynic

systematic said:


> At first, I thought it read, "I like to look at charts naked"...which is probably taught in some obscure Gann course.  Hey, whatever works!
> 
> Whilst it's confession time...I'll come clean, too.  Whilst I have zero need to look at a chart as far as my plan goes, I still do it from time to time.   I can't help myself.  90% of investors do it, I'm sure...and the other 10% are lying.



Thou durst not confess to tainted bloodlines lest thou be declared a mudblood by Lord ValdeHunt. At the peril of thy immortal soul, I beseech thee, shield the pedigree dream from the grievous bite of thy mongrel analyst reality lest thou shatter the faith of the reverent members of Trading House Sly There In!



> Random funny:
> 
> View attachment 66882




Funny how cartoonists ofttimes convey a profound truth! That particular truth is seldom addressed in many of the widely acclaimed gospels.

As usual, I have gone a bit off topic, so all I can say about the XAO Bull is that, since the advent of GFC it too often tends to be exactly that, and moreover, loads of it!


----------



## galumay

craft said:


> No one has ever called me smart before, well not without adding another for letters, you'll make me blush.




Oh come now, too much modesty! I and many others may not have used the word 'smart' but there is widespread admiration for your knowledge, wisdom and generosity in sharing both here on ASF.


----------



## Value Hunter

craft said:


> View attachment 65284
> 
> 
> Nothing seems too disturbing here from a Big Picture Australian Valuation perspective.





Note how that chart starts in 1983. 1982 was the start of the greatest secular (i.e. long-term)  bull market in stock market history. I bet if you used a 100 year chart it would not look so rosy. In the grand scheme of Thongs your sample size of data on that chart was both too small and represented an exceptionally bullish period of stock market history.

I have seen longer term CAPE charts and I can tell you its a somewhat different story.


----------



## craft

Value Hunter said:


> Note how that chart starts in 1983. 1982 was the start of the greatest secular (i.e. long-term)  bull market in stock market history. I bet if you used a 100 year chart it would not look so rosy. In the grand scheme of Thongs your sample size of data on that chart was both too small and represented an exceptionally bullish period of stock market history.
> 
> I have seen longer term CAPE charts and I can tell you its a somewhat different story.




Yes of course you’re right. 

I didn’t pick the start date because it corresponds with the floating of the Aus Dollar a rather paradigm changing event on historical data in Aus. And I didn’t pick it because in calculating the CAPE it looks back 10 years and picks up both 1982 and 1974 data which is the two largest deviations on the price chart. And I didn’t pick it because the US Cape was coming off its lowest point since the Great depression. And I didn’t pick it because the dollar floating was the most meaningful start point in the data I have. And I didn’t pick it because I feel the modern data I have collected is a bit more robust than the historical. I didn’t put up over 30+years of history because I thought the real strength of the chart is its longitudinal comparison of modern history. 

I wish you would have just shared the source of your historical Aus Cape Chart in your post – then I could stop collecting my data which I collect (and stupidly shared here) because I couldn’t find anything historical in relation to CAPE for AUS.

Looking forward to you putting up the data to back your assertion.


----------



## sinner

Value Hunter said:


> Note how that chart starts in 1983. 1982 was the start of the greatest secular (i.e. long-term)  bull market in stock market history. I bet if you used a 100 year chart it would not look so rosy. In the grand scheme of Thongs your sample size of data on that chart was both too small and represented an exceptionally bullish period of stock market history.
> 
> I have seen longer term CAPE charts and I can tell you its a somewhat different story.




Your point stands, however it is also worth adding that if 1982 is the secular low (and if you look at US CAPE charts for example, it is), then a full range of valuations that represent the spectrum of cheap <=> expensive is included in the dataset. That is the most important thing.

If you have a 100 year CAPE for Australia, I would also love to see it.


----------



## Newt

XAOA nudging all time highs on monthly chart, for now.
(Some lower and upper trend lines sketched in, log scale)


----------



## craft

Quant said:


> If we pull back to 3 decades of data on a log scale you don't see support under AUG lows till sub 4500 , fundamentals actually support that level " without " the market becoming historically cheap . I look at the earnings data and GDP data and its very concerning for 2016 , the dreaded " R " word rears it's ugly head . With the LIB govt in and reluctant to spend I cant see it being avoided this time , no booking 5% of GDP on the credit card this time . Starting to look inevitable  ...
> 
> The naming of this thread is the very definition of ' Optimist '




Earnings and GDP numbers still subdued, Brexit, almost hung Aus parliament and Trump as President yet the market still hasn't yielded to the inevitable  - 6 weeks left to fulfil an inevitability - what an opportunity!!!!


Optimist????


----------



## craft

Fair value on the chart is just my *opinion* based on fundamental economic drivers.




Plenty of scope for the market to make noise in the short term , but the red line of physical economic human endeavour marches ever NE, though it has slowed a bit since the GFC. The big question to me remains whether that slowing is temporary or permanent.


----------



## craft

Where are all the Bulls?





The green line on this chart is Macro driven - It should in theory be mean reverting. When it's reverted in the past it has driven secular bull markets of around 5 fold. Looks like it may have turned about the time this thread started. If it has peaked it would indicate we have started a new secular bull that should take us to somewhere around 24,000 over the next decade+ (time to achieve will be dependent on inflation rates)

How's that for Bullish?


----------



## craft

craft said:


> She don't come round that often and she's typically late but I think the old Cow might be onto the scent of a Bull.
> 
> View attachment 66864




Coppock did in fact trigger back here.



Where are all the Bulls?


----------



## craft

XAO v's Accumulation index. Notice how important Dividends are to the long-term.

Also note the perfect retest of all time highs on the Accumulation index prior to it going onto make fresh new highs.  Where are the Bulls?


----------



## systematic

I'm here - but I think I've always been a bull, just my bias - apart from the end of the dot com boom, which for some reason seemed obvious to me at the time - but I had not a cent in the market and was simply being a smartie trying to advise my Dad at the time. I think I followed the tables in 'Shares' magazine, and noticed that the divvy yield of the market was getting worse, or something like that.

