Money printers go brrr!

Jobless claims reach 26 million

After the initial guillotine strike US stocks have still been levitating at enormously high valuations, after accounting for the inevitable drop in earnings.

And this is in spite of a locked in recession, and a previously unfathomable 26 million folks filing for unemployment across only the past five weeks. 

To put that in context, it took the powerhouse US economy fully 10 years to create 22 million new jobs on a net basis, and just five weeks for 26 million jobs to be wiped out.

We've never seen anything like this before, so it's difficult to say what might happen next. 

The word 'unprecedented' is being bandied around a lot right now, but this is...well...a unique situation.

On to stock markets.

Yes, markets are well down down from the highs, but with earnings getting crushed forward P/E ratios are now trading at 19.1x, which is even higher than the enormously expensive valuations we saw around the turn of the year.

At first blush is mind-boggling given the wrecking ball that has blasted through the US economy. 

In fact, the recent rebound has been the fastest since the Great Depression, following on from the fastest -34 per cent crash on record. 

The forward P/E is now hovering waaay above the 5- and 10-year average, despite the deeply recessionary outlook. 

Source: Factset

Factset reported that year-on-year earnings were already down over four of the five past quarters -even before the Coronavirus recession - which is an interesting insight into how irrational stock prices were becoming.

As Shiller has pointed out previously, it's not the earnings which are much changed much through the market cycle, but rather the increasingly speculative price that people are willing to pay for those earnings. 

Now consider that if earnings were to fall by say, a quarter, which seems likely, then the P/E may in fact be above 25x, which is alarming (refer back to the above Factset chart for some context). 

Analyst consensus is for year-on-year earnings to be down by -32 per cent in the second quarter of 2020. 

Brrr!

Now it's often said that markets are forward looking, so perhaps investors are looking a looong way across the void to such a time when earnings can rebound again. 

Maybe. 

But realistically there can only be one explanation for these outlandishly high stock market valuations, and that's the US Federal Reserve has been expanding its balance sheet at an absolutely furious pace. 

You only need to look at markets which the Fed can't touch (cf. the recent implosion in oil prices) to see the true state of play. 

The question thus becomes: can the Fed overwhelm the natural decline in stock markets by creating more and more money out of thin air?

It's not a bet I would take on - in the last recession the PE ratio fell to 10 - but it will be an interesting one to watch. 

Why buy & hold doesn't work in expensive markets (Podcast, Episode 2)

Why buy and hold doesn't always work

You can tune in to listen to Episode 2 of our podcast series at Apple iTunes here (or by clicking on the image below): 

Alternatively, you can tune in to listen at Spotify, Stitcher, or Soundcloud. 

Episode 3 of the series will be released on Monday, where we discuss what you can invest in, and when.

And thereafter, one episode will be released each week on the Monday. 

In the meantime, you can download a free chapter from our new book here. 

Weekend reads

Must see articles

This week at Property Update, a look at when Australia will reopen and more.

See here for more, or click on the image below:

You can subscribe for the free Yardney podcast here.

Domain Q1 Aussie housing

Domain housing report

There's been very little to discuss in terms of housing markets for a few weeks, with no open homes allowed and just a handful of online auctions.

Domain reported its Q1 median prices this week for houses:

And for units:

Property Observer ran through the numbers and outlook here, including the Domain forecasts for 2020 and 2021. 

Meanwhile Chris Joye reported at the AFR that Sydney and Brisbane prices have continued to rise through March and April, and that there will be no sharp downturn. 

Prices will either be flat or drop by 5 per cent at most, forecasts Joye, before the up-cycle resumes. 

Listing volumes and transactions have been so thin that's it hard to get a read on things. 

There still seem to be plenty of buyers around for apartments in Sydney - just look at some of the prices achieved through March and April - but there's been more caution for homes at the $2 million plus level, and the same is reportedly happening in Melbourne.

This is a very good time to do your own research on what's selling in your local market, with all sorts of different commentators pushing various barrows as usual. 

