How one boat stopped the economy

Adam Keily: [00:00:51] 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. Hi, Thomas. How's it going? [00:01:05][13.8]

Thomas Keily: [00:01:06] Yeah, good. How are you doing? [00:01:07][1.0]

Adam Keily: [00:01:07] I'm very well, thank you. Look, as always, we love getting listener emails coming through and you can e-mail us any time you like c.v at equity markets, dot com or head up the website, equity markets, dot com forward slash KVI. And this week, Thomas, the email inbox was overflowing. It was jam-packed. We had over a trillion emails. Would you believe if my math is correct, math is correct, which it turns out our math is rubbish? And that's what most of the emails were about that hit our inbox this week. So I will tell you all about that a bit later on when we cover that and some other questions that came through. So stay tuned for that. But first, Thomas. Ever given a toss about a ship getting stuck in the Suez Canal? [00:01:55][47.6]

Thomas Keily: [00:01:55] Oh, well, this week, you're right. [00:01:58][2.3]

Adam Keily: [00:02:02] The reason that is hilarious, of course, is because there was a ship and the ship was cold ever given, which is not to be confused about. If you have seen the media reports, the ship is cold ever given, even though there's massive riding on the side of the ship, which says Evergreen [00:02:19][16.8]

Thomas Keily: [00:02:20] I saw that I was the one. Yeah, I thought I thought someone had just made a mistake somewhere. Just a lazy, lazy journalism copyediting in the newspapers. And someone's right there. [00:02:33][12.9]

Adam Keily: [00:02:34] It's right there and decides how to deal with it. It turns out that Evergreen is the name of the company that owns the ship and ever given is the name of the ship. And there's some somehow it's [00:02:47][12.7]

Thomas Keily: [00:02:49] Evergreen's the company ever given the ship. [00:02:51][2.2]

Adam Keily: [00:02:52] Yes. Correct. Ever. Because it's a strange word, I mean a strange name for a ship. I think they committed some time to name their ships like Edward G, something which is a bizarre naming convention to go with, you know. And so that's how you end up with ever given. So they started with Evergreen as the company and then they went with like ever great, ever good and ran out of kind of superlatives, I guess. And they were ever given. [00:03:17][25.6]

Adam Keily: [00:03:20] I think it's the same people that name Cyclones and tropical storm, you end up with Cyclone Larry and things like that. Um, apologize to all the Larrys out there. Might be tuning in. [00:03:32][12.7]

Adam Keily: [00:03:33] Um, but anyway, back to the story and the ever given, which is a huge ship, it's kind of bigger than the Empire State Building. Absolutely enormous shipping vessel. It got stuck. It ran aground in the Suez Canal. So the Suez Canal, for anyone that doesn't know, is in Egypt, a manmade canal that like a big, big trench through the sort of top right part of Egypt. And that that big trench joins now the Mediterranean Sea with the Red Sea. And basically, it's one of the busiest, if not the busiest shipping route in the world, kind of connects Asia with Europe. So if you want to ship from, you know, Malaysia to France, you're going to go through the Suez Canal [00:04:14][40.9]

Thomas Keily: [00:04:15] 200 kilometers long, but it saves ships nine thousand kilometers by having to go all the way around Africa. [00:04:22][6.9]

Adam Keily: [00:04:23] Yeah. And if you ever watched movies, I think the Horn of Africa isn't that like where ships perish? Isn't that like that's obviously in movies where people have like, oh, you don't want to go around the Horn of Africa, the Cape for various reasons. [00:04:37][14.5]

Thomas Keily: [00:04:38] Yeah, maybe. Maybe yeah. I think it just it was a perilous time. All places shipping back in the day. [00:04:47][8.5]

Thomas Keily: [00:04:49] There are dangers everywhere. [00:04:50][1.0]

Adam Keily: [00:04:51] Well, that's probably why they built the Suez Canal, because there'd be dangers and they were like, we need less dangers, you know, [00:04:57][5.2]

Adam Keily: [00:04:58] we need more boats arriving at their destination port. So, yeah. So so we're going to say, you're right. So they had to they'd have to go around Africa, basically right around the bottom of Africa to get where they need to be. So it would cost them heaps in time and obviously money. So that's where the Suez Canal came from. Anyway, this ship, the ever given is now stuck. And as of recording at, what is it, twenty ninth of March, roughly nine o'clock at night, I believe that they've just managed to float it. They've said they've partially floated it, so most may have dug it out. [00:05:29][31.2]

