Same but different, different but the same

Earlier this year I wrote a story titled "The Bear Market That Changes The World". In it, I predicted further unprecedented central bank market support measures and interventions, as well as governments joining in on the act through accumulating a heavy load of additional debt.

As we all know today, those forecasts have proven accurate and as the story title suggests, it will be incredibly difficult, if not nigh impossible, to wind back the enormous mountain of debt that has been built to fight off the economic consequences from this year's global pandemic.

And this story is not over yet. Global debt is still rising, and it will continue rising as governments cannot escape the cold reality that businesses that stop operating no longer pay tax, no longer keep people in jobs and they certainly won't be making any investments needed to lift the economic recovery onto a sustainable trajectory.

Last week the Institute of International Finance reported global debt has surged by over US$15trn since 2019, reaching a new all-time record high of US$272trn-plus during the September quarter of 2020, projected to grow further to US$277trn by year-end, equal to 365% of global GDP.

Anyone who still thinks governments will finally come up with a credible path towards reducing this historic mountain of public and private debt is seriously deluding him/herself. When you're this deep down into the rabbit hole, there simply is no way back. The Rubicon has now well and truly been crossed.

How exactly this scenario plays out over the decades ahead, I don't think anyone genuinely knows, but I can confidently make one prediction: we all have to get used to the fact that debt, in its broadest concept possible, is now an integral and crucial part of governments, businesses and households for the times that lay ahead.

And the more time passes by, the more the world is changing. In a sense, that title I chose in March is misleading. This year's pandemic and societal lockdowns have not changed the world per se; they have made sure that running trends, such as accumulating debt and extreme central bank policies, have now become irreversible.

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There are many more ways in which the world is changing, and has been post-GFC, including the inner dynamics of financial markets. Negative real interest rates and government bond yields are forcing investors big and small higher up the risk ladder while the rise of passive investing, predominantly through Exchange Traded Funds, or ETFs, is equally unstoppable.

It's not easy to establish by how much both phenomena have impacted on prices and relative valuations for financial assets, but the impact itself is undeniable. Consider, for example, the market for global government bonds has traditionally been significantly larger than the size of global equities, but that gap between the two asset classes has been shrinking rapidly in recent years.

At the current pace, it is not inconceivable most of us will live through the moment that equities replace the once all-mighty bond market as the world's number one destination for superannuation and other investment funds. Will that shake things up a little? You bet it will!

Even in pre-GFC days, financial markets have always been influenced by the number and types of participants. 2020 has introduced a fresh group of share market enthusiasts: twenty- and thirty-somethings who not only helped create the fastest bear market recovery on record post-March, but who are equally contributing to the rise and rise of so-called "story-stocks".

Think Nio, China's equivalent of Tesla in the US, or, closer to home, Afterpay ((APT)).

It is not possible to determine who or what exactly influenced what and when, or how exactly. Such data are simply not available, let alone the context and insights necessary to obtain an accurate insight, but those expert voices who keep a firm eye on global liquidity might be looking into the right direction.

Investors need not look any further than recent price action in crypto currency Bitcoin which seemed to be bobbing along between US$9000 and US$12000 after having sold off in line with global equities in February and March. Since the beginning of October the price has -quite literally- exploded to the upside, by now having surged past US$18000. At the start of 2020, Bitcoin was languishing below US$8000 and only true believers seemed to still be interested.

Given its popularity among younger generations, Bitcoin's stellar come-back this year can be interpreted as the clearest sign those younger enthusiasts are making their mark. It can also be seen as the ultimate indicator for excess liquidity inside the global financial system.

Viewed from the latter's perspective, this month's stellar rise for Bitcoin bodes well for the Australian share market, and for risk assets in general. As the old adage goes: money first finds its way into financial assets before it is spent in the day-to-day economy, making the recovery happen that has been anticipated and priced-in first.

And Bitcoin, those eagle-eyed experts will assure all of us, has been preceding the next upswing for global equities on more than one occasion since its inception in 2008.

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It may not necessarily be obvious to all and sundry, but general investor sentiment has made a dramatic turn in the past few weeks.