Heaps of current stuff on US (for example) talks about it being too expensive etc.  For whatever reason (and forecasting doesn't effect my investing plan ever), I tend to find the more obscure stuff appealing, where you can justify that the good time are yet to come.

I've not thought about this much.  Totally off top of my head - but the planet just came out of a pretty serious funk, in good old, '08.  Bet people 9 years after the crash of '29 weren't feeling that great - yet when you look at a chart in hindsight....

Hence, I'm the proverbial, perennial, bull.


----------



## Ves

craft said:


> Where are the Bulls?



There was once an old saying.  Something along the lines of 'pessimists get to loudly express their fears and get a pat on the back before anything has happened,  whilst optimists initially look stupid but eventually make money.'


----------



## InsvestoBoy

Hi craft,

I'm young so I want to be bullish, because bearish means a much worse future for me.

I own stocks (mostly LICs with low management fees and ETFs because I'm not a good picker) and I want them to be good investments over time.
I don't want drawdowns on those investments.
I don't want to get fired from my good job that I like because my (listed) employer suffered a massive drop in profits.
I don't want my AUD based nest egg to be worth 0.6 or worse USD again.

But asking myself, what has really changed in a good way or actually been fixed since the GFC (when I was in my 3rd year of Uni)? I mean, whatever caused the GFC...did we change our ways? Or learn a lesson? I struggle to find evidence of that. At least US banks are much lower leveraged than pre-GFC, can't say the same for us, more leveraged than ever 

Why are interest rates and inflation forecasts so low?
Why aren't Aussie companies investing for the future? I look at this kind of data http://www.abs.gov.au/ausstats/abs@.nsf/mf/5625.0 and see new CapEx is down nearly half in only 4 or 5 years. This one really scares me.
If prices of important stuff like housing keeps going up at the current rate what does it mean for standard of living which was one of the bedrocks of our awesome society?
Why is our household debt so staggeringly high?

Another scary one I ask myself about: stock market is supposed to be about market mechanism causing efficient and robust capital allocation. But in Australia, every year, 9.5% of every salary earners real productivity is going into the stock market in the form of superannuation contributions, whether those companies represent a good or bad allocation of capital. It can't possibly be efficient, and has to be creating a base of bids for at least some companies that don't deserve it.

I don't mean to come on your interesting thread and be very bearish, just communicating my honest feelings, hope that is OK.


----------



## Trembling Hand

InsvestoBoy said:


> every year, 9.5% of every salary earners real productivity is going into the stock market in the form of superannuation contributions, whether those companies represent a good or bad allocation of capital. It can't possibly be efficient, and has to be creating a base of bids for at least some companies that don't deserve it.



That's an interesting one isn't it The bid is underwritten yet there isn't much to show from it on a long term trend. Divs I guess?


----------



## Quant

XJO currency adjusted , Bullish ??  

XJO x AUDUSD


----------



## skc

Trembling Hand said:


> That's an interesting one isn't it The bid is underwritten yet there isn't much to show from it on a long term trend. Divs I guess?




I guess not the full amount is going into the local stock market.... there'd be plenty going into those default "balance" funds which are probably 20-30% local shares (others are cash, fixed interests, international shares and alternate assets). Offsetting against that would be those who needs to take capital out of the market from time to time to fund their retirements.

Seriously though... the share market is ultimately a game of flow. When inflow > outflow the market will march towards the top right corner over time, short term volatility not withstanding. That's why Australian demographics is always scary for me.


----------



## Smurf1976

InsvestoBoy said:


> At least US banks are much lower leveraged than pre-GFC, can't say the same for us, more leveraged than ever
> 
> Why are interest rates and inflation forecasts so low?
> Why aren't Aussie companies investing for the future? I look at this kind of data http://www.abs.gov.au/ausstats/abs@.nsf/mf/5625.0 and see new CapEx is down nearly half in only 4 or 5 years. This one really scares me.
> If prices of important stuff like housing keeps going up at the current rate what does it mean for standard of living which was one of the bedrocks of our awesome society?
> Why is our household debt so staggeringly high?



There's rather a lot of things like the ones you mention which give cause for concern. Housing, energy, capital investment and so on all point the same way really.

We've got some serious problems in the Australian economy with distortions, hollowing out and things stretched to ridiculous extremes and I think the performance of the ASX is sounding a warning of that.

Does anyone seriously think we can continue down this path? Entire industries wiped out, high costs for practically anything and a huge reliance on ever increasing house prices. Something's got to give surely? 

I take a look at longer term (10+ year) charts of a lot of stocks which I identify based on fundamental factors. Suffice to say there's an awful lot that have never come anywhere close to recovering from the GFC in terms of the stock price. It's not the odd random company here and there, if you start just bringing up long term charts and taking a look at them then you'll find there's plenty in that situation. The fundamentals of some of them don't look too bad but the stock prices are another story. Take out banks (which are somewhat tied to housing) and resources and there's not a lot holding up the index so far as I can tell.


----------



## craft

Quant said:


> XJO currency adjusted , Bullish ??
> 
> XJO x AUDUSD
> 
> View attachment 70701



Seeing this is along term thread, how about taking that chart back to the floating of the Aus $. Then possibility chart it on a semi-log scale and add an exponential trend line.

You might get a whole different perspective on deviation from mean of that ~5000 trough where we started this thread.

Bullish??  **** yer


----------



## craft

Smurf1976 said:


> I take a look at longer term (10+ year) charts of a lot of stocks which I identify based on fundamental factors. Suffice to say there's an awful lot that have never come anywhere close to recovering from the GFC in terms of the stock price. It's not the odd random company here and there, if you start just bringing up long term charts and taking a look at them then you'll find there's plenty in that situation. The fundamentals of some of them don't look too bad but the stock prices are another story. Take out banks (which are somewhat tied to housing) and resources and there's not a lot holding up the index so far as I can tell.