Thomas Keily: [00:05:30] Most exciting float of the year. Move over roadblocks. [00:05:33][3.5]

Adam Keily: [00:05:36] Oh. In case you're after pans this way. How can we do this. We have them coming thick and fast. [00:05:41][5.0]

Adam Keily: [00:05:43] Yeah. They've managed, they've managed to partially float. I don't know what that means, but it's obviously a positive step because up until now it's blocking hundreds of ships. And these ships are huge. As we said to each ships can is carrying billions of dollars worth of worth of cargo. And so none of these ships can get through. And it's the reason we want to talk about today is because it has really huge impacts globally, doesn't it? [00:06:12][28.9]

Thomas Keily: [00:06:12] Yeah, it's pretty big. As you saying like the Suez Canal is one of the major shipping routes like this. Nineteen thousand ships went through go through a year. That's like fifty a day. So huge volumes of trade like the was the ever given itself. It's got twenty thousand shipping containers on it, like it's Massawa, it's a lot of shipping containers. You could get a lot of tiny homes out of that whole village. [00:06:37][24.8]

Adam Keily: [00:06:39] We should do an episode on tiny homes. I read an article today that tiny homes are booming. So yeah they go yeah. [00:06:45][6.7]

Thomas Keily: [00:06:45] So yeah. So you Joumana trade going through, you know through there. [00:06:49][3.0]

Thomas Keily: [00:06:49] So yeah. What's it like. Ten percent of the total. Seaborne oil, eight percent of LNG and 20 percent of container volumes through the Suez. So, yes, it's pretty significant. And oil prices in particular spiked sort of on the nervousness around this. No one thinks it's going to be too long lasting. And you think, you know, for all of human ingenuity, we literally dug a canal through two continents. So we should be able to unplug a ship, [00:07:14][25.6]

Adam Keily: [00:07:16] get a boat and stuck in the one that we've dug. We've obviously got the technology to go deeper than the boats. But we seem to be seeing the earth-moving equipment that they're using to dig out this ship. [00:07:28][12.0]

Adam Keily: [00:07:29] It's just they're like little specks, little cars next to the next to the ship, like it's going to take them forever. Well, obviously not. They've got it partially floated, but it's just. [00:07:39][10.4]

Thomas Keily: [00:07:40] Yeah, I mean, the canal was dug back in eighteen fifty, something like it's around that mark and what really. Yeah, yeah, yeah. I didn't [00:07:48][8.6]

Adam Keily: [00:07:49] think we had the technology to dig a hole that big then [00:07:51][1.9]

Thomas Keily: [00:07:51] we had shovels. [00:07:52][0.4]

Adam Keily: [00:07:55] Obviously. [00:07:55][0.0]

Thomas Keily: [00:07:58] it's like the whole aqueduct system in the north of England like yeah. That was, that was probably done around the same time and that was all done by hand and horses and stuff. [00:08:06][8.4]

Adam Keily: [00:08:07] There's no way hands and horses dug the Suez Canal 1850. [00:08:11][4.3]

Thomas Keily: [00:08:12] Yeah. This is another thing they had like steam powered like locomotive excavators back then [00:08:19][6.9]

Adam Keily: [00:08:20] will wonders never cease because the aqueducts are one of the one of the seven wonders of the world and they are the Suez Canal. Not up there. [00:08:27][7.0]

Thomas Keily: [00:08:27] Yeah, it's pretty wonderful. I was actually talking about like the canal system in the north, which they used to transport Woog down to the Port Liverpool. Yeah, yeah, and that was all done by hand and then and then not yet, because it was it was like 10, 15 years before the railway sort of launched and when the railway launched, then all the boats went out of business because away just took it over there. [00:08:52][24.8]

Adam Keily: [00:08:53] It might have drifted off topic when they open the shipping reference, we might have drifted off. We were uncharted waters here, beached boats, that conversation. But the important point is labor. [00:09:08][14.7]

Thomas Keily: [00:09:08] Labor used to be very cheap relative to back in the day relative to other options. These days, machines are very cheap. Um, yeah, but but this despite all that, like 90 per cent of trade, is still Seabourne. I was surprised at that fact. I thought there'd be more by air. But like ships, ships are still doing the bulk of it. I there's another one. [00:09:30][21.5]

Adam Keily: [00:09:31] All right. We should stop. [00:09:33][1.5]

