Can your stonks handle inflation?

Adam Keily: [00:00:52] Hello and welcome to comedian versus economist, we demystify the world of money and help you get a handle on the bigger picture. My name's Adam and I'm joined, as always by my little older brother and real life economist Thomas. [00:01:04][12.5]

Thomas Keily: [00:01:07] Adam, how you going? [00:01:08][0.5]

Adam Keily: [00:01:08] I'm going very well, thank you. I look a lot to cover on the show today. We're going to be talking more bonds and inflation again, which I can't tell you how excited I am about that. We covered it last week and I was left feeling a little bit like I'd been run over by an economic steamroller. So we're going to try and clear up the bond slash inflation piece a bit for the listeners out there today. We did get a bunch of listener questions as well this week. So I think there's still a bit of explanation to be to be had around around that topic. So we'll try and we'll try and smooth that out for you guys today. Speaking of listener questions, we had a bunch that came through this week. So really appreciate the questions, because I've got to say, the questions are actually pretty, pretty fantastic, to be honest. So thanks very much for sending them in. You can, of course, email us. CVT at Equity makes dot com or head over to the website equity meit's dot com forward slash CVT and Thomas, big news. Stay tuned to the end because I'll tell you how you can go into the draw, not you. Obviously, the listener out there, this is like, you know, you can't enter, but you can go into the draw to win 500 dollars. [00:02:22][73.9]

Thomas Keily: [00:02:23] Cash, cash, cash in our listener survey. [00:02:30][6.8]

Adam Keily: [00:02:30] So go. I feel like I'm back on Trivelin. Yes. Stick around for that. I'll tell you how you can get involved in the listener survey. And before we get started, though, GDP came out this week. I did. I did see it in the news a it pricked my ears up a bit. I thought now I'm now I'm economizing that the word let's hear about GDP and the data and I don't want to say it again, Thomas, but I think you call it, didn't you? Mm hmm. You called it the economy. It was going to boom, you said. And sure enough, GDP came in even higher than people were expecting. [00:03:03][32.9]

Adam Keily: [00:03:04] Yep. Yep. Now, I know that one. Yeah. That's going up on the on the mantle and home. [00:03:10][6.0]

Adam Keily: [00:03:11] Nonfunctional token something. I I'm not sure that you can you can do it any other way, to be honest. You put a put a podcast episode up on the mantle. [00:03:23][12.4]

Adam Keily: [00:03:25] Yeah, but yeah, we got we got three point one percent in the quarter. Um, the economists around the country were expecting two and a half percent. So that's a that's a good solid whack. Better than we were expecting. Um, it follows up the previous quarter, September quarter was revised up to three-point four percent. And that's the first time ever in recorded history that we've had two quarters of growth, over three percent in history, two consecutive quarters in history. Yeah, I think about like three percent is that's a pretty decent annual growth rate. But with with TONC that up in a quarter in just three months, [00:04:04][38.8]

Adam Keily: [00:04:04] is that because of such a low starting point, though, like we had, we had a long way to come back from where we were, didn't we? [00:04:09][4.8]

Thomas Keily: [00:04:09] Yeah, we did. We did. Yeah. So I think we like down seven percent in the June quarter. So we're still one point one percent lower than we were a year ago. So even though we've had to tonking quarters in a row, we're still one point one percent lower than than we were recovered. But coming back quicker and is, uh, Josh Frydenberg said it's six months earlier and twice as fast as expected in the in the October budget. So pretty good result for GDP. [00:04:37][27.6]

Adam Keily: [00:04:38] Wow. [00:04:38][0.0]

Thomas Keily: [00:04:38] That's one a couple a couple of interesting stories. It's probably worth flagging that the big the big the big question is how how quickly we were going to transition from a public spending driven economy to a private spending driven economy. So I was [00:04:51][13.1]

Adam Keily: [00:04:51] wondering. [00:04:51][0.0]

Adam Keily: [00:04:52] Yeah, yeah, I could sense that. [00:04:55][3.2]

Thomas Keily: [00:04:57] Um, yeah. Because so when covid hit the lockdown's happened, the economy sort of slammed on the brakes. The government stepped in and backstop the economy with with a huge public spending campaign. And that and that propped up the economy. But with that, the idea was that was going to be temporary and that the private private sector would come in and pick up the slack sooner rather than later. [00:05:21][23.6]

Adam Keily: [00:05:21] The public spending was job, keep a job seeker, that kind of stuff, right? [00:05:24][2.5]

Thomas Keily: [00:05:24] Yeah. Yeah, all that stuff. Yeah, yeah. And we saw that this quarter. So consumption was up strongly, I think over four percent in the quarter even. And then public spending, direct public spending halved. I think so, yeah. So we had had public spending winding back and households stepping into that breach um and spending, spending well the other. So yeah. So we're seeing, we're seeing the economy transition from public to private and that's a good news story. That, that's, that's right. That's a good sign. Health there's a good news story is that the services economy was coming back strongly. So services was hit particularly hard with lockdown because as you saw the face to face stuff that you can't do in a lockdown, you know, goods, retail, that's held up reasonably well. So it was the services sector economy that really bore the brunt of the covid lockdown that was coming back strongly in the December quarter as well. So that's the other good news story in that, um. Yeah. So economy's on track, doing pretty well, [00:06:22][58.1]

