Fundamentals (funnymentals) & Sentiment
- Thread starter AusDoc
- Start date
The following brief article has a rather Australian focus so you may not be interested. It reveals some of the very ordinary thinking that passes for economic insight.
Low interest rate environment set to continue
Central Banks around the world appear to be agreed that the low interest rate environment is likely to continue into the foreseeable future. I think the most important figurehead of all, Janet Yellen, has played things particularly well in terms of not scaring investors and has commented that the Federal Reserve does not intend to pull back the big metaphorical lever until they have seen real, sustainable growth.
Many economies also have higher than normal unemployment levels (our own sitting at around 6%) and this is also giving Central Banks the ability to continue policies that are supportive of investment, with minimal risk of generating excessive inflation.
Another positive of low interest rates, especially at the current time, is that it allows Governments to refinance and reduce or liquidate their debt, without having to resort to excessive spending cuts or tax increases. Ever since the US rate went to 0% it has literally saved trillions of dollars in interest payments.
This low interest rate environment has been one of the defining reasons why we have seen yet another financial year finish very strongly for investment markets. But what’s particularly interesting to note is that the fixed interest returns have been higher than perhaps people have realised. See below:
#Source: Bloomberg.
Aust shares based on ASX 300
Overseas shares based on MSCI Index (unhedged)
Global REITs based on FTSE Global Real Estate Total Return Index (Hedged)
Aust REITs based on ASX 300 Property Accumulation Index
Aust Fixed Interest based on UBS Composite Bond Index
Cash based on UBS Bank Bill Index
This has all been during a financial year where we saw a US Government shut down in October, the US Federal Reserve tapering in December, and quite severe geopolitical tension following Ukraine’s loss of control over Crimea in March.
Furthermore, looking at the bigger picture (and the following table), you will see that the ten-year returns are very strong given the magnitude of the Global Financial Crisis experienced therein.
If not for the global listed infrastructure Australian shares would have been the highest performing asset, with an average annual return of 8.85% over the last ten years.
# Source: Colonial First State.
There has of course been some direct consequences and anomalies of having such a low interest rate environment. These have included:
1/ The search for higher yielding investments and perhaps a favouring for blue chip investments with a strong dividend yield and high franking credits. In fact this has caused many companies to cater for such a market and the payout ratio for Australian equities are at a 30-year high.
This has been a predominant cause for the huge market rally between 2009 and today, which is actually greater than the rally between 2002 and 2007. However, the big difference is that key valuation measures such as the P/E ratio are not overly excessive, as they were in 2007.
2/ A knock on effect of the above is that since companies are paying more in dividends they have less to invest internally in order to create future growth. They are also being seen to be buying back their own shares, often using borrowed funds at low interest rates, which caused the effect in the first place. This may well be a contributor to muted job growth and the slightly high unemployment figures we are seeing.
I believe the fact that key figures/institutions are suggesting rates will continue to be low for the foreseeable future, could be a slightly concerning indication that economic activity simply isn’t picking up as much as they would like. Statistics do indicate that savings made on lower mortgage rates are mainly being used to reduce debt levels, rather than for consumption or investment.
It was Lord Maynard Keynes who was the leading proponent of using stimulus to bring forward demand when in recession. When criticised that stimulus spending would ultimately create problems in the long run, he famously replied, “In the long run, we are all dead”.
Source: Kris Wrenn, Low interest rate environment set to continue, The Hudson Report, 22 August 2014.
</ends>
All I can say here is, well... ummm... Keynes was a short-sighted, ignorant bastard
...not to put too fine a point on it.
Low interest rate environment set to continue
Central Banks around the world appear to be agreed that the low interest rate environment is likely to continue into the foreseeable future. I think the most important figurehead of all, Janet Yellen, has played things particularly well in terms of not scaring investors and has commented that the Federal Reserve does not intend to pull back the big metaphorical lever until they have seen real, sustainable growth.
Many economies also have higher than normal unemployment levels (our own sitting at around 6%) and this is also giving Central Banks the ability to continue policies that are supportive of investment, with minimal risk of generating excessive inflation.
Another positive of low interest rates, especially at the current time, is that it allows Governments to refinance and reduce or liquidate their debt, without having to resort to excessive spending cuts or tax increases. Ever since the US rate went to 0% it has literally saved trillions of dollars in interest payments.
This low interest rate environment has been one of the defining reasons why we have seen yet another financial year finish very strongly for investment markets. But what’s particularly interesting to note is that the fixed interest returns have been higher than perhaps people have realised. See below:
#Source: Bloomberg.
Aust shares based on ASX 300
Overseas shares based on MSCI Index (unhedged)
Global REITs based on FTSE Global Real Estate Total Return Index (Hedged)
Aust REITs based on ASX 300 Property Accumulation Index
Aust Fixed Interest based on UBS Composite Bond Index
Cash based on UBS Bank Bill Index
This has all been during a financial year where we saw a US Government shut down in October, the US Federal Reserve tapering in December, and quite severe geopolitical tension following Ukraine’s loss of control over Crimea in March.
Furthermore, looking at the bigger picture (and the following table), you will see that the ten-year returns are very strong given the magnitude of the Global Financial Crisis experienced therein.
If not for the global listed infrastructure Australian shares would have been the highest performing asset, with an average annual return of 8.85% over the last ten years.
# Source: Colonial First State.
There has of course been some direct consequences and anomalies of having such a low interest rate environment. These have included:
1/ The search for higher yielding investments and perhaps a favouring for blue chip investments with a strong dividend yield and high franking credits. In fact this has caused many companies to cater for such a market and the payout ratio for Australian equities are at a 30-year high.