Adam Keily: [00:09:33] And yeah. So ships are still because obviously that's the most economical way. So planes are expensive, especially if, you know, if you need to transport, you know, like I don't imagine you can load up a plane with with tons of steel, the type you're building a skyscraper somewhere and you need to transport tons of steel to build that skyscraper. Doing it with planes is going to be astronomically expensive, whereas you could just load up maybe one ship, maybe a couple of ships and send it over and then time and you're building a skyscraper maybe times. Not that critically [00:10:06][32.7]

Thomas Keily: [00:10:08] needed here by 4:00 p.m. [00:10:09][0.9]

Adam Keily: [00:10:12] Well, that's it's an important point because one of the articles I read today about them said that that 90 per cent didn't have time delay insurance on their delivery. So all these people that are waiting on on deliveries of all this cargo didn't have any insurance which covered them for delays in shipping. So, yeah, I guess people do care when stuff gets, you know, the whole world, the whole world as the oil prices going up, not because the oil has been lost, but because it's not going to reach its destination when people are expecting it to be there. [00:10:42][30.1]

Thomas Keily: [00:10:42] Yeah, yeah, yeah, yeah. And this comes up like shipping rates have already gone through. We're already on a tear-away before this happened. So I think like, yes, I'd like the ship, a 40 foot container from on the east west route through the Suez Canal, used to cost so used to cost eight hundred and fifty one dollars a year ago. So if you had a 40 foot container because eight hundred and fifty dollars to get it into Europe, now it's just shy of five thousand dollars and that sort of still reeling out of covid and sort of all the supply chain disruptions we've seen since then. Yeah. But yeah, it's, it's, I mean it's an interesting story for inflation, so I think yeah. We'll see freight rates and oil prices spike in the short term, probably not massively because it'll look a lot of difficulty with oil, like European inventories are still reasonably large, like they're not going to run out of oil. And that's why, you know, prices will rise. It's not going to, you know, go go crazy because like in Europe, consider just eating to their stockpiles. But it's part of the inflation story. And it's something that the central banks have said they're watching is what's happening to shipping rates because shipping rates, because, you know, 90 per cent of trades, seaborne shipping rates affect 90 per cent of traded commodities and traded goods. And so that then feeds through into into prices. And if you have a sustained increase in shipping rates, then you're going to have inflation. [00:12:03][81.3]

Adam Keily: [00:12:04] But this isn't going to be sustained or is is is is more flagging the potential through other shipping routes that there could be disruptions. This is how easily a disruption could happen. I mean, essentially, this is the car crash on the freeway that that this is what sending a warning sign because, you know, like covid, we had massive supply chain disruption. But this is not expected to be long lasting. Right. We're talking maybe a week. [00:12:32][27.8]

Thomas Keily: [00:12:33] You think so? You think so? I mean, if. [00:12:34][1.5]

Adam Keily: [00:12:36] not knowing at all how to float stranded ship can carry hard cargo ship. Wouldn't take more than a week, you wouldn't reckon. [00:12:46][10.0]

Adam Keily: [00:12:46] But it's temporary. [00:12:47][0.3]

Thomas Keily: [00:12:47] It's just temporary. Yeah. But I also think it comes at an interesting time because we have had massive supply chain disruptions through covid. You know, there's at least there's a number of chokepoints, what they call choke points in global trade, where like the Suez Canal, the Strait of Hormuz, the Strait of Malacca, these places where trade can you get choked? And I think firms and nations now would be looking at all of this. And those are the big push up until very recently to where the offshoring push where all of the supply chains spread quite why there really chased the cheapest labor costs and the cheapest production cost I could find. And a lot of that went to China, but to Asia and different places. And then. Firms and countries realized that they were very vulnerable to any disruptions to these networks like the whole automakers found that they couldn't access chips anymore. And that sort of ground everything to a halt and for the sake of just a relatively small component, couldn't produce cars anymore. And I think there's so there's this seemed one of the flavors that I feel like I'm reading a lot more about these days is companies and nations looking at their supply chains and realizing that they're quite vulnerable to disruption and that maybe they need to bring them closer to home or building more resiliency or sort of alternatives that they can go to if things don't play out. And particularly like China's you know, China's were leaning on the trade levers now to sort of try and influence diplomatic outcomes. So I think, you know, companies and nations are looking at and some feel a bit nervous. So maybe the case we've sort of reached a bit of a high watermark in globalization and things might localize a bit more from the [00:14:39][111.5]

Adam Keily: [00:14:39] time to start. Time to start buying Australian made. Yeah, maybe that's, you know, because it feels a bit like sort of it's almost like doomsday prepping. Can't go to the shops anymore. You're going to have to start, you know, will be out chopping trees down for some timber, build a table with kids growing vegetables by local, go to the markets. [00:14:58][18.4]