Adam Keily: [00:06:23] as you say. As you said the other week, the economy's booming. [00:06:25][2.3]

Thomas Keily: [00:06:26] Booming. Yeah. [00:06:26][0.4]

Adam Keily: [00:06:26] And that's going to continue. [00:06:27][0.8]

Thomas Keily: [00:06:28] It's looking like it. Yeah. Things are on track. I mean, the interesting thing about it didn't didn't didn't the share markets love the strong GDP result, didn't they. Yeah. Yep. [00:06:38][10.0]

Adam Keily: [00:06:43] it was up nearly two-point two of a percent today. It recording on Monday, the 8th of March for those playing along at home. Yeah. Which was surprising. I don't want to get us off track too much, but I do follow the US, you know, a little bit. And the last thing I read on Saturday morning was that Friday the US market exploded. We're not like Mm. Like two, three per cent or something like that. The Nasdaq was right up again. Dow Jones was right up. Things were booming and it was and everyone was saying Australia's going to just pick up, pick up on that momentum and we're going to surge [00:07:18][35.2]

Adam Keily: [00:07:19] was going to soar. So saw what it did. And that's down below. Yeah. Yeah. I mean, alone. [00:07:28][8.8]

Thomas Keily: [00:07:28] It launched two percent in the first hour of trading and then petered away, I think closed pretty much flat. I kind of wanted to point that out because you had you had a strong result in the December quarter come out Wednesday last week, much stronger than economists were expecting, says that the outlook is even better than we thought, which should mean that the outlook for profits for, you know, for sales and for revenue and for profit company profits should be better than we're expecting, which means that, you know, an it should be an upward surprise for share prices. But we didn't see that in trading on Wednesday, Thursday, Friday and even today. [00:08:02][34.1]

Adam Keily: [00:08:04] So is this the is this the little bond yields thing kicking in again, the way we talked about last week? [00:08:09][5.7]

Thomas Keily: [00:08:10] I think us I think it is. And this is this is probably the key phrase. To watch for and if you have been in the markets for 10 years, you might recognize this seems like 2013, 2014, but the key phrase to watch now here is the good news is bad news. Bad news is good news. And we will pick up a pick up on that, I think, in as we go on. But, yeah, kind of the key idea here is if the economy is recovering quicker than we than expected, it means that we're the governments are probably going to rein in the spending rather than expected, and central banks are going to rein in the easy money quicker than expected. And that's not great for the outlook. All right. Let's share prices [00:08:51][41.3]

Adam Keily: [00:08:52] a little bit later before we get into that in too much detail. I did mention that we had a bunch of really great listener questions coming this week. So I don't think we can get to all of them. But I did just pick out a few here. So Simon has written in and Simon asks, following on last week from the Bonds conversation, he said he's just interested to know the different different types of bonds, why governments issue them real life examples and where people can buy some if they're interested. Look, if anyone else has anything that they like me to Google, then feel free to [00:09:25][32.6]

Adam Keily: [00:09:35] we can't tell you that, we'll have to stop being lazy and do his own research. I did the research voice and I'm happy to report that pretty much the first hit will take you to how to invest on the Australian government bonds dot gov. I got a whole website for it. Basically, you can buy money on the ASX, so exchange traded Treasury bonds and exchange traded Treasury indexed bonds. I didn't look into much beyond that. I did note, though, there's a warning that says you should obtain independent financial advice and read the relevant investor information statement on term sheet. Just want to make it clear that this is definitely not independent financial advice. [00:10:13][38.3]

Adam Keily: [00:10:15] This is a podcast and you shouldn't thank you for your investing [00:10:18][2.9]

Adam Keily: [00:10:18] advice from a podcast. I think the other warning that goes along with buying bonds to survive just before you answer for a second, the other warning should be that you need to be prepared to be quite boring at parties talking about your investment in bonds instead of something more interesting. [00:10:32][14.0]

Adam Keily: [00:10:35] hopefully that answered Simon's question. Did you have anything to add? [00:10:37][2.3]

Adam Keily: [00:10:38] Yeah, I'm just waiting for Elon Musk to tweet all these bonds. YOLO. Yeah. That very good. Uh, yeah. Uh, yeah. Uh, I mean, yeah, I don't know. [00:10:53][15.4]

Thomas Keily: [00:10:54] I mean. Yeah, well I don't know how much to add to that. I mean Googling. It's probably a good idea. [00:10:57][3.8]

Adam Keily: [00:10:59] I mean, I mean you get three year, five year, 10 year, they're more than 10, 20. You can get 20 year bonds. [00:11:05][5.9]

Thomas Keily: [00:11:05] It's a it's a little bit of a niche area. It's not something where I mean, it's really sort of good to know. Um, but unless you sort of going to be actively trading bonds, sort of like background [00:11:17][12.1]

Adam Keily: [00:11:18] wannabe, what he says is, [00:11:19][1.3]

