A Finsec View – New inflation numbers, World’s most intimidating asset class, Hero to zero and more

18th November 2022

It’s been a long time coming, but underlying US inflation finally appears to be easing. More on this in our market update below.

One factor that will influence future inflation is demographics. This week, the world reached a milestone, with the global population officially hitting 8 billion. Australia has played its small part. New figures from the Australian Bureau of Statistics (ABS) show life expectancy in Australia actually increased during the COVID-19 pandemic (one of the few countries). From 2019-2021, life expectancy for both men and women lifted by 0.1 years to 81.3 and 85.4 years respectively, compared to the 2018-2020 period. We now boast the third highest life expectancy in the world, according to United Nations’ estimates.

The figures raise some questions: How did the life expectancy go up during the pandemic? One can only ponder – was it because of the lockdowns? The vaccines? Did Australia’s distance from the rest of the world play a part? Perhaps masks were helpful? Needless to say, Australia looks to have come out of COVID-19 in decent shape compared to other nations. Still the lucky country…

Also in this issue…

We discuss new inflation numbers and their impact on Fed decision making. The latest employment figures make for our chart(s) of the week and we take a deep dive into the world’s most ‘intimidating’ asset class – Bonds! All this and more, we hope you enjoy the read.

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Market Update

The biggest event in markets over the last week was, of course, US inflation numbers. Whilst still high, the markets got very excited (the Nasdaq jumping nearly 10%) when headline figures came in at a surprising 7.7% yoy.

The other big event was the US midterm elections. In what could be considered a good outcome for markets, the house was won by the republicans and the senate retained by the democrats. We say a “good outcome” in that it will most likely stop Biden from spending more money (inflationary), and his more bold infrastructure and spending bills are unlikely to get through in their current form.

This should all have a positive impact on the Fed, with a few moving parts working in their favour:

1. Inflation has come down faster than expected (mentioned above)
2. US unemployment has risen from 3.3% to 3.7%
3. Wages growth has slowed to less than 4% per annum
4. The Biden spending spree will be blocked by a divided congress (mentioned above)

Seemingly the US economy is slowing, and markets are now factoring in a 50 basis point rise rather than the 75 points we have been anticipating.

The sentiment seems to be similar the world over, with many Central Banks now slowing the pace of their rate-hiking programs as they approach or exceed their own neutral rates of interest in their domestic economies.

This was inevitable after a frenetic period of acknowledgement that the war in Ukraine had turbo-charged supply pressures in global energy and food markets and caught Central Bankers on the back foot after overly generous Covid-19 support programs and record low-interest rate settings.

Can we count on a policy pivot soon?

We are a long way from pause just yet! Whilst hopefully we are not headed for so-called ’70’s inflation’, the base case remains that we will see higher than average inflation for some time to come.

Right now, Central Bankers (including the RBA) are of the view that a period of observation and reflection is required – Rate hikes tend to have a delayed effect on economic growth and inflation rates. In Australia, for example, we have a lot of household debt. With a number of fixed-rate mortgages set to roll off in the front half of next year, we are not likely to see the real impact of rate hikes until around June.

In finding the ‘pivot’ all Central Bankers will be looking to see if the forward-looking or leading data has softened enough to signal a less aggressive stance which would bring them to a pause in rate hikes. This will likely require a softening in the labour markets, further adding weight to slowdowns of economies and easing of demand to meet available supply and restore equilibriums.

Rate rises are a blunt interest. For now, whilst we wait to understand the delayed effect of hikes, the latest data doesn’t suggest the US economy is poised for a nosedive, nor does it strongly argue for a shift in sentiment to a more neutral stance on rate hikes. Whilst there have been some worrying signs of an economic downturn in the UK in the most recent data (weak re­­­tail sales, deteriorating manufacturing data and housing readings over the last few weeks) they are probably not compelling enough to outweigh the need to combat CPI inflation at above 10%.

Markets will continue to expect and factor in further tightening of policy.

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Buy now, pay (the mental health consequences) later

The way young Australians think about and manage their finances is rapidly changing, according to new research from The Monash Centre for Youth Policy and Education Practice (CYPEP).

The report ‘Young people’s financial strategies’, released earlier this month, reveals job losses during the COVID-19 pandemic, lack of affordable housing and the rapid rise of platforms like cryptocurrency and “buy now, pay later” (BNPL) schemes, have significantly changed the financial landscape for young Australians, and not necessarily in a good way.

The survey of 500 young people aged between 18 and 24 sought to understand their attitudes and strategies regarding their finances. It found a startling link between financial stress and poor mental health. Only 38 per cent of people who rated their mental health as very poor saved on a regular basis compared with 75 per cent who rated their mental health as excellent.

Not surprisingly widespread use of buy now, pay later products contributed significantly to those who had experienced financial stress, with more than half in the survey having used them.

The report found that living at home helped young people save money, as did having a job, but that didn’t always protect them from experiencing financial hardship.

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Sustainable money habits do not develop overnight – and unfortunately, learning often comes through trial and error. Taking the first steps can be daunting.