Thomas Keily: [00:15:01] I mean, you couldn't get ceilings during covid for love or money. And a lot of places like people, people stayed home and the first thing they did was make gardens and. Started growing vegies. You didn't obviously. [00:15:13][12.5]

Adam Keily: [00:15:14] But now I've got toilet paper. [00:15:15][0.8]

Adam Keily: [00:15:19] I just finished off the last of our covid because actually, I wasn't holding I just bought a lot of weetbix because that was my covid plan. Figured we could live off Weetbix worst comes to worst. [00:15:31][12.3]

Thomas Keily: [00:15:34] The other interesting thing with this is that we often think of this like from a Western perspective, but China is also very vulnerable to disruptions to trade networks. So like the US is, is a net exporter of crude oil these days, that they're not exporting more than they need, exporting more than that. [00:15:51][17.0]

Adam Keily: [00:15:51] So they're making it and selling it. I'm making it. They're pulling it out and selling it out. [00:15:55][4.5]

Thomas Keily: [00:15:56] Whereas China imports three quarters of the oil it consumes. So it's quite an imbalance [00:16:01][4.3]

Adam Keily: [00:16:02] things like steel as well. [00:16:03][0.8]

Thomas Keily: [00:16:03] China is a big importer of steel and they're from Australia. [00:16:05][1.9]

Thomas Keily: [00:16:05] Four fifths of the iron ore it uses, I think. Yeah, yeah, yeah. So really reliant on that. Plus it's reliant on because it sells finished consumer goods and goods to the world. It needs, you know, shipping container shipping to get those goods to places. So if those networks break down is no longer able to sell and earn and money anymore. So China's really, you know, is very sensitive to this as well. It's not just the Australian and us thinking like, oh, we've got to look after our supply chains. It's something that China is engaging in a lot. And that's why they've got these initiatives like the Belt and Road Initiative, [00:16:40][34.5]

Adam Keily: [00:16:41] the one the Belt and Road Initiative. [00:16:43][1.2]

Thomas Keily: [00:16:43] Belt and Road Initiative. Yeah, that basically it's just sort of it's like the old Silk Road is like a sister. There was a sort of long trading route that ran into China that [00:16:54][10.7]

Adam Keily: [00:16:54] I know it well. Yeah, that's what a lot of gear off the Silk Road. [00:16:57][2.9]

Thomas Keily: [00:17:00] Not not that one. [00:17:01][0.7]

Thomas Keily: [00:17:04] So it's sort of riffing on that, but basically saying it's creating these trading routes through it to facilitate trade into China and out of China. And it's also bought like it's boring, it's buying ports, it's buying stakes in a lot of global ports because it sort of recognizes the strategic importance of that and how reliant the Chinese economy is on these trade networks. So it's taking a very active role in building them. [00:17:32][27.4]

Adam Keily: [00:17:32] Interesting. Yeah. I mean, there are all sorts of cargo that are got stuck on. IKEA has got tons of tons of stuff that's stuck on a ship somewhere, which surely if it's someone I can whip something up to get a ship unstuck, we should be make something out of a flat pack of IKEA furniture. [00:17:52][19.2]

Adam Keily: [00:17:52] well I mean the ships are backed up forever. I mean, you talk about costing money, um, the sort of forecasting millions and millions of lost, lost dollars. The longer these ships get stuck there. And there is a company called Maersk erm is MERS that's got a ton of ships that are stuck there. Um, ironically, that was also the victim of a supply chain attack, a big cyber attack back in I think twenty seventeen. So they got yeah. They got hit with this big cyber attack with some malware called not Pecha. Interesting story behind that name. Actually not picture it was there was a previous some previous malware called Pecha and it wasn't that. [00:17:52][0.0]

Thomas Keily: [00:18:31] So I can't believe it's not picture. [00:18:33][2.1]

Adam Keily: [00:18:36] Three hundred million dollars in revenue, they lost. They were down all this, all their I.T. systems were down for 10 days and they lost 300 million in revenue and that was in twenty seventeen. So you can imagine, like if you know, if all their ships can't can't move and they can they can't ship stuff, then that was in twenty, seventeen to 300 million dollars plus inflation since then. What are we looking at. 500 trillion according to their math. Yeah. [00:19:00][23.6]

Thomas Keily: [00:19:02] Was it, was it a ransomware attack, or what was the motivation. [00:19:05][3.1]