Adam Keily: [00:11:20] I guess and he's probably thinking what I'm thinking, which is if the bond if bonds are coming along and they're tanking the share market, then ergo I need to be buying bonds because bonds are going up. So that makes sense to me. You want to me, this is the kind of thing that gets you thinking. You think, all right, well, share market starts going down. That's bad. Might want to buy some bonds if they're going up because you want to be going getting things that are going up, right? [00:11:49][28.7]

Thomas Keily: [00:11:49] Yeah, I mean, that's that was the way to think about it twenty years ago. But that's not what's happening, right? Like on the last week when we started talking about this, the bonds and stocks are going in the same direction. So bond prices are falling and share prices are falling. So the oh, the old the old way of constructing a balanced portfolio was to have a good mix of stocks and bonds, because when your stocks are falling, then your bonds are probably going up and probably you're covering yourself to a bit. But now you've got you sort of you concentrating your risk. It seems that when stocks are going down, bonds are going down, bond prices are going down as well. Right. And so, yeah, I'm not sure. I'm not sure. Like the investor community or from what I've read, has really settled on how to think about bonds in the portfolio mix. [00:12:34][45.0]

Adam Keily: [00:12:35] Right. Well, he did ask. He did it was asking why government issue them. And we were talking off air just before about you mentioned the bond auction. So how does a bond auction work? [00:12:44][9.3]

Thomas Keily: [00:12:46] Yeah, so so the government the government needs to raise money and it sells bonds. So it sells a so basically it's like they say to investors, you give us a hundred, you give us a price, a certain amount of money, and in five years time will give you a hundred dollars back. And in in the interim, we'll pay you a yield as a return every year called the coupon rate, so it might be like five percent or whatever. So that's five dollars of that, the face value of hundred dollars. So every year you get five bucks. Yeah, I think in the end, you say at [00:13:29][43.1]

Adam Keily: [00:13:30] the start that you said we'll give you some money and they'll give us 100 dollars back. I think just to pick up on that. [00:13:35][5.9]

Adam Keily: [00:13:37] we will give you a hundred dollars and I'll give you a hundred dollars back just so quickly. . [00:13:42][4.7]

Thomas Keily: [00:13:43] That's not exactly what I was like. You give me a price. So there's this. Yeah. So so what they're saying we create this little product. This product entitles you to five dollars every year for the next five years. And at the end of that, five, five years will give you one hundred dollars. Yeah. Now and then and then, so that's so that's locked in those features of the bond are locked in. Yeah. Then it goes to auction and there's sort of a complex auction process that's not worth going into. But basically the market then decides what it's willing to pay for that instrument that's going to give them five dollars every year for five years. [00:14:21][37.7]

Adam Keily: [00:14:22] Yeah, okay. [00:14:23][0.4]

Thomas Keily: [00:14:24] And so then does that make sense? So that's. [00:14:26][1.9]

Thomas Keily: [00:14:26] Yeah, that's why that. [00:14:28][1.6]

Adam Keily: [00:14:28] Yeah. So that's where I was getting confused because I thought I thought you gave the government a hundred dollars, they gave you five dollars every year and then at the end they gave you 100 dollars back. [00:14:37][8.9]

Thomas Keily: [00:14:38] Yeah. No, no. Right. Not exactly. Not exactly. [00:14:40][2.8]

Adam Keily: [00:14:42] Look, we got we got more listener questions [00:14:43][1.4]

Adam Keily: [00:14:44] to get on with. So Ali just had a quick one. He saw your appearance on The Cosby Show with Cosby's equity might show with Bryce and Alec. And he was wondering where you find all the charts that you used. So he's assuming most of it's behind a paywall. But just curious, and I did you have a place that you get all these charts from that wouldn't require him to sell an organ? Now, again, I'd like to try first to answer the question as always, Thomas, and then I'll let you jump in. But just look, I don't typically watch Cosby's past Wednesday because I have some some clown come on talking Macur on Thursday [00:15:29][44.8]

Adam Keily: [00:15:31] so [00:15:31][0.0]

Adam Keily: [00:15:34] I can give you some charts, Ollie. But warning not safe for work. So, Thomas, where [00:15:39][4.7]

Speaker 3: [00:15:39] do you get your shots? [00:15:40][0.5]

Thomas Keily: [00:15:48] Everything I get is behind a paywall, unfortunately. Um, yeah. If you I mean, I got an AFA subscription. A lot of articles carry stuff in the I'm signed up to a few research houses. You get a few research reports. That's probably an expensive way to track that down. If you want. You're looking for a great aggregator. There's something called the Daily Shot dot com Ren and they have a daily chart pack that they pump out. And they used they started their own in-house research firm for doing research for a hedge fund, I think, and then started this chart pack that then sort of took off. And everyone's like, oh, this is really useful. Thanks, guys. Can we have a copy? And then they said, this is just going to be a standalone product. And so you pay I think it's fifteen us a month and you get access to, um, this chart pack that comes out and there's almost no analysis. It's like look at what happened to retail sales in the US and then there's a chart. But it's really it's a really interesting snapshot of the economy. So if you're looking for something like that, that's that's pretty good, depending on what you need. If you're you know, if you need something, particularly Minnan-Wong, [00:16:52][64.2]

