Positioning for the stock market bubble

Now that the Reserve Bank of Australia (RBA) has successfully created a bubble in the residential housing market, they seem hell bent on creating a bubble in the equities market as well.

With vast amounts of cash still sitting in bank accounts earning returns below the rate of inflation (let’s face it - virtually nothing) and even more pain on this front to come, we are now seeing material amounts of these funds leaving banks and entering the stock market because people cannot maintain their standard of living when a bank will only pay 2.8% on a term deposit.

Cheered on by the RBA, the market is potentially poised to go much higher (before the inevitable pull-back or crash). However, this may not happen until the Australian market is above its peak of 6,800 or so which it achieved way back in late 2007.

When a 10 year Australian Government Bond only yields about 2.7% (equivalent to a price-earnings ratio of 37 times), the stock market should be much higher than it is and if I was a betting man (and I am), I would wager that it’s going higher.

Now, don’t get me wrong, the stock market is not cheap based on fundamentals, it’s cheap as a result of artificially low interest rates which lead to artificial stock market booms (the US has been a textbook example of this over recent years).

At this point of the cycle, I want some fairly meaningful exposure to the Australian stock market, but I also want some level of hedging in place. I can get this exposure through certain ETFs and I have been increasing my exposure on this front.

I sincerely hope that the RBA’s actions don’t ultimately destabilise the entire Australian banking system (and that’s not out of the question, just ask Mr Greenspan about it). The RBA is taking us into dangerous uncharted waters and hoping everything will be ok. As I’ve stated before in these pages, I simply don’t have any confidence in them. I believe their policies are insane and will ultimately reduce the living standards of the average Australian.

But at this point, any possible adverse repercussions from the RBA’s policy settings are some way off. So, I hope to enjoy a bit of a ride in the equities market and then hope I’m prescient enough to exit before the clock strikes midnight and Glenn Stevens turns all those remaining at the party into turds. If I’m not smart enough to exit in time, my short exposures will soften the blow of any crash.