Adam Keily: [00:19:06] Well it was, it was just malware. They kind of got out of control actually. So they didn't they sort of didn't mean to. And the original Petchey was ransomware. But I think not Pecha was like someone mucked it up. And so they cryptid, they encrypted everyone's data. But then they didn't have the decryption keys. [00:19:28][21.8]

Adam Keily: [00:19:30] So they were just like, sorry, we didn't mean to release [00:19:33][3.7]

Adam Keily: [00:19:34] it as it was. They kind of I don't know the full story. They this sort of malware got out of hand. It was designed to attack, I think it was Ukraine. And it just sort of it leaked from there and then. Yeah. Supply to what's called a supply chain attack because it was originally deployed using this accounting software called me Doc, I think it was. And to anyone who used me, doctors kind of got all caught up in it. And Maersk, the shipping company, got smashed with this, not Pecha malware. And it took out their whole IT infrastructure, except for and the reason they were able to restore their one of their key systems was that a place I'm going to say in Nigeria. But I don't think it was. And what was it? Maybe another African country where one of their systems was offline because there was no power at the time. And so because it was powered down because they were suffering a power outage at the time that this malware ripped through all of their infrastructures, it was the only system in Merced's infrastructure that was unaffected by the malware. So they were able to use it to rebuild their directory and reinstate large portions of their infrastructure. Total lack that this thing was offline because of a power failure. [00:20:58][83.8]

Thomas Keily: [00:20:58] That's amazing. Isn't trying to sort it out. Dear sir, Greetings from Nigeria. [00:21:02][3.4]

Adam Keily: [00:21:04] I have excellent. We have the only copy of your directory news. [00:21:09][5.5]

Adam Keily: [00:21:14] Yeah, it was huge. It was one that was one of the most famous kinds of malware hacks, I guess it got in history, but. Yeah. Yeah. So I know. And now Maersk is caught up in all this. What made me think about was I read that some talking today about me being caught up in a lot of their ships were now stuck waiting for they are ever given to get out of the Suez Canal and let things start flowing again. So. Well, there you go. Interesting stuff. As we say, they are floating right now. So by the time you hear this podcast, they may have it out of the canal. Time will tell. All right. Stick around. After the break, we got some listener emails to get to, including the ton of e-mail we got after a bit of a markup up on our part last time. So we'll see you. [00:22:00][46.3]

Thomas Keily: [00:22:02] Banking with Virgin money has never been more rewarding earn rewards on your everyday spending and pays zero monthly fees with the Virgin Money Go transaction account and with points, perks, and epic experiences tailored to you, you can manage your money easily on the go smash your savings goals, get money for it and be rewarded for it. Bank to your own beat. Virgin money, terms and conditions, and monthly criteria apply. Now let's get into the show. [00:22:28][25.8]

Adam Keily: [00:22:31] Welcome back, your own comedian versus economist, and we love getting listener emails. Don't forget, you can always send us through your e-mails, cve@equitymates.com or head over to the contact form equitymates.com/cve. And this week, Thomas, we have got a few emails to get through. This first e-mail comes from just about every one of our listeners who joined in last week. We were talking about stimulus packages and job caber and we did have I think it was a listener e-mail actually, from Aaron who was writing in with a suggestion about if 300 million people got a million dollars each, then that would add up to 300 billion, which was the same as the stimulus package that America was producing. So why not just give everyone in America a million dollars each? And then I thought that sounds like a cracking idea. [00:23:23][52.6]

Adam Keily: [00:23:24] We should definitely do that. [00:23:25][0.9]

Adam Keily: [00:23:26] You paragraph some stuff about the economics of it all. And people were very helpful in pointing out the fact that 300 million times one million does not, in fact, equal three hundred billion, rather, three hundred trillion. So slight miscalculation on our part. Sorry if we maybe even misunderstood, Aaron, your email. [00:23:50][23.8]

Thomas Keily: [00:23:50] but it was a trick question because math was the right answer, frankly. [00:23:57][6.0]

Adam Keily: [00:23:57] Uh, yes. We have conducted a full and thorough internal investigation on comedian versus economist and have found absolutely no responsibility to the comedian in checking the math on this show. So that was pleasing to say, probably worth noting. [00:24:14][17.2]

Thomas Keily: [00:24:15] that, like, I'm not a details guy. Right. Yeah. Which is sort of has been limiting for me actually in my career as an economist. [00:24:23][8.0]

Adam Keily: [00:24:24] All about the macro. [00:24:24][0.5]