Over this longer term time frame you reference (10+ years) Dividends become increasingly important - especially so when growth is subdued as it has been since the GFC meaning companies need to retain less to fund growth. The only two industry sectors that have not surpassed their pre GFC highs according to their Accumulation Indexes are Materials and Energy. I appreciate your observed perspective but the big picture data paints a different picture.  Sure there is plenty of capitalist driven constructive destruction of individual companies but at the entire market level things have resumed tracking upwards.


----------



## craft

skc said:


> Seriously though... the share market is ultimately a game of flow. When inflow > outflow the market will march towards the top right corner over time, short term volatility not withstanding. That's why Australian demographics is always scary for me.




Why?

_(A Case for the optimistic)_

In relation to absolute population growth - there is no reason why this can not fall to zero or even negative and we can still be better off on a per population basis - the measure you experience as an individual/family.

In relation to age demographics - either increased productivity from technology unfolds and unproductivity of aging simply offsets the negative effects of what would otherwise be underemployment in the working demographic from technological productivity increases or if that doesn't net out Australia is very well placed with sensible migration of workers to counter the problem of falling productivity from aging if politics don't stuff it up.


----------



## craft

InsvestoBoy said:


> Another scary one I ask myself about: stock market is supposed to be about market mechanism causing efficient and robust capital allocation. But in Australia, every year, 9.5% of every salary earners real productivity is going into the stock market in the form of superannuation contributions, whether those companies represent a good or bad allocation of capital. It can't possibly be efficient, and has to be creating a base of bids for at least some companies that don't deserve it.




If national savings outstrips economic expansion we will get an increase pricing multiple as excess cash chases limited investment opportunities - overpaying for investments undermines returns so it is something to worry about.

Possibly the best measure to keep an eye on it is this ratio and it doesn't look concerning to me at the moment.


----------



## craft

systematic said:


> I've not thought about this much.  Totally off top of my head - but the planet just came out of a pretty serious funk, in good old, '08.  Bet people 9 years after the crash of '29 weren't feeling that great - yet when you look at a chart in hindsight....
> 
> Hence, I'm the proverbial, perennial, bull.




Hey good to see at least one Bull.




I would rather be poor and happy than rich and miserable so there's no down side in being a perennial bull to me, though I guess the optimum should be to strive for data driven realism.

I think you are right in your observations of the GFC's effect on broad long lasting sentiment.


----------



## craft

InsvestoBoy said:


> Why are interest rates and inflation forecasts so low?
> To some extent Interest rates are low because inflation expectations are low - As real returns (inflation adjusted) are what impact your future purchasing power, maybe this paradigm is not so bad.
> 
> 
> Why aren't Aussie companies investing for the future? I look at this kind of data http://www.abs.gov.au/ausstats/abs@.nsf/mf/5625.0 and see new CapEx is down nearly half in only 4 or 5 years. This one really scares me.  Less nominal growth expectations due to lower inflation.
> 
> 
> If prices of important stuff like housing keeps going up at the current rate what does it mean for standard of living which was one of the bedrocks of our awesome society? The fear you express in to much capital chasing too little supply in the last paragraph is probably more relevant here than in equities.
> 
> 
> Why is our household debt so staggeringly high? Household debt is 1.8Trillion and Superannuation Equity is 2.2T.  The Market cap/GDP ratio seems to indicate these capital flows aren't effecting the equity market too much but my bet is that the cash component of the super pool is creating liquidity for the banks which is being converted into loans to buy housing.  Will it cause problems? Will people simply payout mortgages with Super once they get access - If they do can our society afford to finance their retirement if the primary residence exemptions stay in place and they choose not to fund their  own retirement but rely on the pension and pass on their housing wealth accumulation as inheritance instead? Do we become a class society based on housing inheritance?
> 
> All the big economic and social questions seem to be around housing! It is the wild card in the short to medium term IMO.
> 
> Another scary one I ask myself about: stock market is supposed to be about market mechanism causing efficient and robust capital allocation. But in Australia, every year, 9.5% of every salary earners real productivity is going into the stock market in the form of superannuation contributions, whether those companies represent a good or bad allocation of capital. It can't possibly be efficient, and has to be creating a base of bids for at least some companies that don't deserve it.
> 
> 
> 
> I don't mean to come on your interesting thread and be very bearish, just communicating my honest feelings, hope that is OK.More than O.K - thanks for the input.



Why are interest rates and inflation forecasts so low?
To some extent Interest rates are low because inflation expectations are low - As real returns (inflation adjusted) are what impact your future purchasing power, maybe this paradigm is not so bad.


Why aren't Aussie companies investing for the future? I look at this kind of data http://www.abs.gov.au/ausstats/abs@.nsf/mf/5625.0 and see new CapEx is down nearly half in only 4 or 5 years. This one really scares me.  Less nominal growth expectations due to lower inflation.


If prices of important stuff like housing keeps going up at the current rate what does it mean for standard of living which was one of the bedrocks of our awesome society? The fear you express in to much capital chasing too little supply in the last paragraph is probably more relevant here than in equities.


Why is our household debt so staggeringly high? Household debt is 1.8Trillion and Superannuation Equity is 2.2T.  The Market cap/GDP ratio seems to indicate these capital flows aren't effecting the equity market too much but my bet is that the cash component of the super pool is creating liquidity for the banks which is being converted into loans to buy housing.  Will it cause problems? Will people simply payout mortgages with Super once they get access - If they do can our society afford to finance their retirement if the primary residence exemptions stay in place and they choose not to fund their  own retirement but rely on the pension and pass on their housing wealth accumulation as inheritance instead? Do we become a class society based on housing inheritance?

All the big economic and social questions seem to be around housing! It is the wild card in the short to medium term IMO.

Another scary one I ask myself about: stock market is supposed to be about market mechanism causing efficient and robust capital allocation. But in Australia, every year, 9.5% of every salary earners real productivity is going into the stock market in the form of superannuation contributions, whether those companies represent a good or bad allocation of capital. It can't possibly be efficient, and has to be creating a base of bids for at least some companies that don't deserve it.



I don't mean to come on your interesting thread and be very bearish, just communicating my honest feelings, hope that is OK.More than O.K - thanks for the input.