Podcast episode out next week

Next episode

A sneak preview of our next podcast episode, where we'll discuss the risk hierarchy:

You can listen to Episode 1 of the Low Rates High Returns podcast on iTunes, Spotify, Stitcher, or Soundcloud. 

As a recap, here's some of what we discussed in Episode 1:

You can pre-order a copy of our new book from Dymocks here (things have been a understandably a little slower than planned, but we're getting there!).

Exports surge 29pc in March

Exports rebound

Hello...from the ABS:

Source: ABS

Export earnings soared 29 per cent in original terms following the slump through January and February, to be 16 per cent higher than a year earlier. 

The surge was due to coal, gas, petroleum, and especially a big rip in the value of iron ore exports to China. 

Imports also jumped 10 per cent, mainly due to a boost in demand for computers, mobile phones, and electronic goods, as Aussies lurched towards working from home in March. 

Huge job losses in late March

A tiny slither of hope for Q1 GDP, then.

But of course this pales into insignificance next to the job losses over recent weeks.

The ABS reported that employment fell by an estimated 6 per cent between 14 March and 4 April, mainly driven by major job losses in Victoria and Tasmania, and felt most keenly in the under 20s age cohort. 

Noted the ABS:

'The largest impact of net job losses, in percentage terms, was for people aged under 20, for whom jobs decreased by 9.9%.

Tasmania and Victoria had the largest decreases in jobs, down by 7.3% and 6.8%.

The Accommodation and food services industry saw the largest reduction in jobs (decreasing by 25.6%), followed by the Arts and recreation services industry (decreasing by 18.7%).'

The result has been an unprecedented surge in calls to Lifeline and other support groups.

Mercifully Australia is on course another extremely low number of new cases of COVID-19 today, with only 8 new cases discovered from 14,122 tests, for an increase of +0.1 per cent.

99.94 per cent of tests came back negative, for a Bradmanesque result.

There were a couple of further cases related to Newmarch in New South Wales, with one nurse and a paramedic also testing positive, but practically nothing else across the rest of the country.

Hearteningly, Tasmania recorded zero new cases for the first time since March 30.

Australia has smashed - not flattened - the curve.

Employment already fell by 6 per cent over the 3 weeks to April 4, and that was 19 days ago, with huge falls in services and manufacturing gauge activity. 

PM Morrison reported that Australia has minimized the spread of COVID-19 much sooner than expected, so the question thus becomes 'how and when do we re-open?'.

Houdini act

Blessed be the hoarders

There was an unprecedented +8.2 per cent spike in the preliminary retail turnover figures for March (charted by data king James Foster below), as Australians rushed to hoard toilet and tissue paper, rice, pasta, home office goods (Officeworks, IKEA), and a range of other supermarket produce and liquor retail. 

This led me to pose the following conundrum during an idle moment: could iron ore exports see Australia post a flat result for GDP in the first quarter (thus dodging the technical definition of a recession in the process)?

It was an interesting technical discussion to which the answer is a mathematically possible but highly likely 'no'.

In any case this is a moot point given that the national accounts for the second quarter are sure to be an abomination, with hundreds of thousands of Aussies not working this month. 

A beautiful set of numbers

In brighter news, the government has apparently pulled off a masterstroke in terms of containing the Australian spread of COVID-19, with an increase of just seven to confirmed cases today, from 12,599 tests over the past 24 hours. 

There were four further cases as part of the north-west Tasmania outbreak, but almost nothing else today. 

Many of the states and territories once again reported a nil increase in cases.

There were another 237 recoveries, and ICU cases fell yet again to 47, as the focus turns now shifts towards how and when Australia can ease its restrictions.

It's unlikely that Australia will pull off the Houdini act of avoiding a technical recession this time around, but the virus figures are so low that a decent rebound in Q3 is a possibility, even if the risk of a second wave of infections remains at large. 

Free chapter download

Free chapter download

You can download a free chapter of our new book here (or click on the image below):

Episode 1 of our new Low Rates High Returns podcast series is now also live on Apple iTunes here (thanks for all the feedback - we've been blown away by it so far!).