Thomas Keily: [00:24:25] Yeah, I am all about the macro and about the big picture, which when I was at the RBA, we did the personality test, the Myers Briggs personalities. [00:24:32][7.1]

Adam Keily: [00:24:34] Yeah. And like a metric testing's. [00:24:35][1.0]

Thomas Keily: [00:24:35] Yeah, and I was I was way off the charts. Big picture. Really big picture. [00:24:40][4.9]

Adam Keily: [00:24:41] Yeah. Big picture. But something tells me that that's not what the RBA is looking for. [00:24:46][5.2]

Thomas Keily: [00:24:48] I was the only one in my graduate cohort that was of the big picture fairly picture fairly. Yeah. It was much more details. Jorgy, that's the classic economist profile who sells Jayjay. The very big picture. Fairly good. Very good. [00:25:06][18.0]

Adam Keily: [00:25:07] All right. Well, apologies for that, but thanks for letting us know. We do appreciate it. We'll try to stay on top of our math in the future. [00:25:13][6.0]

Thomas Keily: [00:25:14] But I stand by all the big picture fairly stuff that I answered in response to that question. I think that was that was on the money. [00:25:20][5.6]

Adam Keily: [00:25:22] All right. Next from next-door neighbor from Jordan, Jordan is loving the show. I wanted to ask what your thoughts about what will happen to interest rates once the four year fixed rates run their course? Can they double the interest rates overnight or will it be a gradual increase? Is it possible we will not be able to pay their mortgages once at rates increased from their record lows? Of course, I like to take first crack at these questions, Thomas. [00:25:43][20.8]

Adam Keily: [00:25:47] that's out there. That's a long fixing in my book I didn't even know you could fix for four years. I thought two or three years was the only options. But now it's fixed for four years, maybe [00:25:58][11.4]

Thomas Keily: [00:25:58] two and two or three is the only option with my bank. But I'm hearing more about these four and five years. [00:26:02][3.9]

Adam Keily: [00:26:04] I don't know. I mean, so I guess in a four year period, because we're talking about the cash rate effectively, which is driving the interest rates and in a four-year period, the cash rate is going to move gradually. But once you come out of your loan at the end of four years, potentially the current variable rate could be quite significantly more than what it is now, because it's going to attract the cash rate from the RBA. So, um, so the short answer to the question is, yeah, it could potentially double, but you'll be able to shop around for other rates once you come out of your four-year fixed rate. So and then yeah. Whether people can afford them or not remains to be seen. But if they go up a lot, possibly not there anything that was all right. Yeah. [00:26:48][44.0]

Thomas Keily: [00:26:48] No, that's pretty good. That's pretty good. That's, that's generally true. The other piece of the puzzle, which is now that we've got since covid is the is term funding facility. So the term funding facility gives banks access to money at the cash rate, which is zero points one percent. So almost free money is given that to the banks, provided that they then lend it out to mortgages and businesses at fixed rates. So the banks then sort of square that away. So they're getting a three-year fixed loan from the RBA at zero points one percent. They then turn that around and lend it to mortgage holders at a fixed rate, the keys off that term funding facility. Right. [00:27:30][41.9]

Adam Keily: [00:27:30] So why can't they then, if that's the case, why can't they presume the RBA has fixed durations on that as well? They don't offer 10 year fixed rates or 10 year? [00:27:42][11.3]

Thomas Keily: [00:27:43] No, no, not that I'm aware of. Yeah, right. Fair enough. Yeah. So so that's why fix rates and now so much cheaper than the standard variable rates right now. It's not normally if normally fixed rates are cheaper, it means that banks are going to think that rates are staying very low. But right now they're just keying off. The RBA is right and that's why fixed rates are lower. And that's why fix rates have gone from like normally five to 10 percent of the market. Right now, they're up around 40 to 50 percent. Yeah. So, like, fixed rates are so much cheaper than everyone's just going to fix rates. So the term funding facility is due to end in June. Right. So that that scheme where they're lending money to the banks at supercheap rates, that's due to wind up in June. [00:28:27][44.2]

Adam Keily: [00:28:28] So then we'll see interest rates going up. [00:28:30][1.3]

Thomas Keily: [00:28:30] I think what we will see is that year fixed rates will go. Theoretically, fixed rates should then go back up to something closer to variable rates or something to where the banks feel that they're in the money, that they can lock you in. And that's probably going to be closer to variable rates. Oh, interesting. There'll be more. [00:28:49][18.2]

Adam Keily: [00:28:49] It makes me want to fix it. Makes me want to fix it for longer. [00:28:51][1.8]

