“I think we've reached the limit” – RBA Boss Warns
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Posted 23/01/2020
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As we wrote yesterday and countless headlines are currently screaming, sharemarkets are looking rather toppy at the moment. The question on many people’s lips is ‘well, where do I put my money?’. Ironically the very reason for those toppy financial markets is the catalyst for the same question. Central Banks worldwide have deliberately made it very unattractive for you to put your hard earned into a bank paying you nothing. They want you to either spend it to improve the economy or invest it somewhere to make it look like the economy is improving.
Many are looking at the sharemarket thinking there is far more downside risk than upside, and potentially losing 50% of your capital dwarves whatever meagre dividends you may receive. In such distorted financial markets one then usually looks to increasing allocation to hard or defensive assets. The main players in that space are the ‘hard’ precious metals and course property, and also the ‘defensive’ sovereign bonds.
Buying Sovereign Bonds is buying the very debt issuance getting us into this mess on the assumption it gets worse because you certainly aren’t buying them for the next to nil (or in many cases negative) yield on offer. There is a growing chorus of concern from leading analysts becoming concerned with buying bonds. Regardless, for the average investor they aren’t easily directly accessible anyway.
Property has held a reputation in Australia for decades as the ‘safe bet’ investment and in the past that has certainly been the case as Australia has enjoyed a world leading run. However again, despite the soft landing of a correction, Aussie house prices are at a level that, like the sharemarket, doesn’t make a lot of sense from a valuation perspective. ABC News ran an article yesterday outlining the path of property prices in Australia and the RBA and government’s role in controlling the bubbles thus far. It referred extensively to an interview with former RBA head Ian Macfarlane who, whilst not predicting a crash, doesn’t believe we will see the same returns going forward and actually believes few would have made much if anything since he left the helm in 2006:
“"I don't think it can continue to go up as fast as it has over that period," he forecast.
"I think we've reached the limit of the household sector's capacity to service mortgages."
After leaving the Reserve Bank's top job, Mr Macfarlane crunched the numbers and believes most property investors would have been better off putting their money elsewhere.
"If you're lucky enough to buy right at the bottom and sell at the top, yes, you will make money. But that's only a minority of people who do that," he said.
"The majority, I think, either make not much more money than they would've in the bank or, in many cases, they lose money."
For the few who do succeed at making money out of rising property values, he had this message.
"You're making yourself richer at the expense of your children."
And, like the use of non-renewable resources or the pollution of a finite Earth, that kind of intergenerational theft clearly isn't sustainable.”
Macfarlane’s reference to the capacity to service mortgages is critical. With rising housing prices and stagnant wages we have, for some considerable time now, seen house prices outpace wage growth. Maths 101 says that is unsustainable as, quite simply, at some stage you just can’t earn enough to service the loan needed to buy that house.
That last statement regarding robbing your children (in our view) refers to the current all pervasive phenomenon of the combination of Government/Central Banks stimulus and over borrowing (remember we are second only to the Swiss in personal debt) which in effect is borrowing from or bringing forward from, or in Macfarlane’s words thieving from, the future. Someone down the line has to pay the piper for current excesses.
Such practices are in effect a debasement of money, or more accurately currency. As currency is expanded recklessly as it is now to stave off a recession or major correction we need to have, real money becomes worth more. The oldest forms of real money are gold and silver. When, not if, we have a major correction there will also be the inevitable flight to the safety of gold and corresponding price rise.
Currently, whilst in Aussie dollar terms gold is near all time highs (thanks to the falling AUD), the US Spot price is still only at around a 60% retracement from its November 2015 $1050 low compared to its 2011 $1900 high. So whilst it is in a bull market, the run is still in its early days.
Whilst one should always maintain a balance of uncorrelated assets in a portfolio, the weighting should always consider the relative valuation metrics for each.