As the sharemarket gyrates around record highs, it is easy to conclude that risks are low. In fact, if a simple market truth is observed – that the higher the price you pay, the lower your return – then it must be true that as the market registers new highs, conditions are riskier.
For the past 37 years global interest rates have been declining and Australia has not been immune. And since the global financial crisis central banks have ensured that rate cutting has accelerated to zero, and in some cases, lower.
To understand where we are it is important to be in possession of two frameworks: the first is how booms begin and turn into bubbles that burst; the second is to understand the maths of valuing assets.
In almost every case a boom begins on the foundation of a legitimate expectation for future growth. The current boom in technology is a case in point. It probably began with private equity billionaire Marc Andreessen’s article, ‘Why Software Is Eating The World’, in The Wall Street Journal in August 2011.
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