23 Feb Why You Can Expect Interest Rates To Go Up
Napoleon Hill famously said, “Every adversity, every failure, every heartbreak, carries with it the seed of an equal or greater benefit”.
And so it was this time ten years ago.
At one point during the GFC, things were that bad, the world’s financial system was literally on the brink of collapsing. Another straw would have shattered the camel’s back. It was that close.
But the financial systems bad news became our economic good news. To reignite our economic engines, central banks around the world continually dropped interest rates to boost consumer confidence and stimulate spending again.
And spend we did! Interest rates dropped to record lows and household debt crept up to record highs. Put simply, people began buying crap they didn’t need to impress people they don’t like.
Asset prices also appreciated, and how!
Napoleon and Trump
Napoleon also knew his famous quote worked in reverse. Meaning, every benefit has an equal and opposite cost.
Enter interest rates.
Since Trump’s election to office, unemployment has dropped to a forty-three year low to the extent that, there is now a severe shortage of skilled labour in some parts of the U.S. i.e the economy is growing again.
However more jobs mean higher wages because businesses compete with each other to attract workers, and this eventually pushes up the prices of goods and services. Aka, inflation!
But inflation is not a dirty word, its just another name for growth.
And therein lies the problem. If the economy grows too quickly, it needs to be tempered by increasing interest rates.
Add to this, the recent U.S. tax cuts, and now businesses have more money to spend and invest and grow the economy even more.
It’s like a family that goes from zero to four kids in just four years. The growth pains become unbearable.
But unfortunately, the economy’s good news becomes our personal bad news.
What This Means for Oz
The big problem for Australia is we now borrow a large chunk of our money off-shore because the Government is up to its eye balls in debt.
Therefore, regardless of what the Reserve Bank says about interest rates here, if interest rates go up off-shore, it will have a direct impact on our borrowing costs back home.
But there could also be another knock-on effect. If U.S. rates go up, some of our banks may follow to remain competitive. I.e. they will increase rates to attract more depositors (this should make retirees happy!)
The World’s Most Boring Investment
Three years ago I wrote a Moowsletter about how the world’s most boring investment could rock stock and property markets. Specifically, I was talking about bonds (which are like term deposits issued by Governments and Corporates).
In short, if interest rates increase and bond rates go up, I would expect there to be a considerable transfer of money from stock and property markets to the bond market because its considered to be a safe haven for investors.
This is one of the reasons why I have been quite negative about the U.S. stock market recently. Its overvalued and as soon as investors have another alternative with higher returns and less risk they’ll run towards bonds.
So now we’ve gone full circle. Ten years ago, the worlds bad news became our personal good news. And now the table is beginning to turn. Interest rates will increase, and assets will become cheap again.
Put simply, it doesn’t matter how thinly you slice the pancake, you will always have two sides.
Which is why we’ll be ok. Just ask Napoleon.
Have a great weekend!
Back paddock – Quote of the week. “Malcolm wants no sex, Tony wants no same sex, and Barnaby wants more sex”.
Little wonder they don’t see eye to eye.