The bag of tricks is empty…

  • Eyes on rates
  • The blindfold is off

There are winds of change ahead, or so the mainstream says.

From The Australian Financial Review (AFR):

Western governments still have their budget woes but the outlook for the global economy is the best in years and with concerns brewing that low rates is fuelling a new debt crisis the time is right to try and take it all back.

Central bankers around the world are looking to hike interest rates.

As the AFR continues:

The whole hunt for yield that has been a key driver of markets over the past few years but that is coming to an end as global interest rates are poised to move over…

The future looks bright. No more hunting for yield, no more suffering savers, no more long term low interest rates.

Sounds great, right? Well, except central bankers are forgetting a minor detail…that is, inflation.

The US Federal Reserve has raised rates twice this year, and is looking to raise them for the third time.

As the AFR continues:

‘…although Janet Yellen, chairman of the Federal Reserve, was not quite on the front foot as many thought when it came to more rate hikes, when she spoke this week, the Fed’s overall rate hike plan is still very much on track.

Hmmm… I highly doubt that. 

The fact is that inflation is well below the Fed’s 2% target. It’s at 1.6%. During the June meeting, the fed downgraded expectations for inflation to 1.7% from a 1.9%. The consumer price index data remains unchanged, and retail sales fell in June for the second straight month, as was reported last Friday.

They may very well be in a rush to get ‘back to normal’ interest rates, but the economy is telling a different story.

More on this after the markets.

Oh, but first:

Today’s ‘magic number’ is…

According to Kris Sayce, today’s ‘magic number’ is 2.2.

If you’re expecting an answer from me about what that means, you’re out of luck.

For the answer, you’ll have to tune in to a special online event Kris is holding LIVE and FREE, ‘The Day the Bull Market Ends’.

To register now, go here.


Over the weekend, the Dow Jones Industrial Average gained 84.65 points, or 0.39%.

The S&P 500 is up 11.44 points, for a 0.47% gain.

In Europe, the Euro Stoxx 50 is down 1.89 points, or 0.05%. Meanwhile, the FTSE 100 lost 0.47%, and Germany’s DAX index retreated 0.08%.

In Asian markets, Japan’s Nikkei 225 is up 19.05 points, or 0.09%. China’s CSI 300 is down 0.80%.

In Australia, the S&P/ASX 200 is down 1.82 points, or 0.03%.

On the commodities markets, West Texas Intermediate crude oil is US$46.67 per barrel. Brent crude is US$49.05 per barrel.

Gold is trading for US$1,231.63 (AU$1,576.03) per troy ounce. Silver is US$16.05 (AU$20.51) per troy ounce.

The Aussie dollar is worth 78.15 US cents.

All eyes on rates

As Yellen said last Wednesday:

I do believe part of the weakness in inflation reflects transitory factors, but well recognise that inflation has been running under our 2 per cent objective, that there could be more going on there.

Yep, there is something else going on there alright.

We have never had so much quantitative easing, so much debt and interest rates so low for so long…all aimed to recover from the financial crisis.

We have never lived this before…and recovery has been slow.

Now central banks are looking to unwind their own doings, but they are starting to realise it is not that easy.

The Fed is keen to increase rates and return back to ‘normal’, but things are far from normal.

Long term low interest rates have caused high asset prices, mainly in property and stock markets.

Low interest rates are not sparking inflation.

Central banks are now starting to face the facts that they may have to raise interest rates, just to try to unwind this mess. They are looking to force it into gear by raising interest rates — even without inflation.

Because the fear is, what happens if we hit another recession? Then the bag of tricks is empty.

As editor Vern Gowdie says, we are in uncharted territory. And we have no clue what the risks are, or what happen next.

The thing is, raising interest rates without inflation can cause a slowdown. Forcing interest rates up when there is barely any inflation will push inflation even lower…and will push the banks to lower interest rates…not up them

Central banks are struggling to get inflation to 2%, never mind the ‘normal’ 5­–10%. Those days are gone.

What to do?

Well, they have a few choices.

They can go on to negative rates, punishing savers even more.

They can decide to stop manipulating the market, and let the economy correct itself…fat chance of that.

Or they can forget about inflation targets and just keep raising rates.

It looks like they are going for the last option, in the hopes that when the next recession strikes they will be able to lower the rates close to zero once again to fuel consumption.

The blindfold is off

Meanwhile in Australia, the epidemic of rising interest rates is making investors worry what will happen to the exposed housing market.

Australia has ‘high rates’, that is, compared to Canada and Europe.

The Reserve Bank of Australia is expected to keep the cash rate at 1.5% through to the end of 2018. Yet with risk increasing and growth slowing, property investments are starting to stink, and property owners are starting to jump off the wagon.

As the AFR reports:

There are more homes for sale in Melbourne and Sydney than at any time over the past two years, with many owners trying to sell ahead of an expected slowdown in price growth.

Over the first six months of the year, Sydney had 16370 auction listings, a 29 per cent increase on the 12708 over the same period last year and a 5.7 per cent gain on the 15,486 of the first six months of 2015, Domain Group figures show.

Melbourne showed a similar pattern, with 18,175 auction listings in the first half, a 13 per cent gain on last year’s 16,083 and 10.2 per cent higher than the 16486 in the first half of 2015.

There is consensus among experts that property has peaked. The question now is, how quickly it will fall.

According to most economic analysts, the landing will be soft, as interest rates are not scheduled to rise until the end of 2018.

UBS is expecting a slump in house price growth next year but no crash, with house price growth falling from 10–7% and then diving to zero, and 3% in 2018. According to UBS, no RBA rate hikes scheduled for the immediate future will reduce the chance of a crash.

Both ANZ and NAB have lowered their property prediction growth for the next 12 months.

It sounds so nice and gradual…but let me tell you, nothing is so gradual.

There are more homes on the market than in the last two years. Investor lending has been dropping for five months in a row. Credit is slowing. First home buyers are priced out.

Who is left to buy property?

In fact, as you can see in the graph below, Debt finance availability expectations for the future look quite grim.

chart image

Source: Australian Financial Review
Click to enlarge

The property market is slowing, and cutting off finance will act as a slowdown. Fewer people will have access to buying a home, which means, you guessed it, a bigger drop in prices.

The reserve bank is being cautious, not increasing rates so as to avoid a crisis.

Yet with household debt at 190.4% of annualised disposable income as of March, interest rates can become a weapon of mass destruction for the Australian economy.

Australia has the highest housing prices ever.

Australian families are entering retirement with more debt than before, aided by interest only mortgages. Actually, 40% of all mortgages are interest only mortgages, and debtors can chain in interest only products for as long as 10 years.

Millennials and generation X are priced out of the property market, and even of the rental market. As the AFR reports, more children aged 25–34 are living at home more. The number increased by 19.6% between 2011 and 2016.

At this point, the interest rate is at 1.5%, and inflation is at 2.1%. There is no incentive to save — or pay debts…

Rising interest rates will increase the incentive to reduce the debt burden. But it will cause pain.

If you are worried about the way the economy is going…

If you are worried about an impending market crash…

If you are worried about protecting your wealth…

If you are at all worried about your children…

Here is something that can help you.

At 7pm on 20 July, Port Phillip will be hosting a special LIVE event with Kris Sayce, Vern Gowdie and Ryan Dinse. They will be discussing the risks in the markets and practical investment opportunities to protect yourself in case of a crash.

Don’t miss out on this unique opportunity. Secure your spot here.

I will definitely be tuning in. Hope to see you there!

Selva Freigedo