Time for a tap on the barometer

ANY remaining doubts that the Australian stock market is awash with cash were removed recently when Westfield shopping mall mogul Frank Lowy lifted $1.1 billion from institutional wallets in a matter of hours for expansion in America.

The inexorable march of superannuation continues, with about $1 billion a week passing through the doors of fund managers. That pool is further swelled by other savings that flow into unit trusts. To be sure, not all of this money mountain goes into local shares. Cash, bonds and investment in foreign equities mop up more than half, but it is still a formidable, beneficial force.

There are two little dark clouds The liquidity story is great – until the day its stops, or slows down. Secondly, it is becoming increasingly difficult to find compelling value in shares as the market closes in on all-time highs.

Australian shoppers have started the year on a spending spree. Consumer confidence remains high, underpinning strong economic growth. But inflation has skipped over the 3 per cent hurdle where the RBA starts to get uncomfortable. The interest rate cycle has almost certainly hit bottom.

The yield on 10-year bonds, which fell to 4.9 per cent last March when the recession freaks were in full cry, has since risen a full percentage point.

It will take some time before fixed interest rate returns pose a real threat to shares. The cost of money too has a long way to climb before it affects mortgage repayments or household spending. But it is worth keeping an eye on the barometer.

Modest inflation is not necessarily poison for equities. It enables some companies to restore margins by passing price rises on to customers.

However, a consequent wage break-out would upset the apple cart

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