----------



## Newt

There was an excellent podcast presentation on Andrew Swanscott's "Better System Trader" that mentioned the risk of NOT being in the market (some time ago - I'd have to dig back for the episode).  Basically that over the long term the trend is up, albeit with some very inconvenient drawdowns along the way, such that a long term investor can't afford to risk not always having at least some size position in the market.

With that in mind, a couple of long term graphs, on log scale, monthly timeframe.
Supporting trend lines I've sketched in (white) for All ords and All ords Accum showing 5.2% and 9.6% long term underlying growth respectively.

Its so easy to get caught up in the emotion of daily and weekly bounces sometimes its worth zooming right out to review the big picture context.  I'm not saying for one minute I'd enjoy a bounce down to the white trend line now, or pretty much any time!

You have to also wonder about the relevance of comparing the current XAO market value to the overheated 2008 top.

On this long timescale, it seems possible the XAO might stay under 6000 as long as 2 years, but within that timeframe perhaps more likely it will pop up considerably higher.


----------



## qldfrog

Newt said:


> There was an excellent podcast presentation on Andrew Swanscott's "Better System Trader" that mentioned the risk of NOT being in the market (some time ago - I'd have to dig back for the episode).  Basically that over the long term the trend is up, albeit with some very inconvenient drawdowns along the way, such that a long term investor can't afford to risk not always having at least some size position in the market.
> 
> 
> View attachment 70990
> View attachment 70991



I see your point but your graph is based on a relatively short (aka a generation) timeline, where we had in the west the effect of a great age pyramid/demographic
Now these inflated baby boomers number are going into spending more than saving, western world has reached a max in term of consumption capacity etc.I very doubt that these trends have any real meaning in the west; in the indonesian market or maybe indian market, yes but not here.people draw money when in pension more than they contribute, be it in their super or own investment, this new phase starts now!!!To the despair of our government pushing debt blindly to avoid the economical truth


----------



## CanOz

Who says the baby boomers have anything left to spend? 

....in the US they're working longer.


----------



## Newt

qldfrog said:


> I see your point but your graph is based on a relatively short (aka a generation) timeline, where we had in the west the effect of a great age pyramid/demographic
> Now these inflated baby boomers number are going into spending more than saving, western world has reached a max in term of consumption capacity etc.I very doubt that these trends have any real meaning in the west; in the indonesian market or maybe indian market, yes but not here.people draw money when in pension more than they contribute, be it in their super or own investment, this new phase starts now!!!To the despair of our government pushing debt blindly to avoid the economical truth




Very fair question from an enquiring mind.  I had a dig around for a longer timeframe as my Norgate XAO data only goes back to 80s.  Interesting the graph below back into the 19th Century shows a long term regression line of 5.1%.

I think most of us working hard to invest or trade Aussie stocks would expect more than 5.1% compound for our efforts, on the expectation we'll do better picking stocks than the long term average of everything in the All Ords that's going up, sideways or down.

(I do however repeat my remark that "short term" discomfort away from these convenient trend lines can last >10 years, just in case the market hits me with lightning tomorrow!)


----------



## Value Hunter

Newt 5.1% is on the price index not the accumulation index. If you add dividends the return would be higher. But the point still stands most on this thread would be hoping to do better than the index.


----------



## Value Hunter

Craft I am not saying the market cannot go higher but its hard to see the market being going sharply higher. Modestly higher yes, but sharply higher I just cannot see the fundamentals supporting it. If you look at p.e. ratios, Cyclically adjusted p.e. ratios, price to book ratios, etc for the Aussie market there is nothing to suggest its greatly undervalued (other than the earnings yield to bond yield comparison).

Interest rates in Australia are close to the bottom pf the cycle so there is not going to be much if any free kick from falling interest rates, the opposite is more likely in fact.

As for corporate earnings the resources companies will be faced with an oversupply of the major commodities for years to come. Sure there might be some cyclical upswings and downswings in resource earnings but I cannot see a major continued uptrend occurring there. Banks can increase their earnings modestly over time but given the high level of indebtedness in the Australian economy its hard to see how strong credit growth (and hence strong earnings growth) can be sustained. Modest credit growth is more likely. Also in the meantime Bank's are facing increased regulations and capital requirements that are impacting margins and earnings. As for Telco stocks Australia is a mature market and new technologies and companies will simply compete away the earnings of the outdated technologies/companies. Overall I don't see huge growth in aggregate Telco earnings. As for retail earnings most of the Australian retailers listed on the share-market are outdated dinosaurs that will slowly be crushed by companies like Amazon, Aldi, Expedia, etc. 

Sure some of the other sectors like tourism, healthcare and education, etc might do well over time but given the heavy weighting of banks, miners and energy stocks in the index they will act as a drag limiting the upward momentum of the market.

For the record I am modestly bullish on the overall market as opposed to strongly bullish.


----------



## skyQuake

Newt said:


> View attachment 71022




Whenever I see a long term chart like this I always wonder if the comparison is fair:
For the entire decade of 1875-1885, All the market moving events, trades and (inflation adjusted) dollar value of trades could probably be squeezed into a month of frantic trading in 2017. 

The velocity of money was so much slower, market adjustments and participants were also much slower...


----------



## craft

skyQuake said:


> Whenever I see a long term chart like this I always wonder if the comparison is fair:
> For the entire decade of 1875-1885, All the market moving events, trades and (inflation adjusted) dollar value of trades could probably be squeezed into a month of frantic trading in 2017.
> 
> The velocity of money was so much slower, market adjustments and participants were also much slower...




That’s a good point. The counterpoint is that the index represents the value of the underlying productive capacity. If a similar % of the economy is represented by listed equity in 1875 as today (???)  then the picture remains reasonably valid. Doesn’t matter the contrast in the transaction volume – that should just be faster price discovery or possible larger financial economy driven bubble deviations depending on your take on things.


