“Rates will stay at 0% until 2024” – Every Central Bank around the World

Ahhh, those central bankers were hilarious!  They remind me of this Far Side cartoon:

Even they cannot seriously have thought that nil interest rates would be maintained until 2024…but I guess they wanted you to believe that they were so you’ll act like you think the rates will stay that way, thus investing more, having greater confidence, and stimulating the economy. Interest rates are now the highest since the GFC. 30 year mortgage rates in the US have doubled this year. These rates aren’t fully impacting the world’s economies – yet. You cannot have a worldwide synchronised increase in interest rates and expect everything to be rosy. My Uber driver on the Sunshine Coast said he wasn’t worried about increasing interest rates because “I’m on a fixed rate until next year”. One of my Sunshine Coast Financial Planning customers said this week that his mortgage repayments were $780/wk, however his fixed rate will expire shortly and by his calculations his mortgage repayments will increase by $300/wk. That’s a 38% increase in mortgage repayments. That’s another $300/wk that isn’t being spent on the Sunshine Coast. His mortgage is $567k. This mortgage size is about $20k lower than the average mortgage size in Australia. Then think about the really big mortgages and the impact these rate rises will have on their repayments and therefore their discretionary income and the resulting effect on the economy.

Why have these interest rates risen so quickly? Well, it turns out, if you print a billion here and a trillion there, pretty soon you’re talking big numbers. And those billions of dollars of printed money get spent, thus driving up prices and therefore inflation. Here’s some inflation numbers for the past 12 months: bread + 16%, milk +17%, chicken +17%, butter + 29%, potatoes +15%, cheese +14%, coffee +18%, peanut butter +15%, electricity +15%, and gas +33%. Mind you, could be worse! Italian inflation is at almost 13% – but that’ll be easily offset by the ECB’s key deposit rate of 1.5%. How do you combat inflation of almost 13% with a 1.5% interest rate? You cannot. Of course you can’t! When interest rates are tightened it’s like turning on the garden hose – the water takes a while to get to the other end – like the ketchup bottle when you’ve banged on it half a dozen times and then SPLAT! Well, I think there’s going to be a splat in the housing market…in my humble opinion. I simply cannot see how things will not go splat when the impact of all of these rate rises is felt across the board with approximately 45% of people that will roll off their fixed rates in Australia.

I’ll list a few of the issues out there:

• Inflated housing markets around the world
• High inflation around the world
• High debt levels around the world
• High share-market valuations in certain countries and sectors
• A worldwide food and energy crisis
• A Putin…and a Xi

We have all of the above at a time when there is an aggressive synchronised tightening of monetary policy all around the world where interest rates are rising dramatically from the lowest base levels in history! I don’t mean to be a Negative Nelly…but these issues are quite concerning!

So, what to do?

• Diversify as much as possible – it’s the only free lunch we get with investing, whereby you can maintain returns but decrease risk, investing in assets that correlate differently means less volatility (risk)
• Dollar cost average – despite the doom and gloom I’ve shared – if you have a long term horizon, and especially if you are say, contributing to super on a regular basis – well, a 40 year old or 50 year old who is not retiring for a decade or two doesn’t need to worry in the least – a crash won’t have much of an impact long-term if you are continually contributing to your super as a relatively large proportion of ones total super as you’re simply purchasing more assets at lower prices. For people investing their life’s savings, then I would advocate a dollar cost averaging strategy over several years, i.e. contributing to risky assets over a period of time to try and avoid some of the pitfalls of volatile markets
• A silver lining on the increased interest rates is that we can now obtain yields of 4-6% p.a. on relatively low risk investments – the same investments that were paying virtually nothing at the start of the year are now paying very healthy levels of distributions, when interest rates were zero this posed quite the dilemma, how do we get any return on the defensive part of the portfolio? Now, however, there are many options available – so that’s great news!
• Reduce risk via the use of long-short funds, bond funds with shorter durations, and assets that correlate differently and provide good sustainable income levels
• Invest in assets where the prices are not so expensive to begin with
• Decrease fees via the use of ETF’s
If you would like to discuss your options, please feel free to contact us at any time.

By Mike Beal, your Sunshine Coast Financial Planner.