Thomas Keily: [00:28:51] Yeah, I was actually having that thought today. But haven't you fixed it already. [00:28:53][2.3]

Adam Keily: [00:28:54] Yeah. Because you told me to fix it like a year ago. Yeah. [00:28:57][2.3]

Thomas Keily: [00:28:58] Well yeah. [00:28:58][0.5]

Adam Keily: [00:29:00] So now I'm conflicted. I don't know whether I should fix it because this all sounds like it makes good sense or if I should just stay away because what you told me last time was wrong. [00:29:08][8.5]

Thomas Keily: [00:29:10] No, I was right. Like you, you've saved a lot of money on the back of that. I have. And I've done well, too. But I don't know. I'm not seeing many people talk about this, so I don't feel super confident with it. But I would kind of think that if you are coming in the offering, you know, fixing your rates now, if that matches your circumstances and all your own personal financial considerations and you've talked to an independent financial planner and all of that, first, I would think fixing your rights is probably smart. Like, I don't think they're going to go much lower. I don't think that's possible. And that's what [00:29:47][36.5]

Adam Keily: [00:29:47] you said last time. I did say that last night. [00:29:49][1.8]

Thomas Keily: [00:29:50] And I just went lower and lower. But yeah. So I don't know. I that's the only disclaimer you need that you had that on the level that other disclaimer about a very independent financial advice, blah, blah, blah. What you need to [00:30:04][14.5]

Adam Keily: [00:30:04] say was, keep in mind I got this wrong last time, because if that's true, then maybe Jared's done on to something with his four-year fixed rate for you. Sounds like a good option. Yeah. [00:30:17][12.4]

Thomas Keily: [00:30:18] Yeah. I mean, particularly given where the economy's at right now. Like, yeah. I mean, the RBA has said that they want to see the unemployment rate, the unemployment rate keep going lower. So they want to reduce economic activity. They want to see business investment pick up. Yet before they start even, you know, before they start considering raising rates, it looks like remember, there are three things that the RBA did post covid. They cut interest rates, the official cash rate, which is what they normally did. Then they did two unconventional things. One was the term funding facility, which gave banks access to super-cheap money. And then the third was money printing. So printing five billion a week, which now most analysts that I'm reading and talking about that's going to be extended currently that runs through September and it's most likely is going to be extended further beyond that to sort of just keeping pace with what's happening in the world. The term funding facility seems particularly focused on mortgage holders and business investment, but particularly mortgage holders. It's hard to see an argument for that sticking around given the house prices are already on a tear away. Households are pretty flush. They've had a big wealth effect out of rising household house prices. Plus, they've got a large savings pool that they're sitting on. Is hard to sort of make the case that households need more support. So, yeah, I like people, I don't know, but I don't see many people talking about this as a bit hard. And I don't know all the details, all the pieces of the puzzle about this argument. But from where I stand, it doesn't seem like there's a strong argument for keeping it going. [00:31:55][97.2]

Adam Keily: [00:31:56] All right. Well, I hope that answered your question. John Gerrard writing as well. Gerard says, curious as money flows into the market. And this may be a bit of a follow on question from the last one. As money flows into the market with low-interest rates, will the opposite happen if they rise? And would rising rates affect general market returns? He says he's generally a passive investor, hoping to see about 10 percent returns on super, etc.. So what happens if interest rates rise? So that's not bad. Gerard, I reckon if you're a passive investor netting 10 percent, then first I have a question. Where can I get some of that action? And. [00:32:30][34.2]

Thomas Keily: [00:32:31] Do you want to come to the show? [00:32:32][0.7]

Adam Keily: [00:32:33] If I were you, I would just stay on the sidelines and just keep making a rain, baby. [00:32:37][4.0]

Thomas Keily: [00:32:42] It's doing nothing. That's my game. [00:32:45][3.2]

Adam Keily: [00:32:46] So have we did cover this off a bit. And I'll hand it over to you because I'm still not sure I understand bond yields and everything else that goes with it. But as interest rates go up, I think there is a chance that certain markets are going to go down certain sections of the market, maybe things like technology stocks and whatever that were maybe overvalued or susceptible to interest rates for various reasons they might go. The returns might drop on those. But is that is that roughly. [00:33:15][28.9]