----------



## craft

Value Hunter said:


> Craft I am not saying the market cannot go higher but its hard to see the market being going sharply higher. Modestly higher yes, but sharply higher I just cannot see the fundamentals supporting it. If you look at p.e. ratios, Cyclically adjusted p.e. ratios, price to book ratios, etc for the Aussie market there is nothing to suggest its greatly undervalued (other than the earnings yield to bond yield comparison).
> 
> Interest rates in Australia are close to the bottom pf the cycle so there is not going to be much if any free kick from falling interest rates, the opposite is more likely in fact.
> 
> As for corporate earnings the resources companies will be faced with an oversupply of the major commodities for years to come. Sure there might be some cyclical upswings and downswings in resource earnings but I cannot see a major continued uptrend occurring there. Banks can increase their earnings modestly over time but given the high level of indebtedness in the Australian economy its hard to see how strong credit growth (and hence strong earnings growth) can be sustained. Modest credit growth is more likely. Also in the meantime Bank's are facing increased regulations and capital requirements that are impacting margins and earnings. As for Telco stocks Australia is a mature market and new technologies and companies will simply compete away the earnings of the outdated technologies/companies. Overall I don't see huge growth in aggregate Telco earnings. As for retail earnings most of the Australian retailers listed on the share-market are outdated dinosaurs that will slowly be crushed by companies like Amazon, Aldi, Expedia, etc.
> 
> Sure some of the other sectors like tourism, healthcare and education, etc might do well over time but given the heavy weighting of banks, miners and energy stocks in the index they will act as a drag limiting the upward momentum of the market.
> 
> For the record I am modestly bullish on the overall market as opposed to strongly bullish.



Wall of worry is the term that comes to mind.


----------



## craft

> American business – and consequently a basket of stocks – is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that. Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the nonsense they peddle.




Substitue 'American' for 'Australian' and this quote from Buffett's 2016 shareholder letter seems pretty apt for this thread.


----------



## craft

The All ords Accumulation Index for the last financial year.



Over this last FY
How many have been Bullish?
How many have been Bearish?


----------



## craft

Here is the all ords accumulation index since the first post in this thread



and here is the above chart in context of the historical accumulation index chart


----------



## kid hustlr

I enjoy your posts Craft.

As an aside,
How do share offers / raising's get included in these type of indexes? I view these as a bit of a hidden win?


----------



## craft

kid hustlr said:


> I enjoy your posts Craft.
> 
> As an aside,
> How do share offers / raising's get included in these type of indexes? I view these as a bit of a hidden win?




thanks for the feed back Kid.

No free hit from capital raisings etc. The index divisor calculation adjusts for corporate actions in the same way it does for index management related changes.

This will give you idea of the how & why of the calcs 
http://www.spindices.com/documents/methodologies/methodology-index-math.pdf


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## kid hustlr

I think this chart puts things in perspective from a pain perspective - the GFC and the following bump really was an extraordinary event in the grand scheme of things


----------



## craft

Updating my data for end of month and noticed my touchstone for fair value has just about reached the level of all time high's of the index. Sensing the level of bearish sentiment still widely prevelant it wouldn't suprise me if the current move still has some good legs.


----------



## Newt

Thinking of you today craft, as the XAO finally reaches a new high.
"So long, and thanks for all the fish....."

Just in case - your insights are always welcome at ASF, should you decide to come home.


----------



## craft

craft said:


> Updating my data for end of month and noticed my touchstone for fair value has just about reached the level of all time high's of the index. Sensing the level of bearish sentiment still widely prevelant it wouldn't suprise me if the current move still has some good legs.
> View attachment 71711



Everything I’m looking at still suggest we are still very close to fair value.

That’s not to say that we couldn’t in the relatively short-term re-visit 5,000 on for example a hard landing from bad debts relating to housing or up to 9,000+ as things reprice on the expectation that inflation will be lower for longer. Both would be extended valuations but within historical norms of valuation.

Given valuation is only around fair level’s currently, I just don’t see this market yet getting anything near the love needed to suggest its long-term demise is imminent. I suspect the un-loved bull continues – the bear market everybody fears will start one day, but it could be from a much higher price level/valuation. Who really knows what the future holds? Maybe we just keep chugging along around fair value of underlying economic fundamentals which slowly and boringly head north east under relentless human endeavour. Perhaps we are in for another decade of no valuation extremes -  Keeping the noise down (+ or – std dev of fair value) is much more the norm for index pricing than the extended valuation points like GFC, 70’s inflation, Great Depression etc that give rise to the extremes in price that people fear.

Calling since 2007 a consolidation that requires a second part that takes us back to or below 2007 lows would create extreme “normalised” valuation never seen before.

ps Thank you for the comment Newt.


----------



## IFocus

craft said:


> Everything I’m looking at still suggest we are still very close to fair value.
> 
> That’s not to say that we couldn’t in the relatively short-term re-visit 5,000 on for example a hard landing from bad debts relating to housing or up to 9,000+ as things reprice on the expectation that inflation will be lower for longer. Both would be extended valuations but within historical norms of valuation.
> 
> Given valuation is only around fair level’s currently, I just don’t see this market yet getting anything near the love needed to suggest its long-term demise is imminent. I suspect the un-loved bull continues – the bear market everybody fears will start one day, but it could be from a much higher price level/valuation. Who really knows what the future holds? Maybe we just keep chugging along around fair value of underlying economic fundamentals which slowly and boringly head north east under relentless human endeavour. Perhaps we are in for another decade of no valuation extremes -  Keeping the noise down (+ or – std dev of fair value) is much more the norm for index pricing than the extended valuation points like GFC, 70’s inflation, Great Depression etc that give rise to the extremes in price that people fear.
> 
> Calling since 2007 a consolidation that requires a second part that takes us back to or below 2007 lows would create extreme “normalised” valuation never seen before.
> 
> ps Thank you for the comment Newt.




Thank you Craft, your invaluable view point sorely missed


----------



## Newt

Have been away a few days, but very happy to see your insights shared again craft


----------



## brty

I'm another very happy to see you contributing again craft.

One part on valuations that can be seen from the long term (140 years!!) chart that Net put up in 2017. 







