Get set for the big money flood brewing now

Two things I’m thinking about today…

1) Labradoodles: they’re just so darn cute!

I’m patting one, watching my daughter play in the park after school yesterday. The dog isn’t mine. It belongs to a woman watching her son run around too.

We get to chatting.

I discover the lady works at a retail store for active wear firm Lorna Jane.

She remarks how much each client seems to be spending. (The dog’s name is Sonny, too, and sleeps a lot apparently).

“All this stuff about a consumer recession,” she told me. “I’m not seeing it!”

That’s interesting.

We left off yesterday with the idea that Aussie consumer, battered and bloodied from the cost of living, is now on the upswing.

So is Scentre Group ($SCG). It’s up 16% over the last year. Not bad. It’s more than the ASX/200. Double, in fact.

SCG own the Westfield shopping centres all over the country. They have 99% occupancy and rents are rising. That doesn’t scream recession or cost of living crisis to me.

The market is telling us, too, that interest rates have peaked and are heading down.

Money is going to wash over residential and commercial real estate. How can we know?

Easy. The brokers are busy. Check out this quote from The Australian Financial Review…

“At Aussie Home Loans, one of the nation’s largest networks of mortgage brokers, pre-approvals are up 30 per cent since November 2024, with strong enquiries from April to May. Customers using the company’s borrowing power tools are also up 65 per cent since the same period.”

Approvals lead to mortgages. More debt means bigger buying power.

That will push up residential real estate. Higher house prices should lead to higher consumer confidence…and lead to more spending, at least in theory.

And what’s this?

The Australian reports that something called the “leverage ratio” is rising on the ASX. This is the amount of debt that ASX companies are carrying.

Here’s the news: it’s going up.

Don’t get me wrong. I’m not suggesting it’s US subprime going on out there.

The article says…

“Across the S&P/ASX 200 the average net debt to earnings ratio (or leverage ratio) is starting to drift up to 3.52 times from the low of 2.58 times at the end of 2022. Shortly before the Covid pandemic, leverage was tracking between 6 to 7 times.”

What does this suggest? It seems to me companies are moving to expand. That’s a good thing!

That might mean borrowing to finance an acquisition. It might mean hiring more people or building new products.

I see it as a positive for the market. And, as you can see from the quote, there’s scope for it to go higher too.

The implication, at least to me, is that both Aussie consumer and corporate debt are going higher at the same time.

The market is rising to reflect this higher spending coming out. It’s BULLISH.

You see…

2) Two of my colleagues, Greg Canavan and Nick Hubble, both have worries on their mind.

Greg worries about valuations. Nick worries about Japan’s perilous debt-to-GDP ratio, and what it might mean for global markets.

I’ll address Greg’s concern today.

An article he cites says that the P/E for the ASX was 14.6x two years ago and is “now trading on an eye-watering forward of 18.3x, and [the ASX] sits just under 3 per cent away from its February record.”

That sounds like a worry. But not to me.

The price to earnings ratio, alone, has no predictive value.

It’s a snapshot of the market outlook on earnings and beliefs floating around now, and no more than that.

Maybe it goes to 27, 30, 40 …or 11 or 9.

Your guess is as good as mine, or anyone else’s, where it is in a year. In fact, let’s check back in May 2026. Hopefully, you’ll still be reading!

I also object to the hyperbolic use of the term “eye watering”.

Markets in the past have traded on much higher P/Es than 18x. Sure, it might be higher than the long term average, but big deal.

Interest rates are expected to fall. It makes sense for the market to trade higher as these cuts get factored it.

We know the market is always pricing in the potential of the future as part of its premium.

You and I may not see better days ahead. But clearly the market does, for some reason we may yet not see.

I’ve argued companies are expanding. AI might revolutionise profits. Or maybe it’s robots and productivity. Maybe it’s cheap Chinese goods causing disinflation. Or maybe some combination of all of them.

It could all change tomorrow too. The market is always reassessing, repricing, rethinking old assumptions.

Using the P/E of the market is useless, in my experience, to position your portfolio.

Rising debt, however, is something we can see clearly.

Consumers and companies are borrowing more. That’s a fact. I’m not saying it can last forever. But I’m running with it for now.

Now…the more important question is…

…who is on the receiving end of this new purchasing power?

More to come.

Best,

Callum Newman,

Fat Tail Daily