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Get ready for an Australian stock market boom, followed by a bubble; The risk-free rate is now negative, ensuring a destruction of wealth the longer an investor remains in cash
Topic Started: 15 Aug 2014, 05:54 PM (372 Views)
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Get ready for a stock market boom!

Roger Montgomery August 15, 2014

I have just completed my latest monthly column for Money magazine, and it got me thinking about why I think there might just be an almighty stock market boom sometime between now and 2016.

You have already heard me discuss Janet Yellen having her accelerator-foot quite firmly to the floor, and how her study of the great crash in the 1930s has made her the most dovish of doves. In other words, her concerns about raising rates too early and plunging the US back into a recession will ensure interest rates stay low for much longer than young economists – those fresh out of university – will have you believe.

Those low rates in the US should spur a continuing migration out of cash and into stocks and property, where the expected yields (but not necessarily returns) are higher.

Here in Australia, the scenario is similar:

1) The risk-free rate is now negative, ensuring a destruction of wealth the longer an investor remains in cash.

2) This corrupts standard measures of risk and makes shares and property look less risky than they really are.

3) In turn, this will spur a migration to riskier assets such as stocks and property (you are already seeing it – property prices are rising faster than incomes, and incomes are rising faster than inflation, but in the very long run property prices rise little more than inflation).

4) The migration from cash to shares will be made more pronounced by the generational avalanche who are on the cusp of retirement and desperate to secure an income better than the $39,000 per year considered to be the poverty line for a couple with two children.

5) The migration to shares will also be made more pronounced by the fact that there is a disproportionately large amount of money in cash thanks to the global financial crisis. This cash is yet to be mobilised fully. When it is, expect to see a good and proper boom, followed by a bubble, followed by – well, you know what happens after that…

Of course, there is always the chance we could be wrong. But somehow, I don’t see that happening.

Read more: http://rogermontgomery.com/get-ready-for-a-stock-market-boom/
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The ASX is always a slow starter and has been again in this cycle unlike the US and the UK. I think we will see a correction in the US market within the next year or less. Once that hits then I will seriously consider chucking some funds into shares, whether its the ASX remains to be seen.
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