Have a good look at that chart before making any long term predictions. Only once in the 140 year period, from ~1888- 1904 did the index take more than 11 years to regain it' prior high. Also with one exception (1987-1994), the index after passing prior highs continued on in a bull market. Even the pull back in 1994 was only a relatively minor one. 

Either history is bunk or the market is likely to go much higher in the current bull market despite all the calls for the market to be going down in a huge bear market 'soon'.
Also for history buffs, the leaders of every bull market are different to those of the past (but there are always one or 2 exceptions)


----------



## craft

My fair market value gauge updated to end of last month. Still conducive to a continuation of the bull market in the long term. But valuation on its own won’t preclude it going to 5K or 9K in the medium term if a market sentiment narrative takes hold.



The strongest narrative for a medium-term upside I see is zero to negative value of cash. Price will react to extra supply of cash as people change asset allocations.

The strongest narratives for a medium-term downside I see is Trump’s tariff wars.

Or a resumption of house price falls in combination with rising unemployment that gets bad enough to impact bank bad debts. RBA lowering rates is already leaning against this outcome as is APRA with an easing of assessment rates.


----------



## sptrawler

craft said:


> My fair market value gauge updated to end of last month. Still conducive to a continuation of the bull market in the long term. But valuation on its own won’t preclude it going to 5K or 9K in the medium term if a market sentiment narrative takes hold.
> 
> 
> The strongest narrative for a medium-term upside I see is zero to negative value of cash. Price will react to extra supply of cash as people change asset allocations.
> 
> The strongest narratives for a medium-term downside I see is Trump’s tariff wars.
> 
> Or a resumption of house price falls in combination with rising unemployment that gets bad enough to impact bank bad debts. RBA lowering rates is already leaning against this outcome as is APRA with an easing of assessment rates.




Craft I tend to think the fact Australia hasn't followed suite with others and started the money printing, leaves us in a fairly strong position, as it means if we do we can proceed with a lot of infrastructure spending.
As long as it is productive infrastructure, I don't see that would be a major issue, as the only downside would be the downward pressure our dollar which in itself would be a stimulant.
Therefore as you say, I can't see what would cause our market to fall, other than outside influences.
By the way, it is great to see you back, now I have someone I can ask the hard super questions to.


----------



## Newt

I greatly value these very big picture perspectives.  The market can be "wrong" for a surprisingly long time while it seeks out extremes of buyer support or seller resistance.  Figuring out the long term averages doesn't require the market to head that way in the short term, but in a world full of information noise its still re-assuring to see the larger trend in place.


----------



## kid hustlr

God I love it when you bring this model out.


----------



## Newt

More please!  Is this model a conglomeration of cash rates, inflation, ????

I don't know - always hated economics but love it when someone smarter than me makes it interesting and relevant.


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## craft

Newt said:


> More please!  Is this model a conglomeration of cash rates, inflation, ????
> 
> I don't know - always hated economics but love it when someone smarter than me makes it interesting and relevant.



The blue line is a valuation calculated from what the underlying physical economy is doing.  Inputs like productivity, population, inflation target, profit share to wages vs capital etc. Not specifically cash rate – that is more driven by the underlying economy.

I’d rather stick a hot needle in my eye than try to explain it in detail on a forum and I reckon you’d rather do the same than read about it, so hope the above suffices.

What’s important about it for me, is not that it’s an absolute “truth” about the value  of the market(all valuations are personal), but it gives me a centre in the universe or a context if you like, independent of price and sentiment to evaluate things.

From this grounding I can more effectively evaluate price and all the other noise that sentiment creates through (social)media etc which offers up endless conflicting opinions on this and that.

For a long term approach I find it much more tranquil and financially rewarding to know roughly where we stand using data from the underlying economy to determine value and evaluate the noise from that position than the reverse of having to try and determine value and when to take on risk by analysing all the noise and conflicting sentiment.


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## craft

craft said:


> The strongest narrative for a medium-term upside I see is zero to negative value of cash. Price will react to extra supply of cash as people change asset allocations.



So, we have negative real interest rates already and the RBA has said clearly to expect interest rates to be lower for longer. Many other countries already have zero or negative nominal interest rates.

How are our dear old saver responding?



I would say still **** scared and have been since the GFC according to the data. We are still flat lining at early 90’s recession levels for cash allocation vs equity. I really do feel for them, I suspect there is a lot of people in cash for "safety", probably in their later years and getting boiled like a frog, as their financial independence slowly gets evaporated around them.

If they finally buckle and decide they must move out of cash, there is a lot of fuel for a continuation of the market upwards.


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## Newt

craft said:


> The blue line is a valuation calculated from what the underlying physical economy is doing.  Inputs like productivity, population, inflation target, profit share to wages vs capital etc. Not specifically cash rate – that is more driven by the underlying economy.
> 
> I’d rather stick a hot needle in my eye than try to explain it in detail on a forum and I reckon you’d rather do the same than read about it, so hope the above suffices.




Not feeling any eye pain at all.  Fascinated at the likely complexity, audacity? of it, but love the sounds of something you've personally created and tweaked to fit your model of the world.  You must have a fantastic financial grounding to understand the concepts to this degree craft.

Just a glimse behind of the curtain of how differently another sees the financial world is still a fantastic insight - many thanks.

Thank you also for the thought provoking Alan Kohler moment with the equity versus cash ratio graph too (that's meant to be a compliment - hope isn't taken as a neg!).  Incredible how the new millenium keeps taking us into uncharted financial territory.  Agree so many older people likely to be too conservative for their own good right now, never occured market rebound on FOMO might follow....


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## Smurf1976

craft said:


> We are still flat lining at early 90’s recession levels for cash allocation vs equity.



Interesting.

Every now and then I come across another stock or other economic measure that has never recovered from the GFC and this is another one.

Manually look through lots of random stock charts and you'll find plenty with a similar pattern over the past 15 or so years.


