Why we’re investing in the age of distortion

As investors we were fully warned when the pandemic crisis broke that investing would be deeply ­affected: artificially suppressed interest rates would create a range of unlikely scenarios sooner or later.

Here we are six months later and the unreal world of zero rates is now flanked by the equally unreal world of an economy where massive government stimulus and support has created a string of counterintuitive outcomes we can now measure.

The last time the markets went this weird was the period in post-oil shock in the 1970s, ultimately dubbed The Age of Uncertainty by economist John Kenneth Galbraith in 1977.

You may think you have a handle on the exceptional conditions out there for active investors, but sometimes we see things more clearly when they are laid out for us.

You might reasonably call this list the seven signs we are now investing in The Age of Distortion.

Consider the following:

Average weekly wages are rising

We have a 7 per cent unemployment rate and a notoriously difficult climate for achieving pay increases, but we are seeing a strong uptick in the Average Weekly Ordinary Time Earnings number. The AWOTE is the key number for wage inflation and what’s happening is that the ­majority of job losses are low-income positions. Consequently, the AWOTE numbers are now pumped up by the JobKeeper program and increasingly based on the residual jobs that belong to higher earners.

In fact, the AWOTE has now increased sufficiently to trigger a likely rise in the cap placed on super contributions from next July (from $25,000 to $27,500 pre-tax, and from $100,000 to $110,000 post-tax) since the caps are indexed to wage inflation.

Mortgage stress has moved to near record lows

If household debt is pressing on the home loan borrowers, the evidence is hard to find just yet. A Roy Morgan survey this week reported the number of mortgage holders at risk of “mortgage stress” was back to near 20 per cent — it was 22 per cent before the crisis — after hitting 29 per cent at the peak of the crisis in April Why? Up to one in 10 mortgages have been deferred by the banks.

Net tangible assets hardly matter any more

The textbooks will tell you net tangible assets (NTA) is what it’s all about: find a company trading at a discount to NTA and it may be a bargain. This was true until the arrival of the “capital-light” technology and finance companies that now dominate. A survey from the Carlyle Group in the US where capital-light Google and Facebook rule the roost, has found that between 1995 and 2018 intangible assets rose from 68 per cent to 84 per cent of enterprise value of the S&P 500.

The creditworthiness of Australians is getting better

Surely not? What about the business closures and layoffs? It just so happens that if you introduce a massive income support plan (JobKeeper, JobSeeker, JobMaker), the bulk of the assistance goes to low-income individuals. In turn, low-income individuals have the worst credit records. In the last six months, the payday lenders have been sidelined and the average credit score of Australians has lifted from 680 to more than 700.

House prices are going up

If unemployment rises, house prices fall — that’s the received wisdom. Yet according to CoreLogic home prices lifted in September in every metropolitan capital except Sydney and Melbourne. Moreover, earlier this week the PEXA property group — in preparation for its sharemarket float — offered private numbers showing that Sydney median settlement values actually inched up by 1 per cent over September. On that basis, it only leaves Melbourne to change course.

The most unlikely people are backing gold

In a seminar earlier this week, Westpac chief economist Bill Evans was asked what was the best defence against inflation. He nominated gold, the metal economist John Maynard Keynes once called “the barbarous relic”. Gold does not pay income, it can fall dramatically if trends change and there is no safety net compared to the government guarantee on cash. Yet across the investment spectrum gold is finding new support. (See Doug Turek of Professional Wealth on this page). With money printing in full swing, gold supporters keep coming out of the woodwork. You have to ask, can Warren Buffett, Ray Dalio, Michael Hintze et al be wrong?

Loss-maker Afterpay just hit $100 a share

The “buy now, pay later” sensation signed a deal this week with Westpac and the share price crossed the $100 mark. Earlier this year Afterpay fell to $8. The company does not make a profit, so price-earnings ratios are impossible here. The company has built an impressive business worldwide, but it’s an inflated share price that gets attention. What is it worth? UBS bravely reiterated its valuation of $28.25 earlier this week. On any measure, $100 is an outrageous valuation — capturing everything you need to know just now about the “growth at all costs” mantra (see Roger Montgomery’s column on this page).

Nobody ever said investing was easy, but there were at least navigation lights — the cost of capital, the risk-free ratio, net tangible asset values, etc. If there were mass job losses, credit scores went backwards and mortgage stress got worse. If a company continued to make losses it did not continue to gain on the sharemarket.

Well, goodbye to all that and say hello to The Age of Distortion.