Adam Keily: [00:17:04] you should absolutely go and check out Ausbizz, by the way, ausbizz.com.au. You go and check out the equity mates show on their TV show that they got going, as well as a bunch of other good stuff on that channel. So go and have a look at that. So Thomas, Tom has written in, uh, hopefully not year. He's over in WA, get Iowa and wants to know what the deal is with everyone ragging on payroll tax. He asked, is it really an inefficient tax? Why? If so, why do some people say it should be applied to larger businesses and not smaller businesses? So he's in Rome, which means he's getting all of the all of the election stuff happening. Right. So they got an election coming up with an election. So he's running away. Everyone's ragging on payroll tax. Tom, I'm happy to take this one and answer it for you. My money here is that it's a vote getter. They might not do anything about payroll tax. There's probably nothing wrong with it because who would know? [00:18:01][57.2]

Adam Keily: [00:18:01] Nobody understands taxes. Just one of life's certainties, right? There's only two certainties, death and taxes. Personally, I'd like to see I invest a bit more in health care and try to stave off some of the death certainty. And once we get that sorted out, then we can work on taxes. But what do I know, Thomas? What's the deal? What's the deal with payroll tax? [00:18:22][20.4]

Thomas Keily: [00:18:23] Uh, yes. Well, there's a principle of of taxation design. Is that as much as possible? You don't want to be discouraging good things. Um, and that if you are going to place taxes somewhere, then it's maybe a good idea to be discouraging bad things. So like smoking, for example, you put a tax on smoking because it has these negative social impacts. So you discourage it. Right. And when you increase when you put a tax on something, you increase the price and that discourages that activity. Payroll tax is a is a tax on employment. So the more people you employ, the more payroll tax you pay. And so. Sort of, the argument goes is like, well, firms employing people is a really good thing, we should be making that as easy as possible and we shouldn't be discouraging it by by putting a tax on it and making it more expensive than it already is. And so the idea is if you get rid of payroll tax and that takes to reduce the cost of employing people, creates more jobs and so on. So that's why it's yeah, it's it's probably a good place to start with taxation reform in terms of like big business, small business. I think it's just about seeing that big businesses have a natural advantage over small businesses. But small businesses are really the lifeblood of the economy, like the for the bulk of employment and activity. So as much as possible, you want to be energizing the small business sector in that sort of the argument for that one. [00:19:49][86.4]

Adam Keily: [00:19:50] Right. I mean, it's a bit like, you know, sounds a lot like the superannuation conversation happening with people talking and putting up the mandatory super contribution from nine to to whatever it is, 12 percent over the next five years or something. And anything that's taking away. Take-Home pay from people, obviously, you know, that's generally people are going to be like, oh, that that sucks. I don't want more, I want more take home pay because that makes more of a difference in my life week to week. So maybe payroll tax tax, which they did you did you stay home? Did you stay at home long enough for Mom to start taxing you? Would you. Part of that. And you went off to uni. Once I started working. Once I started working. Mom was like, [00:20:37][46.8]

Adam Keily: [00:20:38] I'm not going to pay you a fixed rate board, I'm going to pay you a percentage of your income. Oh, well, she started slugging me 10 percent or something like 10 percent tax to instead of borrowed from my income. So not only did I have to falsify my payslips to mom, but that's where I lived, where I learned everything I know about tax evasion. [00:21:07][29.1]

Thomas Keily: [00:21:10] Well, you were 32. That's reasonable. [00:21:13][2.4]

Adam Keily: [00:21:16] Not true. Oh, yeah. I just I started work early, [00:21:21][4.9]

Adam Keily: [00:21:21] so I skipped that whole Accademia nonsense that you carried on with. And I got straight into and [00:21:26][4.2]

Adam Keily: [00:21:26] I started contributing in the economy straight away. I. [00:21:29][2.7]

Thomas Keily: [00:21:30] Yeah. Now I was still mooching on the parental teat. [00:21:33][2.9]

Adam Keily: [00:21:34] Oh yeah. Yeah. [00:21:34][0.7]

Adam Keily: [00:21:35] And I don't worry, I [00:21:36][1.0]

Adam Keily: [00:21:36] noticed, I noticed as I was paying my board tax was a go. Well what we brought this week was we get rich now that Tom's doing any super. This is this [00:21:53][17.5]

Adam Keily: [00:21:54] is how we got to where we are today. I wouldn't be the host of a podcast if if we didn't send you to uni. So I'm sure that I [00:21:59][5.9]

Adam Keily: [00:22:00] couldn't be prouder saying there is a unique degree. A hundred and fifty thousand dollars over five years. Host of a podcast. Good one. All right. Now, you've [00:22:16][16.1]

Adam Keily: [00:22:16] done very well, Thomas. You've done very well. Last question. I think we better we better crack on otherwise. Yeah. People probably aren't that interested in our home life and we've got a lot to get through in the second half. So last question here is from Yvonne and Evans asking. Thomas mentioned that the RBI have a target for inflation, but I can't understand why they would be upset if inflation was under the target. I've always understood inflation is bad. I have a picture in my head of inflation being zero percent and economists dancing around the RBA like a wild party. Animals they are. Why are we aiming for inflation, Adam, or should Thomas take this one? I don't know. [00:22:55][38.8]