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## fiftyeight

craft said:


> So, we have negative real interest rates already and the RBA has said clearly to expect interest rates to be lower for longer. Many other countries already have zero or negative nominal interest rates.
> 
> How are our dear old saver responding?
> View attachment 96987
> 
> 
> I would say still **** scared and have been since the GFC according to the data. We are still flat lining at early 90’s recession levels for cash allocation vs equity. I really do feel for them, I suspect there is a lot of people in cash for "safety", probably in their later years and getting boiled like a frog, as their financial independence slowly gets evaporated around them.
> 
> If they finally buckle and decide they must move out of cash, there is a lot of fuel for a continuation of the market upwards.




Just trying to get my head around this one. I guess it is more than just 'retail' when it is every person in retirement/savers. But how does this compare to the funds and instos.......which I guess eventually is private wealth??

Does this include super, surprised equities allocation is so high? I really dont anyone with a meaningful portfolio outside of super.

As most are not allocating their own $$$, does this say more the risk appetite and herd mentality of financial advisors than the savers?

Very interesting indeed


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## craft

fiftyeight said:


> Just trying to get my head around this one. I guess it is more than just 'retail' when it is every person in retirement/savers. But how does this compare to the funds and instos.......which I guess eventually is private wealth??
> 
> Does this include super, surprised equities allocation is so high? I really dont anyone with a meaningful portfolio outside of super.
> 
> As most are not allocating their own $$$, does this say more the risk appetite and herd mentality of financial advisors than the savers?
> 
> Very interesting indeed



Hi @fiftyeight 

I obviously created the chart poorly because what you should get from it is that cash holdings compared to equity holdings is high.

The amount of cash held as a ratio of cash/equity increased after the GFC to early 90’s recession levels and has stayed there since.

The data is agreeing with what you have observed.

I have seen data that SMSF cash allocations are still elevated. Not sure about large super funds, they don’t change their plan asset allocation very often, however their overall cash position would be dictated by people choosing balanced/conservative/cash options over growth options etc. So, I suspect cash in these funds are also likely to reflect private and SMSF data.

The RBA seems to have basically taken the position of “stuff this” the hoarding of cash and the lack of investment has gone on long enough and created underutilisation in the physical economy, so they are dropping rates. If people respond how the RBA wants, there is a lot of cash on the sidelines to invest more productively to a) stimulate earnings and/or b) push up earnings multiple of existing assets – hence fire power for continuation of a bull market.

Of course, people might give the RBA the finger and continue to prefer cash even at zero or negative rates.  I’m not one of those people – I love equities, hate cash.


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## Newt

Could it be that the next generation has also been convinced to hoard their cash, having seen the damage the GFC did to their parents?  Housing too expensive - may feel its better to live off the credit card, paying down as required.  
I was shocked when my father first suggested I invest a large part of my savings in shares mid nineties.  1987 seemed not that long ago back then.  Had enough business education by then to understand the potential growth premium from equities.

There is a whole generation of 20-30's that have only ever worked in the post-GFC environment.


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## craft

Newt said:


> Could it be that the next generation has also been convinced to hoard their cash, having seen the damage the GFC did to their parents?  Housing too expensive - may feel its better to live off the credit card, paying down as required.
> I was shocked when my father first suggested I invest a large part of my savings in shares mid nineties.  1987 seemed not that long ago back then.  Had enough business education by then to understand the potential growth premium from equities.
> 
> There is a whole generation of 20-30's that have only ever worked in the post-GFC environment.



I’m not sure why the preference for cash. I don’t have that preference, so I don’t understand it.

Giving it a couple of minutes thoughts and making some wild arse guesses, maybe the older generation who are wealthy, experienced the GFC and didn’t like it, have less ability to return to work if they experience another loss etc so prefer cash. The younger generation who would be more inclined to be equity holders can’t balance out the cash on an aggregate basis by buying equities because they are stretched to the max paying for expensive housing, HEC’s, their own super and high taxes to fund current retirees who weren’t self-funded.

Baby boomer wealth in retirement is not taxed so there is no redistribution benefit and they seem to be conservatively invested so there is little stimulation for the economy from their investment activities. It’s an idle pool that needs to get circulating one way or another.

Younger generations borrowing given their other commitments is about tapped out as an economic driver. Its time for savers (and the RBA seems to be forcing their hand) to put their money to productive use rather than just in deposits and rely on borrower to make the investments.

Listen to what Phillip Lowe says when he acknowledges all the retirees that write to him daily about not being able to live off their bank savings anymore. It’s basically sorry – but tough.


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## Newt

craft said:


> expensive housing, HEC’s, their own super and high taxes to fund current retirees who weren’t self-funded.......



All very good reasons why early 20s workforce would be saving very differently to previous generations.
First few working years of my life didn't know what to do with all the money, so saved it in interest bearing deposits >15% return.

HECS and compulsory super alone must take huge chunks out of their disposable income.


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## InsvestoBoy

craft said:


> The RBA seems to have basically taken the position of “stuff this” the hoarding of cash and the lack of investment has gone on long enough and created underutilisation in the physical economy, so they are dropping rates.




Just like all the other Central Banks globally who didn't see the GFC coming and don't understand too well the real economy vs their academic modelling, the RBA knows there is something wrong but they can't explain it so they are just desperately dropping rates.

This will not solve the problem, just as none of the previous rate cutting cycles managed to spark wage growth or inflation that they have been predicting incorrectly for so long.






> Of course, people might give the RBA the finger and continue to prefer cash even at zero or negative rates.  I’m not one of those people – I love equities, hate cash.




Here are several things to consider:

Firstly, what you are referring to as cash is not cash. Cash is base money, i.e. commercial bank deposits held in reserve with the CB and all circulating currency. What you are referring to as cash is actually one tier up in the inverted monetary pyramid, i.e. bank deposits, or an loan to the bank for which the investor receives a return in the form of interest payments.

So in the sense of economic agents, you should really consider those people as (very conservative) investors. Savers are people holding their savings in base money or outside the financial system in assets such as physical gold.

With that in mind,

In academic terms there are two "effects", one is "substitution effect" where as interest rates decline, consumers substitute that very conservative investing with spending. The opposite is "income effect" where as interest rates decline, those investors in bank deposits feel the need to invest even more to offset their declining income.

