Another day, another rally in the post-COVID world.
We were told everything would be different after this, that things would never be the same again.
The stock market wasn’t listening to such musings…
It’s been on a relentless rise over the past month or so, just the same as it was back in January and February. Nothing has changed…
The Dow rose another 2% overnight, the S&P 500 increased nearly 1.4%, while the NASDAQ lagged for a change, up ‘only’ 0.8%.
The US dollar and gold continued to weaken as investors sell-off defensive assets. Bond yields rose too, but with the 10-year yield still very low at 0.76%, it doesn’t say much about the strength of an economic recovery.
Still, you’ve got all the ingredients of a bull market here. Small-caps outperforming large-caps. Stocks rallying while defensives sell off. And central banks and governments with their foot to the floor on stimulus measures.
The latest idiocy coming out of Canberra?
Another $688 million thrown at the housing industry. There are a whole bunch of rules around eligibility and the type of projects it targets, but no doubt there will be plenty trying to game the system. That’s what ‘free’ money does.
The housing lobby is a strong one in Canberra. The fact that this corona shutdown means there is a pause in migration means there will be a short-term drop off in demand. The lobbyists will have ramped up the pressure in recent weeks because of this.
Nearly $700 million of your (and your kids) money isn’t a bad outcome for them, although I’m sure they would have wanted more.
For what though?
It’s not as if the industry has been hit particularly hard by the shutdown. At least not compared to many other sectors…builders have been allowed to go to work.
Building approvals data out yesterday showed total dwelling approvals were up 5.7% in the year to April, despite falling 1.8% during the month. Hardly a fall off a cliff…
Still, squeaky wheels get the oil in Canberra…
Yesterday also saw the release of economic growth data for the March quarter. The market completely ignored it. Which is what it nearly always does…it’s old news!
The media focuses on the banality of whether we are in a recession or not. Which is kind of pointless when they base it on a headline number that isn’t the key indicator.
So let me show you the important numbers to focus on…
The headline number everyone looks at is ‘seasonally adjusted GDP’, which came in at -0.3% for the quarter, and 1.4% for the year. But if we adjust for the terms of trade (a ratio of import and export prices) and population growth, it looks a little different.
On this number, which is called the ‘real net national disposable income per capita’, the economy grew 0.1% in the quarter and 1% over the year. Not a bad effort.
The stock market factors in inflation
These numbers are ‘real’, meaning they’re adjusted for inflation.
The stock market factors in inflation, so you need to look at it as a different set of numbers to see the economy through the lens of the market.
This is the ‘current price measure’ of GDP. It was up 0.8% in the March quarter and 3.1% over the year. Inflation accounted for half of the annual increase.
Which brings me to an interesting chart I want to show you…
As you know, we are living in the age of stimulus…the age of there are no losers, and everyone gets a ribbon. Our benevolent overlords — the governments and central banks — are there to catch us if we fall.
But is that really helpful? Does it create real wealth and an increase in real living standards? Or does it just lead to people taking on more debt and running faster on the treadmill?
Let’s check the answer to that.
The chart below shows the ASX 200 denominated by one ounce of gold. By making the denominator of the equation something solid and unchanging, you get a better idea of the real performance of the actual asset. You strip out the affect of asset price inflation.
It’s not a pretty picture…
This chart tells you that since 2009, the real performance of Aussie equities has been terrible. That is, there has been no REAL value creation. In aggregate, all the gains are due to stimulus and the resulting asset price inflation.
When sound monetary policy exists, it doesn’t devalue the currency against sound money (gold), and entrepreneurs must create real wealth.
That’s not happening. And it’s probably not going to happen for a long time…