This has been a predominant cause for the huge market rally between 2009 and today, which is actually greater than the rally between 2002 and 2007. However, the big difference is that key valuation measures such as the P/E ratio are not overly excessive, as they were in 2007.
2/ A knock on effect of the above is that since companies are paying more in dividends they have less to invest internally in order to create future growth. They are also being seen to be buying back their own shares, often using borrowed funds at low interest rates, which caused the effect in the first place. This may well be a contributor to muted job growth and the slightly high unemployment figures we are seeing.
I believe the fact that key figures/institutions are suggesting rates will continue to be low for the foreseeable future, could be a slightly concerning indication that economic activity simply isn’t picking up as much as they would like. Statistics do indicate that savings made on lower mortgage rates are mainly being used to reduce debt levels, rather than for consumption or investment.
It was Lord Maynard Keynes who was the leading proponent of using stimulus to bring forward demand when in recession. When criticised that stimulus spending would ultimately create problems in the long run, he famously replied, “In the long run, we are all dead”.
Source: Kris Wrenn, Low interest rate environment set to continue, The Hudson Report, 22 August 2014.
</ends>
All I can say here is, well... ummm... Keynes was a short-sighted, ignorant bastard
...not to put too fine a point on it.Some trivia...
GBP/USD is called ‘cable’ because the first physical connection between London and NY was a cable between banks establishing an exchange rate for the time.
The Irish pound versus the USD was called the ‘wire’, as it was a smaller version of a cable.
The EUR/USD is called ‘fiber’ in many retail spaces as it’s a German version of a cable.
But have you heard of the Kylie? It's the nickname for the AUDNZD.
One pundit suggested its derivation might be as follows:
AUD/NZD= Aussie/Kiwi = Australian bird = Kylie.
But another insisted that the definition of Kylie is Boomerang. So there you go.
On a more serious note perhaps, the attached is a very brief and clearly written FX glossary.
GBP/USD is called ‘cable’ because the first physical connection between London and NY was a cable between banks establishing an exchange rate for the time.
The Irish pound versus the USD was called the ‘wire’, as it was a smaller version of a cable.
The EUR/USD is called ‘fiber’ in many retail spaces as it’s a German version of a cable.
But have you heard of the Kylie? It's the nickname for the AUDNZD.
One pundit suggested its derivation might be as follows:
AUD/NZD= Aussie/Kiwi = Australian bird = Kylie.
But another insisted that the definition of Kylie is Boomerang. So there you go.
On a more serious note perhaps, the attached is a very brief and clearly written FX glossary.
AusDoc said:
Thats right, the mainstream retail definitions are well known but the etymology of the words reveal a different story.
Im no expert, but a quick decipher of the word 'cable' leads me to the word 'Cabal' as in conspiring group.
The word 'Fiber' leads to the word 'Fibber' or Fib meaning lie...
Seems the economist's can finally agree on one thing... the Eurozone is financially stuffed (or many and longer words to that effect). Here's a "Chief Economist" (notice how they're always chiefs? ??? ) who actually doesn't work for a bank and argues that QE will simply not be enough to save the Euro.
See more at: http://www.cer.org.uk/insights/quantitative-easing-alone-will-not-do-trick#sthash.VU6gDLNG.dpuf
He concludes:
I can't escape the feeling that he maybe should have pointed this out to the ECB at least a year ago!
See more at: http://www.cer.org.uk/insights/quantitative-easing-alone-will-not-do-trick#sthash.VU6gDLNG.dpuf
He concludes:
I can't escape the feeling that he maybe should have pointed this out to the ECB at least a year ago!
TopFroxx said:
I'm no economist, I just read it the way you would. The bond rates are the verdict of the financial markets on the state of economies and the forecast of future performance for a stated period.
Looking at the list you can see, I think, why the AUD has so much resilience. Who would invest in the other countries if they had a free choice to invest in Australia instead? That's why there is so much cash flowing into Australia, underwriting its value. It is an obvious choice when you see the positive returns compared with negative ones.
As for why Australia is doing so well, that's another story I guess. No doubt you will find plenty of Australian politicians willing to take credit for our brilliantly run economy. But that's all political hubris and nonsense. Given that we have experienced the greatest natural resources boom in our short history yet our governments managed during this period of massive income to actually get further into debt while we have nothing to show for it, I would say that our economy has not been well managed at all. So, I think Australia is doing well purely because overseas markets, principally China, want our natural resources.
Meanwhile, the other countries listed seem to have nothing to offer but debt. Even Germany, the economic power house of Europe, is slowing and thanks to the EU has to carry more than its fair share of the financial burden.
Anyway, that's how I see it. I thought Weston's list made the situation quite graphic.
the golden gun
RINSE & REPEAT
AusDoc said:
To me, and from what I've read, the only inherent, tangible value of a currency is the yield it offers in the overnight interest rate markets.
So that info you posted is extremely relevant to anyone trading EUR or AUD, and especially EUR/AUD. Albeit from a longer-term perspective.
the golden gun
RINSE & REPEAT
TopFroxx said:australia better invest in other areas than the commodity sector then. planning to immigrate in about 2 years
http://www.buzzfeed.com/simoncrerar/why-arachnophobes-should-skip-australia
still planning to immigrate to australia in about 2 years?
the golden gun said:
i'm no arachnophobe and also have lived and traveled through australia for roughly a year already. i'll be fine
(except a huntsman jumps down in my face while driving, then i might become one of the famous victims in spider caused car accidents)if australia slumps in 2 years my second choice would be canada btw. havent been there yet, but planning a 3-4 week trip for next year to get to know the country and its people