Having kept a finger on the pulse of the Sydney property markets myself, I have witnessed the change in general dynamics whereby, at first, everyone seemed convinced property prices looked vulnerable and destined for weaker prices in 2021, thus only high quality properties were finding willing buyers at reasonable prices.

Post the latest RBA rate cut, and the (unexpected) subsequent follow-through in banks' owner occupier mortgage rates, those hesitant tyre-kickers are now driven by FOMO. Properties that couldn't attract a decent offer only weeks ago, are now flying off the shelves at prices $100k-$200k above reserve, with multiple candidate buyers bidding against each other.

All of a sudden the buzzword in Sydney is: limited stock available.

In similar vein, two-three months ago the big debate among investors seemed to have returned to how "expensive" equity markets looked in light of historical comparisons and the many risks and uncertainties ahead. That too has quickly shifted into a "more risk is good"-type of mindset.

Now, major international asset managers at the likes of Morgan Stanley, Goldman Sachs and others, are toying with the possibility of double-digit percentage gains for equities next year, on top of a firm rally into year-end. Value-stocks are priced too cheaply and most commodities are facing deficits as economic growth is expected to recover strongly after this year's steep falls.

Bitcoin's sharp resurgence is simply the most visible indicator of this sudden switch in general sentiment. The ruling narrative is that todays newfound popularity follows investors realising central bankers and governments have no other viable option than to continue to debase their fiat currencies.

It's the same narrative that can be heard among true blue gold bulls, but thus far this late in 2020 it is not benefiting the price of gold bullion. Rising US bond yields are most likely responsible for the latter. It also means excess liquidity, not that popular narrative, might well be the primary driver for Bitcoin.

Caveat emptor, as per always, but Bitcoin's rally might bode well for equities in the weeks ahead.

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Fittingly, the latest monthly global fund manager survey by Bank of America has been labeled the most bullish survey of the year with cash levels dropping as money is flowing into equities and with growth forecasts rising fast on the back of positive news flow about vaccine candidates.

Overall, observe market strategists at BofA Securities, cash levels have now returned to below pre-covid level; 4.1% versus 4.2% in January while global growth and profit optimism is at a 20-year high. "Early stage" and "steepening yield curve" have become the two most popular expressions used.

Emerging Markets are back on the agenda. And so are energy producers.

Taking note of the general spike in market optimism, BofA Securities market strategists are keeping their attention focused on signs the last bull has put his money in the market. Markets are approaching the point BofA strategists call "Full Bull" mode. Their advice is investors should start preparing to take money off the table.

Market moves are as much about general sentiment as they are about underlying fundamentals.

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Apart from the prospect of having at least one vaccine to beat the virus in 2021, growing investor optimism is carried by company updates beating market expectations and rising forecasts for the two years ahead.

But that's not the full story, not by a long shot.

Central banks are still keeping short-term bond yields pinned close to the zero yield level, while also guaranteeing sufficient liquidity to keep the economic recovery alive and on track, while governments continue to provide further stimulus and support. Inflation is low, though bond yields at the higher end (longer-dated) are on the rise.

The matter of inflation or not is guaranteed to remain the subject of lively debate for many years to come. Arguments on both sides of the Grand Disagreement are equally persuasive and valid. But as long as inflation remains modest, and economic growth and corporate profits continue to improve against a background of ongoing stimulus and excess liquidity, it is likely equities might be enjoying the best of all worlds in 2021.

Further fueling bullish forecasts is the realisation many a consumer has been adding additional cash to savings in 2020. What if this money is being spent next year?

While some might still offer the counter-argument that, when measured on simple Price-Earnings (PE) multiples, equity markets have seldom looked as "expensive" as today, the key offsetting argument is that, on a relative comparison between bond yields and dividend yields on share markets, equities do not look over-priced at all.

And that, as they say, is the crucial factor when investing in the share market in 2020 and beyond. You have to accept the world is changing, and keeps on changing, and this also affects how assets like equities are being valued vis-a-vis government bonds and other (yielding) assets.

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