The RBA is desperately betting on the substitution effect dominating, and I say desperately is because all the evidence (as your equity:cash ratio chart plainly shows) is that the income effect has been dominating and there is no evidence (outside academic models with no bearing in reality) to suggest further cuts would spur the substitution effect.

As well as this, another thing to consider is many savers don't invest because they want to get rich, they were investing to see maintenance of the purchasing power of their savings over time. As inflation is so low, the opportunity cost of holding even cash in a shoebox declines proportionally, your savings don't suffer the ravages of inflation as harshly and you gain optionality to invest more aggressively during inevitable bouts of market volatility.


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## InsvestoBoy

With the Australian Government 2047 bond trading at 1.448%, and inflation breakevens trading at even more miserly values, the long run market implied forecast for growth and inflation is decidedly Japan-esque.

For years the likes of the technocratic Central Bankers and their academic brethren were so sure that they could avoid the road that Japan went down simply by pulling the right levers at the right times and now they are embarking down that very same road when all the evidence from Japan, i.e. low or even negative CB rates, QE, QQE, etc are not going to pull them out of the sinkhole.

They won't admit they don't understand the problem, so how can they possibly solve it.


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## IFocus

Craft where do you see debt amongst all this given the current house house debt levels are pretty significant?

BTW great conversation


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## fiftyeight

craft said:


> Hi @fiftyeight
> 
> I obviously created the chart poorly because what you should get from it is that cash holdings compared to equity holdings is high.




Definitely not your chart. More case of me learning on the fly, so figuring out exactly what is 'cash' and what is 'equity' newb questions required. I get the gist, just making sure I get the whole picture.

But the general gist is, there is enough money sitting idle in private hands to have a meaningful impact on equity prices if the cash was mobilised.

I guess the money has to go somewhere at some point, if not spent on medical bills, genx/y might have enough money to pay down some debt....and we are back in the same place of no spending. Haha macro



> Of course, people might give the RBA the finger and continue to prefer cash even at zero or negative rates.  I’m not one of those people – I love equities, hate cash.




Most people would have no idea they are flipping the bird to the RBA haha


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## craft

InsvestoBoy said:


> Just like all the other Central Banks globally who didn't see the GFC coming and don't understand too well the real economy vs their academic modelling, the RBA knows there is something wrong but they can't explain it so they are just desperately dropping rates.
> 
> This will not solve the problem, just as none of the previous rate cutting cycles managed to spark wage growth or inflation that they have been predicting incorrectly for so long.
> 
> View attachment 97153
> 
> 
> 
> 
> Here are several things to consider:
> 
> Firstly, what you are referring to as cash is not cash. Cash is base money, i.e. commercial bank deposits held in reserve with the CB and all circulating currency. What you are referring to as cash is actually one tier up in the inverted monetary pyramid, i.e. bank deposits, or an loan to the bank for which the investor receives a return in the form of interest payments.
> 
> So in the sense of economic agents, you should really consider those people as (very conservative) investors. Savers are people holding their savings in base money or outside the financial system in assets such as physical gold.
> 
> With that in mind,
> 
> In academic terms there are two "effects", one is "substitution effect" where as interest rates decline, consumers substitute that very conservative investing with spending. The opposite is "income effect" where as interest rates decline, those investors in bank deposits feel the need to invest even more to offset their declining income.
> 
> The RBA is desperately betting on the substitution effect dominating, and I say desperately is because all the evidence (as your equity:cash ratio chart plainly shows) is that the income effect has been dominating and there is no evidence (outside academic models with no bearing in reality) to suggest further cuts would spur the substitution effect.
> 
> As well as this, another thing to consider is many savers don't invest because they want to get rich, they were investing to see maintenance of the purchasing power of their savings over time. As inflation is so low, the opportunity cost of holding even cash in a shoebox declines proportionally, your savings don't suffer the ravages of inflation as harshly and you gain optionality to invest more aggressively during inevitable bouts of market volatility.



I doubt the RBA cares whether cash deposits get spent or invested productively, either is good for the physical economy. But they have to get it moving because debt loads are too high to rely on more borrowing to soak up the deposits to get it circulating.

Thanks for your response all views are welcome. I however disagree with the tone that seems to suggest that the RBA have no idea.  Sure, they won’t have all the answers, its not a science, but there are some pretty good minds on the job. I also look out at the physical economy and think the outcomes are pretty good. Life in the physical world in contrast to history is pretty ******* sweet from my viewpoint. What, do we all think its too good to last?

My two biggest concerns would be financial equality and growth v environmental constraints. Far from being worried about zero interest rates, I have long held to a theory that interest free money helps alleviate both these problems.

Japan is a pretty good country to live in I reckon, their gini coefficient is better than ours and their GDP per capita isn’t topped by too many other countries. Ignore the incredible earnings spike in the monetary system that everybody points too, and the physical economy is not too bad considering their demographics and where they started from post war.


Yep, I’m an eternal optimist – I love life, if it all goes too ****, I’ll be blindsided because I havn't headed your warnings.


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## craft

IFocus said:


> Craft where do you see debt amongst all this given the current house house debt levels are pretty significant?
> 
> BTW great conversation



I'm not overly concerned; Household debt has not risen any faster than household wealth. Debt however has risen faster than disposable income, so servicing becomes a problem in relation to taking on more debt. That is why savers need to start moving the money via some other mechanism than putting in the bank and having a borrower pay interest. 

There is also a financial stability problem in that household debt spent on owner occupied housing is not self-liquidating. Hence rising unemployment could cause a financial shock (not the end of the world) but painful especially to banks and those directly affected.

Ps those asking questions of me should realise I’m just making this stuff up based on what I see around me in an attempt to understand the world I live in. I like everybody else don’t know nothin about the future.


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## IFocus

craft said:


> Ps those asking questions of me should realise I’m just making this stuff up based on what I see around me in an attempt to understand the world I live in. I like everybody else don’t know nothin about the future.




Understand Craft just looking for your opinion nothing more, wont hold you to anything or turn up later finger pointing its more the thinking around the issues thanks for the reply.


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