Thomas Keily: [00:33:15] Yeah, yeah. That's yeah. That's a piece of the puzzle. I mean, part of it is it depends on the asset allocation mix that in your super portfolio. So rising interest rates are obviously good for fixed incomes. So you get a higher return on your fixed-income investments. What it does to stocks can be a bit of a mixed bag and it sort of depends on what else is going on. But yeah, so the idea is a lot of valuations are pretty stretched because money has been so cheap and that's allowed them to leverage and expand. And people have projected that forward and things such as that as interest rates start to rise and then the share prices might look overcooked and they might start to unwind. But at the same time, if it's if interest rates are rising because the economy is doing so well, then that boosts the profit for the outlook for the firms, which is a positive for share prices. So now that all balances out is not super clear cut. [00:34:16][60.5]

Adam Keily: [00:34:17] All right. And the next one is from Hannah. And Hannah says, hey, guys, love the show. Had something about Turkey in their interest rates going to 19 percent. Can you explain what's going on there and could it happen here? No idea. Hannah, I'm sorry. I have no idea why Turkey's interest rates would be going to 19 percent. Maybe they maybe they've got some shipping containers full of cash that they're waiting on and they're stuck [00:34:39][22.5]

Adam Keily: [00:34:40] in a canal. So I don't know what's going on in Turkey. This segment. Great. Isn't it good, though? Why? [00:34:51][11.9]

Adam Keily: [00:34:52] It's like he's rated at nineteen percent. The rest of the world sitting at like zero. Point one was TYT. Why on earth would Turkey be at 19 percent? Well, it's not [00:35:00][7.7]

Thomas Keily: [00:35:00] only the 19 percent that a couple of weeks ago Turkey's central bank governor raised rates two percent in a single hit. So there were 17 percent. He raised them another two percent to 19 percent, at which point President Erdogan fired him and installed someone else's central bank governor. [00:35:19][18.7]

Adam Keily: [00:35:20] What is right, so how do they get. OK, you haven't answered the question, and I think [00:35:27][6.5]

Adam Keily: [00:35:27] it's really that significant that they went up from 17 to 19. [00:35:30][2.8]

Adam Keily: [00:35:30] I think maybe what's most significant. How do they get to 17 in the first place? [00:35:34][3.6]

Thomas Keily: [00:35:35] Why does this sort of tie into a conversation around MMT? The idea here is that Turkey has a lot of its debts, as I understand it, denominated in foreign currencies. So when American banks and firms lend to Turkey, they're not happy to have their debts in lira because the lira is traditional. Yeah, it's just too volatile and puts him at risk because they say, no, we want our dollars back. We're going to give you one hundred U.S. dollars. We want 100 hundred U.S. dollars back. We don't want the lira equivalent because we don't know what the equivalent is going to be worth in two years, five years, whatever. And so the debts are denominated in foreign currency. Now, if the currency starts to devalue, that means that their debts become relatively more expensive. That makes sense, so because is devaluing then the US dollar did start getting more and more expensive and the burden of paying the interest and repaying the debt becomes bigger and bigger until it potentially cripples the economy. So what you've got to do to prevent that is you can't allow the lira to devalue. You've got to hold it up. The way that you hold it up is that you set interest rates at a higher rate, which then attracts money into the country. The money coming into the country needs Lira to be able to invest to capitalize on these 19 percent interest rates and that support pushes the lira higher or holds it up at a particular level. [00:37:06][91.1]

Adam Keily: [00:37:07] Right. [00:37:07][0.0]

Thomas Keily: [00:37:07] So they kind of they're forced to do this because they're like many emerging market economies, their debts aren't denominated in the local currency. They have foreign-denominated debts. Because that because that's going on, they've got to then they've got to they sacrifice their interest rate independence almost because they've got to use the interest rate lever not to support the economy like we're free to do in Australia. They've got to use interest rates to support the currency to stop the debt from getting out of control. And I think that's what's happening in Turkey. [00:37:36][28.9]

Adam Keily: [00:37:37] Yeah, crazy times. I reckon we need to leave it there for this week. I hope you've enjoyed the show this week. Don't forget you came across in the same. I don't think I've given out emails a bunch of times already, so I'm not going to say it again. cve@equitymates.com. [00:37:47][9.7]

Adam Keily: [00:37:54] Don't forget, you can check out all the other great podcasts. So many now across the Equity Markets Media Group. So make sure you check out all the other podcasts that we have now to get started investing in equity markets investing podcast. We've got Karma and Zoe with Mapei Love and some really great new podcast which is called You're In Good Company. Maddie and Sophie are doing some amazing stuff there, so plenty to play and listen to. We do, of course. Thank you enormously for tuning in to comedian versus economist and hope that you will join us again next time. See you then. [00:37:54][0.0]

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