Henry, 9/2. There is a big disconnect in Australia's asset markets at present. The Reserve Bank has rung a clear warning bell. It is widely accepted that interest rates will rise and domestic demand has to grow far more slowly. Yet the share prices of Australia's leading retailers and banks keep roaring ahead. The excuse is current "scorching" profit results, yet can this stellar economic preformance continue?
There is a free Goldmembership and an honourable mention for the reader who can best explain this disconnect.
Homer P, 14/2. I well remember 1989. Although bank bill rates were a touch above 18% Grosvenor Place in Sydney sold for a yield of LESS than 2%.
Why? In a bubble people lose sight of reality. People actually thought with bill rates above 18% asset prices would continue to skyrocket.
Kindleburger wrote the classic book on manias et al.
It is somewhat similar this time round.
If the household sector is heavily geared and rates rise then something will give.
Rob L, 12/2. There is no real disconnect, yet. Have you forgotten the interest rates in the high teens that Whitlam and Keating managed to inflict on us. That's when real panic sets in.
If interest rates move .25% to .5% that is no big deal, wait until they move to the point where they exceed the franked returns on the shares of leading retailers and banks.
Desmond M, 12/2. Oh, come on, Henry!
You know & I know the reason for the illogical "disconnect"; but betcha you won't award me the prize.
People in late capitalism live in a society where greed, self-centredness, and ignorance is praised, promoted & widely practised. In such a society, there can be no reasonable expectation that most people (and that includes the so-called "hard-nosed" elites of business & finance) can think logically about the longer term.
Most Australians, after all, believed John Howard when he made the implicit promise that interest rates would not - indeed could not - increase under a coalition government.
Oh, well, off to sip the last of the Dom before the collapse!
Gordon W, 12/2. Your disconnect is like schroedinger's cat. It's existence only clear in retrospect. If things go on as they are then there never was an asset bubble and hence no disconnect. I take Henry to believe higher interest rates are A. inevitable, and B. will prick an asset bubble. I agree but neither of us really know the future: a correction might not happen for a longer time than we anticipate, and might happen for other reasons entirely. People see years of prior asset growth, and being tribal creatures we go with what has worked in the past and what we see our neighbours doing, (you know, the bloke with nice boat in the CBA commercial going "equity mate").
We all learned to play musical chairs as infants ... you don't win by being the last one standing ... but you also look pretty stupid sitting down while the music's still going. Most of us learn to keep an eye on the grown-up with the tape player and wait till the finger twitches. The finger simply hasn't twitched yet.
Henry, 12/2. Much to our suprise, The Boss has expressed an opinion on this weighty subject: "It's been such a good week I've even had time to enter Henry Thornton's competition to explain why equities are rising in price when the RBA governor has been telling anyone who will listen that there are interest rate rises ahead.
"Not hard to work out, dear Penpal. He has been misrepresented and misunderstood. Don't I know how easily that happens? I must say sorry to him (but not to anybody who steals a valuable room in one of our detention camps on some looppy excuse that she's an illegal)." Continued here.
Nassim Taleb, The Black Swan, 11/2. Intelligence can cause you to over interpret from a random pattern. Clearly if you add epistemic arrogance, you have, on occasion, a toxic combination of confidence and misdirected knowledge.
Graeme M, 10/2. Price is a reflection of the number of $$$’s floating about. The share market and the real estate market can keep on going up forever, of course. Just look at what has been happening throughout the 20th & 21st century.
At times when the amount or cost of the $$$’s is adjusted then human error can cause a domino effect and a fall in price. After all, given the number of inputs that make up economics it would be impossible to have 100% accuracy.
At this point in time, we have a society that has become used to making money by borrowing money and investing it in assets; the classic free lunch. Who would not be in it?
And ... you don’t have to work out a well run company from a lucky company as long as the price of the company keeps going up.
And ... it can go on forever as long as the money supply is being expanded and that wonderful 2-3% inflation continues.
And ... we have bugger all places to put it anyway, in order to get the free lunch of asset appreciation. So no-one is gonna let go this baby unless forced to do so and it is in no-ones interest to force anyone to let go. Remember, though, what happens at a free lunch. Most people eat too much and are sick.
Mark S, 10/2. The disconnect you describe yesterday morning is clearly a case of lost dystopia. When markets believe, that in reading the entrails of buoyant corporate reporting they see reflections of the future; then the fear is removed from the fear/greed equation. Compounding this is the fact that, at the ensuing party, the players are so pre-occupied with licking the grease from their fingers; that they’ve yet to notice that the carcass from the great BBQ is stripped to the bone.
Those who heard the bell obviously left early: taking their party bags with them. They’re still a little hung over and have decided to stay in for a while on the firm advice of their accountants.
Meanwhile, in another corner of the cosmos, three familiar old hags are roughing out their plans for the next paradigm.
I’m reminded of the lyrics to a song; “I caught a falling star, it cut my hands to pieces”.