Prior to the March sell off this year, our flagship fund held almost 30 per cent in cash and our small companies fund held more than 40 per cent in cash.

In December/January the ASX200 Industrials Index was trading at a record 26 times 12-month forward earnings.  At the same time, one-year-forward earnings estimates had been declining since July 2019.  In my three decades investing I have not seen such a picture being sustained for very long, and while we didn’t predict Covid-19 would be the event that burst the bubble, in March in popped.

Today, the equities market is similarly dislocated from earnings.  Indeed the uncertainty around earnings is so extreme that more than 200 Australian companies have pulled guidance, unable to offer investors any sense of what the future may hold.

The support in the market is due to two factors.

The first is a definition of ‘recovery’ that differs from the definition that might be held by someone on the street.  The market’s definition of recovery is akin to a boxer knelling after having been knocked flat on the canvas.  He’s up on one knee and therefore that is better than being KO’d on the mat.  But the boxer is not at full strength and is certainly not ready to go another round.  The man in the street’s definition of recovery is a return to the levels of income, revenue or profits he was earning before the world went into a pandemic-inspired lockdown.

That latter definition of recovery is some way off.

Indeed, The Reserve Bank of Australia’s assistant governor Glenn Stevens recently noted, “Depending on how quickly the various restrictions are able to be eased, you could get a reasonable bounce, particularly in some of the most affected areas such as personal services and hospitality. But even on an optimistic view, the pace of recovery won’t be as rapid as the contraction was.”   A few weeks prior our longest serving treasurer Peter Costello observed, “it’s going to take some time to get unemployment back to five per cent…If we peak at 10 per cent or 11 per cent, I think we’ll get back to seven pretty quickly, but I think it’s going to be a long hard grind to get back to 5 per cent unemployment.”

The point is that senior officials with some experience running this country’s monetary and fiscal policies believe the journey to prior levels of incomes will be slow and halting, rather than the easy and quick return implied by the stock market.

Which begs the question, why is the market now more expensive than it was prior to the economic lockdowns?

Part of the reason is that markets are lauding, and rallying on the back of central bank counter-measures.  One of those measures is the announcement by the US Federal Reserve to buy individual corporate bonds.

This occurred after the market for corporate leveraged loan-backed Collateralised Loan Obligations (yep, nothing has been learned since the GFC, which was inspired by the collapse of mortgage-backed Collateralised Debt Obligations) collapsed between February 22 this year and March 23.

The market cheered the entrance, for the first time in history, of the US Federal Reserve into the primary issue market for corporate junk bonds.  More recently it has announced its entry into the secondary market.

Importantly however, it should be noted that such buying activity only has the effect of maintaining low interest rates for companies that would otherwise already be bankrupt.  It does not generate revenue or customers for those companies.

And of course, all of this bond buying support must be funded by the printing of money, something markets are also currently cheering.