After we forecast a sharp rebound in Aussie house prices in April, national home values troughed in early July and have since jumped 6.8 per cent. That is in line with our April projection for capital gains of up to 10 per cent over the 12 months to June.

Since many presume bonds are negatively correlated with equities (the truth is that this correlation has been positive over the long run), one might suppose that fixed income fared poorly. But in practice it has yielded equity-like pay-offs, notwithstanding the RBA slashing its cash rate three times this year with the average cash rate over 2019 slumping to just 1.1 per cent.

Australian fixed-rate bonds have appreciated 8.4 per cent in total return terms as the yield on the AusBond Composite Bond Index declined to 1.0 per cent in October, its lowest level ever. This performance conceals a more complex story in the data. Since fear and greed have been replaced by relative ebullience on the back of superior global news flows, long-dated yields have started normalising. And this has destroyed fixed-rate bond returns: the Composite Bond Index has actually suffered a 0.74 per cent loss since August 16.

The floating-rate ASX hybrid market has been another standout, as it was in 2018, despite having to contend with the spectre of Labor removing cash refunds on franking credits. Once this risk was, as we anticipated, eliminated by ScoMo’s election victory in May, the risk premium required on hybrids quickly compressed by up to 100 basis points, driving strong total returns of around 7 per cent.

Pity the poor souls who were advised to dump hybrids in 2018 and 2019 on the basis of the presumption Labor would come to power and/or control the Senate. They have suffered a similar fate to those who sold all their risky assets and went into cash during the darkest hours of 2018.

Where does this leave us as we head into 2020? The bottom line is that there are grounds for optimism in the forecastable short term, which by definition means horizons of less than 12 months or so. As a result of the Fed’s rate cuts, the ECB’s quantitative easing and expansionary measures by many other central banks around the world, there is a great deal more policy stimulus coursing through the global economic arteries than 12 months ago.


The US presidential election in November should take the trade war and tariffs off the table for fear of spooking animal spirits. Indeed, Trump’s trade truce means China has won a temporary reprieve from the fundamental economic decoupling sought by the bipartisan consensus of geopolitical hawks in Washington.

In the UK, BoJo’s comprehensive ascension removes another tail risk as he now has an unambiguous electoral mandate to consummate his proposed withdrawal deal from the EU.

And then there is the ongoing shift in the global intellectual zeitgeist away from fiscal prudence towards spendthrift deficits that will only amplify the inflationary impact of the cheapest money in human history. This is because nobody is worried about the downside risks of a future inflation cycle. The costs of near-zero interest rates and central banks artificially boosting all asset prices – supplanting markets in a new form of statism that is replacing capitalism – are allegedly non-existent.

One thing I have learnt is that when the human brain is confronted with an opportunity to take a short-term gain in exchange for much greater future pain, time and time again it makes the wrong choice. Hedonism always seems to prevail.

Locally, the RBA is hell-bent on meeting its legislated mission of full employment and consumer price inflation between 2 per cent and 3 per cent. This has given us the contemporary housing boom and a policy posture that is committed to keeping downward pressure on the Aussie dollar. This will in turn support a revival in housing construction, key exports like tourism and import-competing industries.

Persistently high commodity prices are simultaneously encouraging mining companies to kick-start a new capex cycle. And public investments in a much-needed infrastructure pipeline to facilitate one of the fastest-growing populations in the OECD should be a final source of domestic demand.

Amidst all this madness, one safe harbour of sanity has been the government’s stubbornly-disciplined fiscal policy. Young Treasurer Joshua Frydenberg has thus far completely ignored the never-ending calls from the RBA and its voice-pieces in the media and economics communities to drop his surplus and bail out the central bank.


His mid-year budget update retained the government’s characteristically conservative parameter assumptions, and staunchly defended its commendable objective of building the fiscal space required to properly protect Australia in future crises. While the international golfing team might have got the yips at the President’s Cup in Melbourne, Frydenberg’s steady hands have not.

There are nonetheless many traps and the Treasurer will be forced to navigate some crucial decisions in the new year. Poor calls could irreversibly cruel his career.

What we can say with certainty is that all the talk of being “late cycle” in recent years is, as we have repeatedly argued, absolute BS. The current cycle is set to elongate for some considerable time.

The two main risks to this central case are a sustained increase in inflation and/or global military conflicts. Both remain low probability in the short term, but significantly more likely over the long run. A third caveat is, of course, the perennial "known unknowns".

I leave you with warm wishes for the festive season. This column will not be taking a break, and publishing throughout. We will, however, be running our aerial drone shark patrols, which you can monitor on our Youtube site. Importantly, the drone fleet has been recently expanded with the addition of a submersible vehicle that can cruise out to meet the great whites face to face.