XAO Bull

[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]

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.

 

[craft]

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.

 

[craft]

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.

 

[Newt]

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....

 

[Smurf1976]

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.

 

[fiftyeight]

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

 

[craft]

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.

 

[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.

 

[craft]

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.

 

[Newt]

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.

 

[InsvestoBoy]

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.

 

[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.

 

[IFocus]

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

BTW great conversation

 

[fiftyeight]

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

 

[craft]

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.

 

[craft]

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.