Adam Keily: [00:22:55] But, uh, I mean, this this is, again, right in my wheelhouse. [00:23:02][6.3]

Adam Keily: [00:23:02] Look, for a start, Yvonne, economists can't dance. [00:23:07][4.5]

Adam Keily: [00:23:09] I've I've seen toys after a few sherries on Christmas Day, [00:23:15][5.6]

Adam Keily: [00:23:16] and he looks like he's trying to correct the next spasm. So there's certainly no economist dancing at the RBA. There's no wild parties, but we don't want zero percent inflation. Because. Because why? Because inflation is kind of a result of what we're doing. Right. It's like it's not necessarily when we say it's like it's a measure. So we want inflation to some degree because that signals that things are going or were going along quite nicely. Think the economy's ticking over. We're producing, we're buying. Things are kind of getting more expensive. It shows a certain level of health. But if if it gets too out of control, then people can't afford things. Things start jumping enormously high. And that's when you just have to load up on Bitcoin and hedge because it's out of control. And Bitcoin is the only thing that's going to make sense at that time will come the apocalypse. [00:24:10][54.2]

Adam Keily: [00:24:11] Thomas, thoughts? Oh, so many, um, [00:24:19][7.3]

Thomas Keily: [00:24:21] you can think of inflation a little bit like the exhaust of a car and it's it's what happens when the car's running, when it's too low. It's sort of signaling that you kind of you're approaching stall speed. Yeah. And the the risk are a bit higher. That's maybe a way to think about it. One of the probably other thing that's worth noting is that variable inflation is worse than high inflation. So, you know, we have central banks around the world have sort of locked in around this two to three per cent target inflation. But the sort of we're just talking about changes in the price level. That doesn't really matter that much. Like if it was it was stable around seven percent. That doesn't really discourage that much economic activity you get in the way and stuff. But if it was like seven per cent one year, 18 per cent the next year, down to two per cent the year after, then everyone kind of particularly people making planning decisions, banks charging interest, these sort of things, they're going to they don't know where they stand. They've got to, like, create a buffer so that, you know, think I'm going to lend you money. Then I need to have an interest rate of interest that covers me for all the possible inflation outcomes. Or I've got to try and figure out what the inflation outcomes are going to be. So, yes, a variable inflation is probably the worst case scenario. And yeah, but high and accelerating inflation is is bad. Yeah. But I think it's yes. Low inflation is is a problem and deflation here is is problematic. [00:25:52][91.1]

Adam Keily: [00:25:53] Yeah. Okay. So you know, we're talking last week if I made any sense of it last week we had the two types of interest right. There was the, the base and then that was that the nominal [00:26:04][10.7]

Thomas Keily: [00:26:05] nominal in the real [00:26:05][0.5]

Adam Keily: [00:26:06] on the real. And one of the one of them was talking about the risk. And if inflation's jumping all over the place, then you've got to kind of try and take the risk into into the right. And so so then you kind of have to take a worst case scenario outlook to that, don't you? Like if it's if it's if next year you think, well, maybe it could be anywhere up to 18 percent, then that's going to factor into interest rates. [00:26:31][24.8]

Thomas Keily: [00:26:32] Yeah. Yeah, yeah. Yeah. Exactly, exactly. [00:26:34][1.9]

Adam Keily: [00:26:35] Yeah. You know how good it is to say. Yeah, exactly. Exactly. There's more new ones. But I just thought we should move on and try and take it to the bank. All right, cool. [00:26:51][15.8]

Adam Keily: [00:26:51] Well that's that's all the time we've got for this week with the listener questions. I really do want to say thanks for the questions. Keep them coming in. We will try and get to as many as we can. But we don't we don't want to take up the whole show with the questions. We've got some other stuff to get through. So once again, c.v at equity markets, dot com or you can head over to the website, equity mates, dot com forward slash c.v. We're going to take a short break now and then we're going to be back to talk some more inflation. So you say [00:27:18][26.8]

Thomas Keily: [00:27:18] banking with Virgin money has never been more rewarding. Earn rewards on your everyday spending and pay zero monthly fees with the Virgin Money Go transaction account and with point perks and epic experiences tailored to you, you can manage your money easily on the go smash your savings goals, get money fit and be rewarded for it. Thanks to your own beat. Virgin Money terms and conditions and monthly criteria apply. Now let's get into the show. [00:27:44][25.8]

Adam Keily: [00:27:46] Hey, welcome back, your own comedian versus economist now, Thomas. We're talking inflation. I think we've got a handle on bond yields now and bonds. I think I'm going to I know as much as I'm possibly ever going to know about bonds now, [00:27:59][12.8]

Adam Keily: [00:28:00] I've reached I've reached maximum saturation, just just dying to talk about something else. So along comes inflation. All right. [00:28:12][12.5]