Often, the idea of budgeting is the first port of call – but the word can have a negative connotation; being ‘on a budget’ implies funds are already tight. But it isn’t just about the amount of money available; it’s about planning and self-control.

The basics of finance can begin at an early age and we would love to see it more integrated into the education system. Money is and has always been, a polarising topic. But, if we can educate young people in the basics, then we’re gifting them a chance to ask the right questions and hopefully look after their own futures.

For those wanting to pass on a little financial wisdom to the young adults in their life, this ‘1 pager – A beginners guide to investing‘ is a good place to start. Included in a previous View (September 9 2022), it received some great reviews the first time around.

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Video: Preparing for the unexpected

If the last couple of years has reminded us of anything, it’s that life is full of the unexpected. And while we can’t predict everything that life will throw at us, we can adopt a more proactive mindset to ensure we have the tools and planning to deal with the “what if’s”.

In this video (presented as part of the South Australian Leaders program), FinSec adviser and risk management specialist Nathan Pech unpacks the thinking required for basic estate planning and business continuity risk.

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The world’s most intimidating asset class: A guide to bonds

Bonds are probably Australia’s most intimidating asset class, which likely explains why they’re so unpopular with everyday investors.

Many investors understand the machinations of stocks, cash and property but, few have the same confidence when it comes to bonds.

Having made a comeback in 2022 thanks to this year’s dramatic rise in interest rates (which has made investing in government debt a viable investment option), many readers have asked for a simple explainer.

In this guide, Australian fund manager Schroders provides the ‘lo down’ on all things bonds.

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Chart(s) of the Week

Australia’s unemployment returned to a near-five-decade low of 3.4 per cent in October. Whilst the results were stronger than market expectations, there are tentative signs that the pace of gains is slowing as the economy begins to operate at full capacity.

Note: As mentioned in our market update above – in finding the ‘pivot’ point (a change in interest rate policy) the Reserve Bank of Australia (RBA) will be looking for a softening labour market as an indicator of economic slowing. In the meantime, this super-tight jobs market will cause pressure to lift wages in a bid to attract and retain talent.

This week’s ‘charts of the week are directly from the Australian Bureau of Statistics and aim to put the latest stats in perspective.

1. The unemployment rate fell to 3.4% in October (0.1 percentage point).

2. Although employment in seasonally adjusted terms rose 0.2 per cent in October, the underlying trend estimate was monthly growth of around 0.12 per cent. This was below the average for the 20 years prior to the pandemic of 0.16 per cent.This indicates that while employment has continued to grow, the rate of growth has slowed to below the longer-term average. It has been below this average for the past 5 months.

3. While employment growth has slowed, the employment-to-population ratio remains elevated at 64.3 per cent in trend terms, 2.0 percentage points higher than before the pandemic. This difference was even more pronounced for the ‘working age population’ (those aged 15 to 64 years), at 77.7 per cent, which was 3.4 percentage points higher than March 2020.

4. Participation rates have not increased materially, although the working age women have seen an increase, compared with the eve of the pandemic, from 70.5 per cent to 74.2 per cent

Source: Australian Bureau of Statistics

These stats are of course a direct result of Covid and border closures, the impact of which we will be living with for many years to come!

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Over the past week, we have been watching the demise of the crypto universe with grim fascination. Only recently, Sam Bankman-Fried was in the stratosphere. FTX, his cryptocurrency exchange, then the third-largest, was valued at $32bn; his own wealth was estimated at $16bn. To the gushing venture capitalists of Silicon Valley, he was the financial genius who was touted as the next Warren Buffet.

With both FTX and Bankman-Fried filing for bankruptcy this week, there is nothing left but furious creditors, dozens of shaky crypto firms and a proliferation of regulatory and criminal probes. The high-speed implosion of FTX has certainly dealt a further catastrophic blow to crypto’s reputation and aspirations.

For more information on the FTX story, click here.

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Wealth wisdom

We are the wealthiest country in the world, yet our
financial literacy is pretty poor, and I think this [Quality
of Advice Review] is an opportunity to address that.

– Alexis George, chief executive, AMP. Super & Wealth Summit

When it comes to financial advice in Australia, you either get everything, or you get nothing, Alexis George, chief executive of AMP, told the Super & Wealth Summit last week.

“Australia is one of the wealthiest countries in the world, but financial literacy is generally poor. Yet, at the same time, reforms introduced after the banking royal commission have turned the Australian advice sector into a service where consumers either pay a lot to get full-service advice, or they get nothing. The fact that just 10 per cent of Australians receive some sort of advice is not good enough,” George said.

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In a country such as Australia, where tens of millions of people will retire in the coming decades with fairly decent super balances and expensive homes, we should surely be able to find the right balance between giving as many people as possible access to professional advice, while using all the lessons of the past few years to ensure consumer protections remain strong – let’s hope so!

Here at FinSec, we can’t over-emphasise the value of including your children and grandchildren in the conversation.

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Friday Fun

He may not be everyone’s idea of Friday fun but in calling compound interest the eighth wonder of the world, Albert Einstein is somewhat of a cult hero in our world.

It has been a long week at FinSec, and this one amused us.