Saturday, February 24, 2018

Long Term Investing Trends

The Australian Dollar tends to be high relative to the American Dollar during economic booms and low during economic crises. The recent low point in 2015-16 is related to a fall in commodity prices and slowdown in the World economy, especially in China. I think China probably slowed down by much more than the government admitted. During 2015 US stock markets went sideways or declined. The Australian market started 2015 optimistically but then had a steep fall:

There is now a lot of talk of renewed growth in the World Economy. On the other hand, US interest rates are rising as the Federal Reserve tries to reduce its balance sheet and with the Fed not buying US government bonds, but the US Treasury trying to issue even more after Trump's tax cut, the Treasury will need to offer higher interest rates, which makes government bonds an unattractive investment as rising yields implying falling prices for existing bonds. That is likely to both have negative effects on growth in the short run and make Australian Dollars less attractive in terms of interest yields. So, I'm a bit skeptical about the Australian Dollar rising strongly from here.

The US stock market is also very highly valued based on corporate earnings over the previous 10 years (Shiller's measure of stock market valuation, CAPE):

Historically, that has meant negative returns in the US market going forward. On the other hand, it is possible that something has changed and the risk premium for stocks has declined so that the stock market won't return to PE's as low as in past bear markets. It's unlikely that inflation would get as high as it did in the 1970s, which both raised the required rate of return and compressed growth profit. CAPE in Australia was 18.4 at the end of January, which is much more reasonable.

The best indicator of an oncoming recession is the yield curve. If short-run interest rates are higher than long-run interest rates, usually a recession follows. There is no sign of that at the moment in the US:

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