Adam Keily: [00:28:13] So we're talking inflation. Inflation's going up. And that's maybe, you know, as we just talked about in response to Iran's question, maybe a bad thing. But I really do want to know, what does all this inflation or potential inflation mean to the stock market? [00:28:25][12.2]

Thomas Keily: [00:28:26] Yeah, it's, um. I mean, it is an interesting one. It moves in two directions. So on the plus side, as we're sort of saying, inflation is reflective of growing economic activity, things, the economy holding up. That's good news for sales revenues, for profits, for the shares outlook. In the old days, inflation was good. You know, inflation was a sign of a heating economy that was hitting its stride. It's a good news story, too. Too, is it, until it gets too high and then it's a problem. But, you know, moving from like almost deflationary environment to to something reasonable, that's a good news story. That's happy days. And that's what the banks, central banks are trying to do. So that that side of it's good good news for the stock prices where it's not good news for stock prices comes through. There's two things. One, through bond yields and what the outlook for interest rates. So the rise in bond yields that we saw was saying that the bond traders were thinking like the inflation, there might be more inflation in the outlook than was previously thought. So so bond prices went down, yields went up, and then that. So the increase in bond yields, because that you can think of that as like the base rate, interest rate in the economy and all other interest rates key off that in that number, that sort of had the potential to send all interest rates in the economy upwards. And then that can create problems for firms with their with their debt repayments. Their debt burdens go up. [00:29:54][87.8]

Adam Keily: [00:29:54] When you say firms, you mean do you mean like hedge funds and stuff or do you mean do you mean businesses in general. [00:30:01][6.5]

Thomas Keily: [00:30:01] So businesses. [00:30:02][0.4]

Adam Keily: [00:30:02] Yeah, corporations. [00:30:02][0.3]

Thomas Keily: [00:30:04] Corporations. Yeah. Yeah. Because they've all got debt on them you know. So yeah. So the, their interest payments go up that affects their cash flow which affects their profits. [00:30:14][10.0]

Adam Keily: [00:30:15] Do we measure that, do we measure that sort of level of debt in the market like across the board. Is that. Yeah, yeah. [00:30:21][6.0]

Thomas Keily: [00:30:22] Yeah. I've seen, I've seen it's not publicly, it's not like an official data but I've seen, I've seen estimates of like S&P 500 debt to profits ratio is kind of thing. Yeah. You can sort of can track that. And right now it just as interest are not particularly high. So debt has been a lot higher. It was a lot higher during the GFC. Typically when you include the cash reserves that they have on hand. So debt does that doesn't seem to be such a problem. It's not a huge story, but it's still enough to affect the cash flow outlook. So so that's sort of like one of there's few other ways that yields bond yields and interest rates directly impact the company's profits. And that that can that can negatively affect the share price. But there's also this common factor that has caused bond yields to go up that can affect the outlook. And that's the outlook for inflation. And I think the biggest story here with what's going on at the moment and why people are now worried about inflation is that if inflation starts to rise and rise quickly and starts to get away from the central banks, then the central banks will start to rein in the easy money conditions that they've set up over the past 12 months or so. Super low-interest rates and money printing Ren might be they might think, whoa, whoa, whoa, this is getting a bit out of hand. We need to win this back and governments need to spend less money. [00:31:48][85.9]

Adam Keily: [00:31:48] What kind of numbers are we looking at before they start thinking? Is it a number based like do they say we've hit 2.5 percent, let's start trying to wander back? I mean, we know that their target is between two and three percent. So do they have a number in mind? [00:32:02][14.5]

Thomas Keily: [00:32:03] No, I mean, so yeah. So two to three percent sort of like the key reference point. But this is sort of the key question is whether it's a short-term inflationary shock that's going to pass through the system quite quickly or if it's something longer-term and more structural. And so we know we know already that there is a short-term inflation impulse in the system. We're seeing sectors of the economy start to heat up because we've had a massive supply shock to the economy. Yeah, like there's been all through the supply chains trade still readjusting to the covid reality. Shipping freight rates are through the roof right now. Commodity prices are through the roof. So all of that is going to feed. Through into the inflation outlook, so we know that at least in the short run, there's an inflation impulse coming and we're going to see inflation lift. What we don't know is whether that's going to be sustained, whether that's going whether we're going to see it sort of come in and disappear out of the numbers pretty quickly, or if we're talking about a return to a to a stronger inflation reality. So, Jerome, Jerome Powell, the head of the US Fed philos equivalent fill out the RBA, his equivalent in the in the US key figure in the whole global economy story. He was saying last week that he didn't think that it was a long term story yet and he wasn't concerned about the rise in bond yields because he was saying, like, it's kind of rational. There is inflation coming into the system. However, we think it's going to be a short term shock. We don't think it's a long term reality yet. And we're happy to run things a little hot until it looks like it does become a long reality. [00:33:45][101.3]

Adam Keily: [00:33:46] Slam on the brakes on that thing. There are so many things in my life I know. That's fine. It's totally fine. This is going to peter out any second there, right? [00:34:03][17.2]

