Sep 14, 2021
Jack Powell

February Market Update

It is very likely that US share markets are now in “bubble” territory. Bubble means shares are trading at historically expensive valuations. At present, many longer-term valuation measures show that S&P500 shares are trading at valuations higher than levels reached in 2000.

If it looks like a bubble...

It is very likely that US share markets are now in “bubble” territory. Bubble means shares are trading at historically expensive valuations. At present, many longer-term valuation measures show that S&P500 shares are trading at valuations higher than levels reached in 2000. The record high valuations in 2000 were the precursor to the “Tech Wreck” which saw the S&P500 fall by 44.70% over the next 2.1 years.

S&P500 valuations stretched
Source: Bloomberg, Yale/Robert Shiller, John Hussmann, John Mauldin

It is easy to point to the markets and conclude we are in a bubble. The next question is: how big will this bubble get, and will it pop? As the famous economist John Maynard Keynes once said, “the market can remain irrational longer than you can remain solvent.”

We are anticipating increased volatility in the US sharemarket in 2021, but are also cognisant of several possible reasons the markets will push higher:

There is No Alternative (TINA).

The bond and cash markets are offering investors negative returns. As shown below, there is now almost US$20 trillion worth of global bonds trading at interest rates below 0%.

US$19 trill in negative yielding bonds

Cash is flowing into share markets at record levels.

At the end of 2020, we saw the largest 2-month inflow of cash into global shares in history. There is also still a large percentage of cash and bonds held in institutional portfolios. We can also expect some of this to make its way into shares as the managers hunt higher yielding investments.

US$200 bill flowed into global shares over 2-mth Large sum still held in cash (MM) and bonds
Source: EPFR, Haver, Deutsche Bank, The Daily Shot

Source: EPFR, Haver, Deutsche Bank, The Daily Shot

Purchasing Manager Index (PMI) moving higher.

The global PMI is set to test record highs, with consumers hopefully coming out of lockdowns as vaccinations continue into late-2021. Historically, fund flows into shares are closely correlated with global PMI.

Global PMI vs. Global share flows US Fed Dot-chart
Source: Deutsche Bank, The Daily Shot

Source: Bloomberg Finance, The Daily Shot

Central Banks expected to leave short term interest rates low.

The US Federal Reserve has given strong indications to the market that their primary focus is reducing the unemployment rate in the US, and that they will look through short term spikes in inflation to ensure they keep the economy growing.

One of the committee members has also suggested that if inflation were to move above 3% p.a. that they would want to see it remain at this level for a period of 12-months before they would consider moving interest rates to slow the inflation down. They could also act to devalue the US currency which would have a similar impact in slowing growth without increasing borrowing costs.

Lastly, the Fed “dot chart”, which is a chart showing where each Federal Reserve Committee member is forecasting future interest rates, suggests that we will not see short term interest rates move higher until 2023 at the earliest.

Only a fool would try to forecast when a share market bubble will pop, but as valuations climb higher, the chance of further upside gains declines, and the chance of higher downside losses increases.

The rise of the empowered retail investor

Over the past year, we have seen a large increase in the number of retail traders. Trading platforms such as Robinhood have allowed micro investors into a market previously only accessible to larger investors, and previously only via brokerage and account fees. Robinhood offers access to global share markets to retail investors for free. The platform’s success is apparent in the growth of its accounts, which numbered 340,000 when it first opened in 2014. The number of accounts has since grown to over 13 million as at the end of 2020.

This rise in retail investors, who are meeting in global chat rooms to discuss the next best investment idea, has led to a massive increase in their influence in the markets. As at mid-January, “small traders” (10 or less contracts) were in excess of 12 million, versus “large traders” at 5 million. According to data from a recent Bloomberg study, “small traders” now make up over 9% of all contracts on the New York Stock Exchange, up from just under 1% in 2016.

No. of options US share market – millions US share account margin trading
Source: Deutsche Bank Research, The Daily Shot
Source: Finra,, The Daily Shot

Alongside this rise in retail investors, we have seen a large increase in traders using margin trading accounts which allows investors to buy shares with borrowed funds. US margin debt has increased from around $475 million in March 2020 to just under US$800 billion at the start of 2021. So not only are retail investors pouring their own funds into the share market, but they are also borrowing heavily to do it.

On the 7th of Jan 2021, Elon Musk tweeted “use Signal“. He was referring to a messaging app called Signal. The retail chat rooms lit up with some investors finally deciding Elon must be referring to Signal Advance, a company that sells signal detection units. As shown below, as retail investors flooded into this stock, the share price went vertical rising 1,100% before investors finally figured out it was the wrong company. As they started selling, the poor investors that had bought at the top would have lost 84% of their capital, and if they used a margin account likely lost 100%+ of their capital. Retail investors continue to take these somewhat questionable risks using the battle cry YOLO (you only live once) in chat rooms to justify their behaviour. You may only live once, but debt stays with you forever.

The risks of trading on a “tip”
Source:, PWA

Global debt across all sectors (public and private) increased by just under US$20 trillion in 2020, with global Debt to GDP ratio rising from 330% in Jan 2020 to over 365% at the end of 2020. As an interesting side note, Australia was one of very few countries that saw a reduction in their household debt through 2020, reducing by about 4%.

Change in Debt to GDP (end of Q4 2019 – end of Q3 2020)
Source:, IIG, Deutsche Bank, World Economic Forum

As shown in the table above, Canada had the largest increase across all measures with the level of debt in that country moving higher by 80% over the first three quarters of 2020. New Zealand’s total debt increased by c.30% over the same period, with NZ having the second largest increase in household debt of c.15%.

