The ASX200 has traded up to 6,875.5 today finally breaking the previous record intraday high of 6,851.5 reached on 1st. November 2007. The highest ever closing level of the ASX200 index was also on 1st. November 2007 at 6,828.7; we may surpass that level today. The Australian government 10 year bond is currently yielding a new record low of 1.20% a far cry from the circa 15% yields I remember dealing at in the  mid-1980s. The sentiment is being driven by cheap money and the prospect of it becoming even cheaper with little to no contemplation of the reasons money is so cheap. We should be very concerned because the bond market is telling us there are real problems in our economy and bond markets in other major markets are sending similar messages. The Financial Times recently reported that there is circa USD12 trillion of investment grade government and corporate bonds with negative yields mostly in Europe and Japan.

While there are a number of events which may cause a downturn the one which is of great concern in our economy is the level of household debt which at the end of 2018 was equivalent to 127% of GDP and 189% of disposable income. Both of these ratios are near record highs and very high on any global comparison, consider the following chart:

Consumer spending data is already showing that households are pulling back on their discretionary spending and I doubt that a couple of rate cuts will do much to remedy this. One only has to look at new car sales to see how the belt has been tightened and with consumption contributing a large amount to GDP the consumer has to be kept happy and positive. It is easy to pick the recessions in the following chart:

That reminds me of this delightful thought from Arnold Schwarzenegger

“Having more money doesn’t make you happier. 
I have 50 million dollars but I’m just as happy as when I had 48 million”

Kind regards
Alex Moffatt, Director
Joseph Palmer & Sons (VIC)


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