My semi-regular check of the stock market recovery

Regular readers have probably been waiting for this post; wondering when I would get around to it. Well here it is.

My semi-regular complaint about the stock market recovery after the 2007 Global Financial Crisis (GFC). And as you would be aware, eight and half years after the GFC hit, the Australian share market—measured using the All Ordinaries index—is still 1,000+ point under the pre-GFC level.

So anyone who had a 'balanced' share portfolio on the Australian share market when the GFC hit is still under water by about 15 percent.

On the upside, market 'experts' are telling us that we should get back the pre-GFC peak of 6,828 by mid-2018.

But if I were you I would not put too much faith in this because a similar forecast has been made every year over the last three years and Australia's current financial status right now is not that flash.

If, per chance, you have ever wondered how the US share market has done since the GFC then you would probably be a little peeved to know it is back well above pre-GFC levels; and has been for four years.

The US Dow Jones index got back to pre-GFC level in the first quarter of 2013.

It makes the statement oft repeated by the Australian Federal government that (para-phrased) 'Australia weathered the GFC better than any other county' seem a little questionable.

Haven't seen petrol under $1.20 all month

Back at the end of last year I did a post pointing out that the days of cheap petrol were over; that you would not be seeing petrol under $1.10 again anytime soon (see that post here).

Well, based on petrol prices in Perth through January I think that I was about 10 cents out. I should have made it $1.20.

I have not seen standard ULP under $1.20 since just before Xmas. In fact I think the lowest I have seen it is around $1.28 per litre, which—for those that like to convert everything back into the ‘old money’—works out to $5.82 per gallon (for Imperial gallons; for US gallons it would be $4.84).

I recall reading in the Australian Financial Review about September of last year that petrol could be $1.40 by mid-2017. At this stage it looks like whoever wrote that article might be right on the button.

Reserve Bank Keeps Its Powder Dry

As most everybody would be aware by now—well, everyone in Australia anyway—the Reserve Bank of Australia (RBA) did not lower the cash interest rate on Tuesday.

The sticky situation that the RBA now finds itself in after dropping the cash rate three or four times a year for the last five years or so, is that they are running out of breathing room. There is now only 1.5% of room until the rate hits zero.

I think this has kind of spooked some of the analysts at the RBA because all indications are that the economic woes of the world, and particularly those of Australia, are far from over. Some financial experts are even suggesting a return to the 'good times' is 15 to 20 years away.

The Australian federal government is more in debt than any federal government of Australia has ever been before, and they don't appear to have any viable workable plan to turn this situation around within the next 1o to 15 years. In fact, at this time, the debt burden is still increasing.

On top of this the household debt in Australia is also at all time highs.

Relative household debt has tripled in the last 25 years. A huge part of this is the mortgage debt being carried by households but our willingness to buy on credit has also contributed heavily.

Depending which numbers you choose to use (they are all pretty bleak), twenty five years ago the average mortgage took 18 percent (very close to a fifth) of the average household after tax income to service—despite the much higher mortgage interest rates then that were up in the low to mid teens. At one stage the interest rate got over 17 percent.

Today the monthly mortgage repayment on the average 30 year loan of $428,000 requires $2,043 to service which is a whopping 31 percent (almost a third) of the average household after tax income—at a time when the interest rates being paid are in the vicinity of a ridiculously low 4.0 percent.

If you took the average WA mortgage of $428,000 and worked it out over 30 years at 15 percent then the repayments would be close to a very scary $5,400. Even at 10 percent you are looking at $3,750.

This is all theoretical. It appears to me that very few households have a before-tax income close to the average of just over $100,000. Obviously I don't know many average households.

The key term in all of this is 'household'. Use of the term household presumably assumes two incomes. A primary and a secondary, usually, but not always, the hubbies income combined with the wife's income. Probably with the primary income being around $66,666 and the secondary income contributing the remaining $33,334.

Anyway, enough of that rambling.

The point is that the RBA only has 1.5 percent left to play with. Actually, as I seriously doubt they ever really want to hit the big zero, I suspect they only really have 1.0 percent of room to move downwards.

So my call on this is that the RBA will apply a lot more caution in dropping the rate any further in the future, and, also, they are likely to move the rate in smaller amounts—like maybe 10 basis points at a time instead of 25.

Yep. They need to keep that little bit of remaining powder dry 'just in case'.

My semi-regular complaint about the stock market in Australia

Time to update my semi-regular ongoing side-bar check of the Australian stock market as it tries to claw its way back to pre-GFC levels. As you can see from the following graph, it still has a long way to go.

When the GFC hit Australia the All Ordinaries index was at 6.828. At the close of trading on Friday 7th of October 2016 it was sitting pretty level at 5,467—still 19.93 percent below the pre-GFC level.

On the upside, an article in the Australian last week pointed out that most people's minimum contribution compulsory rate superannuation should now have recovered back to the pre-GFC levels. Well I guess that is good news even though it has taken the better part of 8.5 years for this to happen despite regular contribution being made over that time. So, in a way, that is like 8.5 years of superannuation appreciation and contributions being lost due to the impact of the GFC.

Also, on the good news side, those in the know are pretty sure that the All Ordinaries index should get back to pre-GFC levels by mid-2018. In other words we should see the All Ordinaries hitting 6.800 points sometime around June/July 2018. However, I would point out that back in 2010 many of the experts were predicting that the stock market would recover from the GFC within five years. However, as you can see, 6.5 years on from 2010 the index is still a long way from having 'recovered'. This is being blamed on the unforeseen ending of the 30 year resources boom that came to an abrupt end after slightly more than ten years. But it does make you wonder what other unexpected events the experts might not have adjusted for.

 

Wanna by a house? Good luck with that!

The following graph, not done by me, illustrates a point I have tried to make in a number of previous posts.

What this chart indicates is that in order to purchase the 'average' priced house these days you need to be earning 130 percent of the average income; and this rate is going up rather sharply.

The average national income as at May 2016 was $1,160 per week which would be around $60,000 per year. So, based on Callam's chart then, an individual would need to be earning $78,000 per year ($1,500 per week) in order to fund the purchase of the 'average' priced house. And this would leave them with absolutely nothing to live on, pay regular out goings (rates, regos, power, water, gas, insurance, etc.), or do anything else.

Yeah. I know. There are properties that cost less than the 'average', and typically couples purchase houses so there are two incomes to work with. But even so, the stark reality is that the cost of the 'average' house is pretty much out of range of any single income couple and that assumes the person who is working is at least on the average income, or better.

I would also point out that lots of people in the workforce are being asked to take income cuts these days, and the statistics tell us that starting income packages for new starters has not increased now for over three years. In some professions the starting packages for new starter has moved downwards.

Also, it needs to be highlighted, that this situation exists at a time when the interest rate is at an all time low; a low never seen before in Australia. A situation the just about all economists agree cannot last much longer. So what happens when the cash rate starts to make its inevitable climb back up to a norm of something more like 5 or 6 percent and the bank loan rates will then be at 8 or 9 percent (i.e., about 3 percent above the cash rate so the banks can make some useful profit on their borrowings).

My personal opinion is that the government should assist young couples much more in obtaining the roof over their heads.

The devil is in the details, but I think engaged or married couples embarking on the wild adventure of life together who have a combined income under $100,000 should be assisted to the degree of $100,000 and have stamp duty waived. If they separate or divorce within 10 years then they would have to pay back a tenth for each year short of ten years. Hence, if they separated or divorced after five years in the house then they have to pay back $50,000.