Thomas Keily: [00:34:04] I mean, it's interesting. So the RBA has been softly signaling that they now are paying much more attention to the employment outlook than inflation than they have in the past. And I think the thinking here is that without wages picking up, then you're not going to see sustained inflation. So you might see like commodity prices pick up and commodity prices feed through into a temporary shock into the inflation data, which will then work its way through the system once it's reached a new level. Until you get wage increases and sustained wage increases, you're not going to see sustained inflation at in the two to three per cent band, which is why they're now saying they want they're looking for an unemployment rate with a four point something they want in the forward somehow, because I think once it gets down into the fours, then you will start to see wage inflation. And once you start to see wage inflation, then you see really broad based inflation in the economy. And so I think that's that's what they're looking for. I think kind of what they're saying is that we don't think it's going to be a long term story until we see wages inflation backing it. Up until then, it's going to be temporary. We're going to be happy to let it run. We're not going to win back the easy money. Until we see a pick up in wages inflation, [00:35:25][80.6]

Adam Keily: [00:35:26] so is the is the recent volatility in the share market? Is that just kind of is that is that people taking a short term outlook or is it even more like algorithms and and flash traders type things going triggering off some. Inflation number and saying, right, these things are going up, we need to to. Account for that. [00:35:50][24.8]

Thomas Keily: [00:35:52] I think I mean, I have heard stories of flash trading going off like the yeah. The bond you relative to the S&P 500 yield. So the dividend yield is relative to the price of S&P 500 companies. So right now or back when this whole story kicked off, you could invest in government bonds and get the same return you could invest in an S&P 500 company or the S&P 500 in just in terms of dividend. Right. But you're taking on a lot more risk. And so that's that's there was a story that triggered a bit of bot trading. Yeah. Just that number. I don't know how significant that is. Right. Yeah, I think there are short-term jitters. I mean, but it's exactly what is what you're saying is like. Yeah, it's like yeah. It's great that you're happy to let it run hot for a bit and then you, then you deal with it. But what if you can't. And when, when you look into the down the barrel there is a lot of money coming into the system, like an unprecedented amount of money coming in very quickly. I think the bond markets are like, yeah, do you really have this under control? You really you know, are you really going to be able to stop this getting away from you like it's you know, it's uncertain times. We're in uncharted territory. We've never run this policy mix before. Maybe you don't have a handle on it. [00:37:10][78.3]

Adam Keily: [00:37:12] Uh, this is not what we need after 2020. We don't need, like, uh, like listening to you say we're we're in uncharted territory, not running this policy mix before we're mixing drinks at a cocktail lounge. I give it a try. It's quite nice. It's got some asparagus in there. Like what? Yeah. Yeah, it turns out it was revolting. Well, there you go. Yeah. [00:37:36][24.9]

Thomas Keily: [00:37:37] Jeremy are going to be right to drive like. Oh yeah. If I get drunk I'll just stop drinking. [00:37:40][3.2]

Adam Keily: [00:37:41] It's like. Oh exactly. Yeah. So when you [00:37:47][6.2]

Adam Keily: [00:37:48] say there's a lot of money coming into the market, you're talking, you're talking investors, you're talking the money that the governments are printing. [00:37:53][5.7]

Thomas Keily: [00:37:54] Printing. Yeah, I'm talking money printing. Right. [00:37:56][1.9]

Adam Keily: [00:37:57] So the inflation if inflation rises, will that slow or stop? The money printing is always right. [00:38:03][6.4]

Thomas Keily: [00:38:04] Yeah. So the money printing is determined by the central banks. Like, that's just like their call on how much money they print. Right. But if inflation starts to run too hard and looks like it's getting away from them, then now they said, OK, we need to print less. Yeah. Maybe even suck up some of the liquidity they've injected. [00:38:23][19.0]

Adam Keily: [00:38:24] How do they do that. Ask for it back a voice. [00:38:27][2.9]

Adam Keily: [00:38:28] Sorry. Oops. We're putting too much money. We've ever run to drop fifty dollars of the Treasury. I have that. I take it out of the market. [00:38:44][15.4]

Thomas Keily: [00:38:44] Uh I guess I have to sell sell government bonds. And here we are again. [00:38:49][5.2]

Adam Keily: [00:38:50] Yes, come full circle. [00:38:53][2.9]

Thomas Keily: [00:38:55] But I mean, once the government spent it. Yeah, once the like Congress or Canberra has spent it, then it's out there. And I know it's not I don't think it is easy to mop up. Yeah. Maybe they sell bonds, but that's a good thing to think about. That is this is a good question. [00:39:13][18.5]

Adam Keily: [00:39:14] Thank you. You're welcome. [00:39:15][1.2]

Thomas Keily: [00:39:19] We've never done it before, so I don't know [00:39:20][1.6]

Adam Keily: [00:39:21] what the what the wallaroo with a memo to the RBA should have an answer to that question. Oh, yeah. [00:39:29][8.3]

Thomas Keily: [00:39:30] No one's asked before [00:39:31][0.7]

Adam Keily: [00:39:31] actually write it down to update the evacuees on the website. [00:39:34][3.0]

