How to play ever lower interest rates

Wednesday, 5 June 2019
Adelaide, Australia
By Bernd Struben

  • ‘Fired up!’
  • ‘Outrageous! Federal Police Raid Aussie Journalist’s Home’

Two things struck me when I fired up my laptop this morning. Neither came as a real surprise.

First, stock markets love cheap money.

Second, our readers — or at least everyone who wrote in so far — don’t.

As you’re likely aware, the Reserve Bank of Australia cut the cash rate yesterday. It was the first rate move since August 2016, when the RBA cut rates from 1.75% to the then record low of 1.5%.

The new record stands at today’s 1.25%. Though that’s likely to fall even lower in the coming months.

RBA governor Philip Lowe has his eye on unemployment and inflation. He’s keen to see unemployment fall from today’s 5.2% down to 5.0% by year’s end. And Lowe would like to see that fall into the ‘four point something range’ in 2020.

If Australia can achieve this Lowe believes inflation will tick up and that long elusive wage growth will return. Presumably well in excess of any rise in inflation.

Lowe stopped short of locking in another rate cut this year…barely.

From the AFR:

Are interest rates going to be reduced further? The answer here is that the board has not yet made a decision, but it is not unreasonable to expect a lower cash rate… Our latest set of forecasts were prepared on the assumption that the cash rate would follow the path implied by market pricing, which was for the cash rate to be around 1 per cent by the end of the year...’

Well there you have it. Debt is only going to get cheaper.

And it could happen faster than Lowe hints.

Central banks cut interest rates in hopes of stimulating faltering economies. That’s where the catchphrase ‘bad news is good news’ comes from. Because stock markets, as mentioned above, love little more than cheap money.

With that in mind, you should pay attention to the latest GDP figures.

According to the Australian Bureau of Statistics, GDP for the March quarter grew at an anaemic 0.4%, slightly below expectations. That puts GDP growth at 1.8% year-on-year.

That’s the slowest pace of economic growth since 2009. And it would have been a lot worse if not for a big bump in government spending.

Does an economy propped up by near-zero interest rates and a big spending government sound healthy to you?

Judging by the emails we received, I’d say not.

We’ll get to those reader replies on the new era of cheap money below.

But first, the markets’ reaction.

The ASX 200 closed up 0.19% yesterday. All of that gain came after the RBA’s 2:30pm announcement.

Investor euphoria has carried over into today. At time of writing the ASX 200 is up 0.49%.

Of course, Lowe can’t take all the credit for this.

The ASX tends to follow the lead of US markets. And US markets were on a tear overnight our time.


The prospect of even cheaper money, of course!

From the AFR:

Jerome Powell may follow Philip Lowe into official rate cuts sooner than many expect after signalling a willingness to ease US monetary policy if Donald Trump’s trade wars crunch the economy.

In a speech that sent stocks surging on Wall Street, which is enjoying its biggest one-day leap since early January, the Fed chairman said he would “act as appropriate to sustain the expansion”.

Not to be outdone, the Bank of Canada also looks to be leaning towards another rate cut. According to data from Bloomberg, the odds of the Canadian central bank cutting rates doubled over the past week, from 25% to 50%.

The reason behind all the angst is the simmering global trade war. I’d expected Trump to have resolved that by now. But that forecast is proving to be optimistic and, well, wrong.

Even as the trade rift between the US and China widens, Trump has targeted Mexico with a new round of escalating tariffs. The first 5% hit is set to take effect next week. If Mexico doesn’t carry its weight to stop illegal migrants from massing at the US border, tariffs will incrementally ramp up to 25% by October.

According to CoBank ACB, that will impact US$45 billion of cross border food trade alone.

When the first 5% tariff takes effect next week, as Trump maintains it will, I expect some market turmoil as investors digest the implications.

There could be some heavy selling until the central bank chiefs are trotted back out to address the media and assure investors that bad news is still good news for stocks.

Now let’s have a look at those central bank turbocharged markets.


Overnight, the Dow Jones Industrial Average closed up 512.40  points, or 2.06%.

The S&P 500 closed up 58.82 points, or 2.14%.

Tech stocks, Monday’s biggest loser, posted the biggest gains yesterday. The tech heavy Nasdaq closed up 2.65%.

In Europe the Euro Stoxx 50 index finished up 33.27 points, or 1.01%. Meanwhile, the FTSE 100 gained 0.41%, and Germany’s DAX closed up 178.36 points, or 1.51%.

In Asian markets Japan’s Nikkei 225 is up 376.88 points, or 1.85%. China’s CSI 300 is up 0.59%.

In Australia, the S&P/ASX 200 is up 31.34 points, or 0.49%.

On the commodities markets, West Texas Intermediate crude oil is US$53.23 per barrel. Brent crude is US$61.81 per barrel.

Both crude benchmarks gained around US$1 per barrel since this time yesterday. But as you can see in the below chart, oil’s heady start to 2019 is well and truly over:

chart image
Source: ICE, Bloomberg
Click to enlarge

The main driver of the downturn continues to be ever increasing oil flowing out of the US. A trend that’s almost certain to continue over the next five years. And one I’m convinced will soon wholly erode OPEC’s abilities to artificially inflate prices via production cuts.

The latest ‘surprise’ surge in US crude and petrol stockpiles is becoming almost a weekly event.

