The Money Loop
I've been pondering the phenomenon of sky high valuations of stocks. Way back before the GFC in the late 1990s, valuations hit a historic high and P/E ratios blew out. Then the tech bubble burst. Investors then decided that it was better to put their money into bricks and mortar, and so that led to some interesting financial engineering with mortgage bonds, and this led to a property boom that turned out to be unsustainable. That bottoming out was the GFC. And here we are again with sky high valuations on stocks. It seems we're due for another downward correction that wipes out a whole lot of real world capital formations. What's interesting this time is that P/E ratios have blown out to the high 20s for Google, Apple, Meta, Amazon and nVidia. And nobody is headed for the door before the bubble bursts.
But then I was thinking about my superannuation account. I have it set on 100% Foreign High Growth Shares, This is because it's the easiest way to get exposure to things like the US Tech sector or Chinese manufacturing or whatever else grows in valuation like mushrooms. Every so often my employers deposits a percentage and my fund then goes out there and buys these high growth shares for me. I certainly don't imagine I'm alone - in fact the odds are pretty good that just about everybody in Australia with their superfund has exposure to these shares. And as long as there is such a thing as superannuation, the money's just going to keep dropping on these shares. Michael Burry is right, there's not going to be any price discovery on these shares any more, with all these funds shoring up the prices. Maybe that is why these sky high valuations can continue, because it's not about rational investment any more, but just passive investors outnumbering the active investors.
In Australia at least, there is this strange loop of money. You go to the supermarket and you get price-gouged. The corporate profits bump up the share price of the supermarkets, and if you have your superannuation invested in say the ASX500, this is good for you. In a weird way, if the big end of town gouges us and scores huge profits, we still get some benefit out of that if our superannuation is in Australian Shares. The gouging becomes like an extra tax that somehow turns into an extra pension down the track for the citizen.
Corporate Profits
Corporate Profits keep climbing. This is in spite of the cost of living going up and people not having enough money to get by. Spending is down, and the economy is teetering on a recession every time you turn on the news. Just because people's disposable income shrinks, it doesn't mean the companies looking after food and utilities don't make a ton of money.
The Australian Treasury has something interesting to say about our Gini Coefficient.
Income inequality has remained relatively steady since 2007–08, with the Gini coefficient for equivalised household disposable income sitting at 0.32 in 2019–20. In 2020, Australia’s Gini coefficient for income indicated that Australia had the 14th highest level of inequality of the 28 OECD countries for which data was available for that year.1
Wealth is typically distributed less equally than income. Wealth inequality has remained steady over time, with the Gini coefficient for wealth increasing marginally from 0.60 in 2007–08 to 0.61 in 2019–20.
That's surprising. I did not expect that, and I wonder how they derived that figure. It suggests that if you are in the property market, it's all just musical chairs. You don't beat the market by buying somewhere special. It doesn't matter how much you're paid because chances are, you're just in the median and you make no impact on the Gini Coefficient. It's weird. We might be earning double what we used to earn, but that money has exactly half of the buying power it used to have, so your place in the pecking order hans't changed at all. It's actually hard to deliver a scenario where a first world citizenry can be better off by voting somebody in or out.
This corresponds to the sobering reality that over the last 14 years since 2010, prices of goods have roughly doubled, and so has my salary. I don't feel a significant increase in my purchasing power at all. The ALP government is crowing about delivering tax cuts but in reality, they're making small changes to adjust my purchasing power to be roughly in line with the historic norm. This leads me to the next point.
Interest Rates Discourse Is Bunkum
During the 20 year lead up to the pandemic I came to the notion that interest rates were being artificially held down. This is because the Central Banks decided to favour investments and asset price rises over stability or equality. This resulted in the housing bubble, and in turn skewing the economy in such as way as to suck the oxygen out of the rest of the economy that has nothing to do with real estate or mining. When Vladimir Putin started his offensive against Ukraine in February 2022, while the world's economy was still emerging from the Covid Pandemic, inflation shot up and Central Banks have been running high interest rates ever since.
The central banks do this in the name of stopping inflation, however if we the people are largely spending the same in the Gini Coefficient, is it really the local consumer pushing up prices through heated demand? Clearly it's anything but the local consumer. So all this talk of taming inflation through raising interest rates ignores the fact that inflation isn't coming from the people the higher interest rates are imposed upon. If people are spending roughly the same portion of their disposable income on the same things in the same way they always did, then raising interest rates on them probably isn't going to change demand.
It runs counter to the narrative that if you raise interest rates, it takes money out of people's pockets in such a way as to bring down demand and therefore inflation. They can argue - and have argued - that this is necessary, but the unchanged Gini Coefficient of Australia tells you it's not likely to change any time soon. Arguably, it's all Vladimir Putin and Xi Jinping's fault we have the inflation. Why do ordinary citizens have to pay out of pocket to quell this damned inflation? With what raising interest rates costs our society, it might be cheaper to assemble a hit team to assassinate Vladimir Putin and end that lousy war in Ukraine. That might send a message to Xi Jinping to get back in the box.
It is entirely possible that the reason inflation came down from the peak of 7.8% is because international supply chains were re-built and re-affirmed in the last 18months, and had nothing to do with the 13 interest rate hikes in 15 months. It might have been because of the corporate greed disguising their price rises as something caused by inflation, because let's face it - there have been record profits in a time marked by great cost increases.
Just for reference, here's this discussion over in the USA about the same topic:
It's so on the money, Jon Stewart had to give up his Apple+ show over this one.
Larry Summers: "Do you feel that Apple are somehow gouging or doing something wrong?"
Jon Stewart: "Yes"
And right there, Jon Stewart is asked to bite the hand that feeds him that day, and he takes a solid chunk.
Yet it needed to be said to make a point. It's not that Larry Summers is a bad guy for taking the Central Bank line - it's all the wisdom he has at his disposal. It's just that the entire discourse is fucked, as Stewart demonstrates. Apple's valuation going up USD 4000 for every American is nice for Apple. It's not like that USD 4000 rise goes immediately into people's pockets to be used. At best it goes towards people's retirement if their 401Ks have Apple shares. If Apple is indeed gouging while people are losing their homes due to interest rates going up in response to global events they can't control, then there's no real moral defence for that disparity.
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