Adam Keily: [00:39:40] I like to think that they've got a plan for it, at least how to how to pull if that's what's needed, like if I have. Well, when we must have done it before, surely we must have pulled money out of the economy. [00:39:49][9.1]

Thomas Keily: [00:39:50] Money typically has grown at a pretty steady rate. Hmm. And that's sort of been managed. And just generally, the money supply has been increasing at a steady rate. And you look at the charts as from like the 70s onward. It's just a pretty steady straight line upwards until recently where this is going on more. [00:40:09][19.8]

Adam Keily: [00:40:10] So is this. Well, this sounds a lot like what people were warning about, doesn't it? Like, I wouldn't want to be a doomsday sayer or whatever what I call doomsday. But this is the people against modern monetary theory. This is kind of what they've been saying. They're saying if you keep printing money, you're going to push inflation through the roof. And that's that's bad, obviously. [00:40:31][21.5]

Adam Keily: [00:40:32] And you don't have it right. There's no way to fix it. We don't think you have a way to fix it. [00:40:37][5.4]

Thomas Keily: [00:40:38] Yeah, yeah. It's a it's a legitimate concern. I mean, it was it was the exact concern that happened following the GFC in the money printing that followed that in America and Europe. And but just inflation never eventuated. Right. And so I think there's a little bit of complacency, the like. Well, it was fine during what followed. The GFC is going to be fine now. I think the difference this time is that it's it's a dirty print in the sense of the central banks are printing it and then lending it to the governments and the governments are then spending it into the economy. And that's that's the injection mechanism where it gets it was it was sort of sloshing just around the financial system before. Once the governments get it and start spending it on wages and infrastructure spending and whatever, then it's into the economy and then it's out there. Yeah. So the question is, does this create inflation? And we're trying to create inflation. We want some level of inflation. We just don't want too much. Um, so that's that's the dance that the policymakers are playing with. But it's yeah. It's it's high stakes, like it's, you know, huge amounts of money. Um, there's a lot riding on it. [00:41:48][69.4]

Adam Keily: [00:41:48] So if if we've learned one thing tonight, it's that economists can't dance, so. [00:41:52][4.6]

Adam Keily: [00:41:54] I hope so, too, we use their call to call back. I hope you enjoyed it. [00:42:03][8.4]

Adam Keily: [00:42:03] Look, I think that's probably enough for this week and talk of inflation [00:42:06][3.2]

Thomas Keily: [00:42:08] that doesn't win as a podcast [00:42:09][1.4]

Adam Keily: [00:42:10] of the year nomination. I don't know what that's a very good look. [00:42:15][5.2]

Adam Keily: [00:42:16] That is I think that's that's enough inflation and bonds. I think we done two weeks on it now. By all means, we'd love to hear from you. If you still got questions, we'll try and answer them maybe on the email.cve@equitymates.com or equitymates.com/cve get in touch with us there. We do love getting your e-mails coming through and some really nice to really kind words of support coming through there as well to people saying that they're loving the show. They like what we're doing. So that actually does make a big difference and helps us to keep recording, really enjoying it. So I hope you are, too. And I don't forget, you can check out all the other great podcasts that we've got on equity markets, media. Of course, Bryce and Alec, they have their they've got to podcast just in case they weren't working enough as it was. I get the Get Started Investing podcast. And of course, if you are across the basics and you're looking for something a bit more meaty, then you should be tuning into the flagship equity markets podcast, the Equity Markets Investing podcast. And as a new podcast launched recently called Meet Pay Llave from Equity Mates Media, that's Zoe and Carmel talking you through the financial side of relationships and everything to do with relationships and money, which is it's a really good listener. So make sure you tune into that one as well. And I did, of course, say we've made a right to the entire idea. Of course, at the start that I would tell you how you could go into the draw for your chance to win 500 dollars. And what you need to do is have a look in the description or in the notes of this episode, and you'll find a link to the Equity Mate Listener survey. And it's a chance for you to have your say what you're liking, what you're not liking, what you'd like to hear, hear less of, hear more of. It's a really good chance for you to have your say and tell us what you think of the show right across the equity markets, media or the podcast. So go there. Should take you about ten minutes, fill in the survey and you'll go into the draw to win five hundred dollars. That's easy. If you of course, if you add in in the free text of the comment section, they're just adding Thomas loves Bitcoin. [00:44:23][126.3]

Adam Keily: [00:44:25] And if you are the winner of the five hundred dollars that I'll check in ten dollars worth of Bitcoin just with a love, so but you must write almost loves Bitcoin place either Big Bear, massive debt. All right. [00:44:43][17.3]

Adam Keily: [00:44:44] That's it. That's the show for this week. Thanks once again for tuning in. What did you have any any final thoughts? [00:44:48][4.3]

Thomas Keily: [00:44:49] No, no, I'm good. Thanks for that. Good show. [00:44:50][1.6]

Adam Keily: [00:44:52] There's no pat ourselves on the back just yet. Let's all over the mouth. [00:44:56][3.9]

Adam Keily: [00:44:57] All right. Thanks again for tuning in. And we'll catch you next time on comedian versus economist. see you later. [00:44:57][0.0]

[2481.4]