As Bloomberg reports:

The American Petroleum Institute’s weekly report was said to show a 3.55 million barrel increase in U.S. stockpiles last week, compared with a 2 million decline predicted by analysts in a Bloomberg survey. API also reported a 10 million barrel surge in gasoline and distillate fuels.

OPEC+ is meant to meet on 25-26 June to discuss extending current output cuts into the second half of 2019. If they fail to reach a new agreement — and the Russians may not even show up unless the dates are changed — oil should fall hard into July.

Turning to gold, the yellow metal is trading for US$1,325.86 (AU$1,895.98) per troy ounce. Silver is US$14.82 (AU$21.19) per troy ounce. (More on gold below…)

One bitcoin is worth US$7,785.34.

The Aussie dollar is worth 69.93 US cents.

‘Fired up!’

Clearly the cut to new record low interest rates struck a chord with our readers. And not a happy one.

Let’s get to some of those emails now.

This one comes from Harry:

So if you are a retiree like me whose income has been devastated by these low interest rates for the last few years, how do you “send a message” to the Reserve Bank (and other Central  Banks)? Withdraw all your bank savings? Buy more gold? Hold cash? Cryptocurrencies?

Good question Harry.

Unfortunately central banks have made up their minds that savers’ (and retirees’) interests come a distant second to delaying the recession we’re meant to have. That recession is coming, mind you. But if they can hand that off to their successors, so much the better.

The second letter comes from Dennis:

Hi Bernd,

Geez I’m fired up!!!

How do you start a class action against the RBA for their discriminatory actions towards the savers of this once great country of ours? Dropping interest rates only helps the borrowers and encourages them to borrow even more; she’ll be right the RBA will cut the rates again if we get into more trouble!?

Dropping interest rates punishes the savers as it makes it all that much harder to get ahead and to make ends meet. also it is also forcing the savers to switch from safe investments like fixed term deposits to the more the risky investments like stocks and corporate bonds and the like for a better yield. Unfortunately, the higher the return the higher the risk and most pensioners and retirees in general can’t afford to be invested in the riskier investments as once the money is gone it’s gone there is no way of recouping what has been lost.

It’s nothing short of criminal what the RBA is doing, it is so totally unfair as far as I’m concerned, may as well back up and move to Bali or Thailand or somewhere similar where the cost of living is a lot more affordable.

The RBA should be raising rates to shake out all the excesses and those who are abusing the system which should help to bring rates back to normal levels (whatever normal is these days). So, in short to answer your questions I’m far from optimistic about how the economy is going at the moment & I have very little faith in the RBA and what they are doing & this interest rate cut is a hindrance and should not be happening.

What can I say? Yes, yes, and yes again Dennis. Thanks for writing in.

Today’s third email is from reader Michael:

I don’t believe cutting the interest rates will advantage nor give more confidence to the everyday punter.

Perhaps the Govt should look at reducing taxes and offer a little more in handouts as this would create more confidence and real spending as it did with the K Rudd handout in 2009.

Cutting taxes is an excellent idea! As mentioned earlier, the only thing keeping GDP growth afloat at all is government spending. And we know where the government gets its money.

How much better if we all had more of our own money to spend as we see fit. GDP would likely grow faster. And the government would get smaller. Then we wouldn’t need any Rudd like handouts at all.

The next mail is from Alex:

I’ve seen Australian 10 year government bonds has fallen below the previous cash rate of 1.5%, and I guess it might be the reason why RBA was so hurried to cut it right now. I regard it as a negative harbinger, your thoughts?

I’m with you Alex. Stocks may be enjoying the sugar hit right now, but longer term ‘negative harbinger’ sums it up nicely.

We’ll leave off with this mail, from Jeremy:

Lower interest rates?

What’s the point? The RBA perhaps think this discount MAY incite the banks to follow suit but our interest rates have no bearing on the rates set by wholesale lenders in Europe or the USA where  our big 4 get much of their money. There is absolutely no guarantee the local banks will pass on any discount to borrowers.

With the massive levels of household debt (particularly and dominantly mortgage debt) how will .25% translate into a spending stimulus?

Traditionally, the banks sourced their lending funds from deposits but who in Australia is going to put money into term accounts these days? Even 5-year term deposits give pathetic returns.

So, just what is the purpose of a cash rate reduction?

It’s ham-fisted monetary policy, as it has always been. Government fiscal policy initiatives are required to stimulate spending, set a path to positive Terms of Trade changes and reverse the credit squeeze that is hamstringing investment spending.’

Thanks Jeremy.

So far CBA and NAB have both passed on the full 0.25% cut. ANZ and Westpac have not.

But with Aussie households already saddled with some of the world’s heaviest debt loads, this is ham-fisted policy indeed.

In the interest of time and space, I can’t publish all your replies. But thanks to everyone for writing in.

If you have a dissenting view on the RBA’s cut (or other ideas you’d like to share) please shout out. Just send your reply to with the subject line ‘rates’. If we print your letter, we’ll only use your first name.

Finally, here’s the latest from The Australian Tribune:

‘Outrageous! Federal Police Raid Aussie Journalist’s Home’

If you think the US’ attempts to prosecute and lock away Wikileaks founder Julian Assange for reporting the truth is a unique occurrence among supposedly free Western democracies, think again.

Under the guise of national security, law enforcement agencies across the West are…

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