While the Debt to GDP increase in NZ is large as a percentage, the actual sum of government bonds being purchased by the Reserve Bank of New Zealand (c.$35 billion) equates to only a small blip when compared in dollars to the sum being held by other central banks.

G10 Central Bank government bond holdings
Source: Nordea & Macrobond, The Daily Shot

2021 global growth forecast

As we move into 2021, governments and central banks of the world continue to support the recovery with both quantitative easing (QE) and fiscal stimulus (benefits and infrastructure spending). The level of support is at unprecedented levels. The combined stimulus that has been pumped into the US economy over the last 8-months is greater than the total stimulus given in the last 5 US recessions combined.

Another example is from 2008 (when the US Federal Reserve first started QE) to 2014, when the US Fed placed a total of $3.66 trillion into the markets. In the first half of 2020, the Fed pumped in an incredible $4.9 trillion in only 6-months.

It is fair to say that global economies are getting unprecedented levels of support. How this plays out over the coming 5-years is going to be interesting. However, with this level of support and the option to extend or continue it, we can certainly expect economies to recover.

The International Monetary Fund (IMF) has produced a GDP forecast for 2021, which supports the market view that we are unlikely to see a double dip recession from the US or China. Indeed, Chinese GDP is forecast to grow at an impressive 10.70% in the 2021 calendar year.

IMF country GDP forecast – ending 2021
Source: IMF World Economic Outlook Jan 2021, The Daily Shot

The main risk to this recovery is likely to be central banks’ ability to continue to provide stimulus if inflation does surprise to the upside in 2021. At this time, most economists are forecasting a spike in inflation as economies open, but this is expected to be a short-term blip and is forecast to decline again into the start of 2022.

Given the asset bubble across shares, bonds, commercial property and yes even residential property has been wholly driven by the central banks’ stimulus, an unexpected end to this due to out-of-control inflation would likely be very bad for most asset prices across the world.

NZ Property

You cannot go to a BBQ or catch up over a beer/wine without property prices coming into the discussion. There is a strong belief in New Zealand that investing into houses is…..well “safe as houses”! Given the fanatical belief that New Zealanders have in this sector, it is unsurprising to see anecdotal evidence of cash moving into this sector due to the banks record low interest rates.

There are several reasons stated for property prices to be where they are today. Some of these are:

  • A shortage in housing vs. the higher demand.
  • Ex-pat Kiwis returning home with profits from their offshore work.
  • Favourable tax treatment for property investors who borrow (leverage) large sums to purchase residential property.
  • Falling interest rates (lower mortgage rates).

All these reasons have in some way driven house prices higher, but one can be shown to have had the greatest impact, and this is falling interest rates.

Below is a chart from Westpac’s economists showing house price and rent inflation over the past 19-years. This shows that house prices are up over 3.6 times (c.7% p.a.) over this period whereas rents have only increased by about 1.8 times (c.3% p.a.).

This supports the argument that current house price increases are NOT being driven by a shortage in available properties, as if this were the case then we could also expect rents to be increasing by a similar sum. Rents inability to keep pace with house prices has also led to residential rental yields being at record low levels with central Auckland’s properties averaging 3.8% gross p.a. as of October 2020, according to data from REINZ.

NZ House price & rent inflation NZ mortgage rates and house price inflation

The main driver for house prices in NZ, and indeed around the world, has been the rapid decline in interest rates providing an ability to borrow greater and greater sums.

The chart above from Westpac’s economics team shows the direct correlation between average mortgage rates (average of 2 yr. and 5 yr. mortgage rates) and house price inflation. As shown, any drop in interest rates has a corresponding spike in house prices in the following quarter. The drop in borrowing costs in NZ has been the major driver of property markets over the past 20-years.

Given the recent continued fall in interest rates in NZ on the back of unprecedented quantitative easing from the RBNZ, economists are now forecasting low double digit increases in house prices in 2021. Assuming interest rates stay at these levels, we can also expect further increase in house prices in 2022. Westpac is currently forecasting house prices finally flattening in 2024, on the assumption that interest rates should be rising by then.

NZ House price forecast


Warren Buffet famously said, “Be fearful when others are greedy and greedy when others are fearful.” We are certainly in a “greed” period in markets with asset prices in the US testing new high valuations, but as discussed above, bubbles can last a lot longer than a sensible investor would think possible, so we continue to proceed with caution.

Share markets have started off the year positively, and are looking through short-term noise, focusing on a successful roll out of the vaccine and continued stimulus from governments and central banks. Share markets have already priced in an economic recovery, so any news to the downside could see markets reprice lower in 2021.

While it could be argued the sharemarket is ‘expensive’, low interest rates are leading to TINA (There Is No Alternative) supporting continued funds flowing into shares in a hunt for yield. This could well push share markets higher in 2021.

There are still some clouds on the horizon, especially in longer dated bonds as yield curves steepen in anticipation of rising inflation over the next 3-5 years.

There are currently several known unknowns in the market, and obviously some unknown unknowns that will no doubt eventuate, but we start this year more positive around economic recoveries and the sharemarket than we were middle of 2020.

The progression of vaccinations will likely be directly correlated to each country’s economic growth in 2021. Barring some unforeseen issue, we expect the world to start to return to some level of normalcy into the end of the year and early 2022. However, we will keep one eye on the inflation numbers as central banks continued support is key to asset prices and the speed of this “V-shaped recovery”.

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