WTF are Bond Yields and what did they do to my stonks?!?

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. Welcome to the show, Thomas. [00:01:06][14.5]

Thomas Keily: [00:01:08] Yeah, thanks, Adam. G'day everyone. [00:01:09][0.9]

Adam Keily: [00:01:10] Now, Thomas, today on the show, I'm asking the question I think a lot of people are asking this week, and that is what the hell a bond yields and what have they done with my stocks? Because it's the question on everybody's mind is things which is ticking along nicely. Everyone had some investments. We all thought we were like we were going well, shares were going up last week. We were talking about how the economy was booming. And then all of a sudden, out of nowhere, along came this thing called bond yields and the share market tanked. And it's just like stock like I don't know. I think there'll be a lot of investors out there, a lot of newbie investors especially, just going, what the hell, a bond yields. [00:01:58][48.0]

Thomas Keily: [00:01:58] Yeah, well, we actually saw that in the Google stats. There was a spike for for bond yields at the end of Friday. [00:02:06][7.5]

Adam Keily: [00:02:06] Was it a direct correlation with the bond yield price going up that correlated with the Google search hits for bond yields? [00:02:14][8.0]

Thomas Keily: [00:02:15] Yeah, bond yields caused that to be causing havoc. [00:02:21][5.4]

Adam Keily: [00:02:21] It's like I mean, you know, I've probably only been investing for maybe six to 12 months. You think you know how things work, like you're feeling pretty good about stuff, especially in this [00:02:33][11.4]

Adam Keily: [00:02:33] this bull market that we've been [00:02:35][1.4]

Adam Keily: [00:02:35] in where it's just like, I'll just buy some of this. I've done my research, which consisted of probably some Google searches by some of this stock, done research. And hey presto, it's been going up. And all of a sudden a long term bond yields and everyone's like, no one told me about bond yields. I just thought [00:02:54][19.3]

Adam Keily: [00:02:54] we I thought the way the share market worked was we all bought some stocks. [00:02:58][3.9]

Adam Keily: [00:03:00] If we wanted to make a lot of money, [00:03:02][1.6]

Adam Keily: [00:03:02] we bought some slightly risky ones. If we wanted to just [00:03:06][3.7]

Adam Keily: [00:03:06] kind of track along nicely, [00:03:07][0.9]

Adam Keily: [00:03:08] then we bought things like ETFs. But regardless of what we bought at all, this kind [00:03:12][3.9]

Adam Keily: [00:03:12] of was ticking along. And now it's not. It's just it's [00:03:15][3.0]

Adam Keily: [00:03:15] all gone south. Yeah, it's [00:03:17][1.9]

Thomas Keily: [00:03:17] a wake up call for for newbie [00:03:18][1.2]

Adam Keily: [00:03:19] investors. I think my favorite quote was from a mate of mine who sent me a message. [00:03:24][4.8]

Adam Keily: [00:03:25] He's like, man, what's happening with the share market? I've gone from thinking on Bezos to [00:03:29][4.1]

Adam Keily: [00:03:29] that guy waiting for the pokies to over at seven thirty eight, which are going to be coming. I can see a lot of people out there. Great, Ali, by the way, uh, a lot of people out there [00:03:40][11.0]

Adam Keily: [00:03:41] that are a bit confused. Hopefully we can we can shed some light on that this week and hopefully you can explain to the rest of us, to us laypeople, what's happened to all our stock market. We are recording on Monday, the 1st of March. And today I did see a bit of a rebound. Can we call it a rebound in the economy back on track? So that's a good thing. [00:04:02][20.6]

Thomas Keily: [00:04:02] Yeah, back up. Back up two percent. Yeah. Fair chunk of the fair chunk of what we lost on Friday. [00:04:06][4.4]

Adam Keily: [00:04:07] Stock on that bond yields. [00:04:08][0.8]

Adam Keily: [00:04:09] Nothing to do with our, um. [00:04:13][3.6]

Adam Keily: [00:04:13] Well, before we get started talking about bond yields, we did have a couple of listener questions come in during the week, which I wanted to to get your thoughts on. And in fact, what I'd really like to do here is because I feel like I'm gradually learning more and more, but I'm not really having to to test my knowledge at any point. So what I thought we might do is maybe I'll have a crack at the listener questions and then you can tell me whether I'm right or wrong. And you can you can tell our listeners whether or whether, you know, whether you can give them the actual answer [00:04:43][29.6]

Adam Keily: [00:04:43] that they're probably after. Yeah. Who flood the airwaves with nonsense and have come in and clean it up. You might be [00:04:52][9.0]

Adam Keily: [00:04:52] surprised. I might nail it. You never know. You might. Yeah. The first question comes from Adrian. Adrian's asking about his Hecks debt, which is now called the Higher Education Loan Program, [00:05:02][10.0]

Adam Keily: [00:05:03] or help, which [00:05:05][1.5]

Adam Keily: [00:05:06] can't that can't be serious. Is it is [00:05:08][1.7]

Adam Keily: [00:05:08] that what it's called now? [00:05:08][0.5]

Thomas Keily: [00:05:09] Yeah. Yeah. I think you're showing your age there, but I think it's been help for ten years or something, maybe more if [00:05:15][5.8]

Adam Keily: [00:05:16] you go into some debt before you've started earning. Yeah. Anything else we can help with. Thanks though. That's all for now. Yeah. Helping hand from people who paid zero debt, the university degree. Uh, well [00:05:31][15.3]

Adam Keily: [00:05:32] Adrian is asking so he's noticed that he's being whacked with a one point eight per cent indexing charge each financial year. And that started while he was at university and not eligible to repay the debt. It did drop from one point nine to one point eight per cent in twenty eighteen to twenty nineteen. But it hasn't budged since twenty nine. So his question is, why is the right one point eight per cent, despite interest rates being so low? He's asking, what metrics does the government calculate this indexing on? Well, Adrian, I reckon [00:06:04][32.1]

Adam Keily: [00:06:06] I reckon [00:06:06][0.2]

Adam Keily: [00:06:07] that one point nine percent is not a bad rate, to be honest. If that was my home loan right, then one point eight percent, I'm taking that every day of the week. So I think as far as loans go, [00:06:16][9.8]

Adam Keily: [00:06:17] that's pretty competitive. The only question I have [00:06:22][4.8]

Adam Keily: [00:06:22] is can Adrian shop is help around and get a better deal. [00:06:26][3.5]

Adam Keily: [00:06:29] Thomas, your thoughts? Yeah, OK, I guess so. [00:06:38][8.4]

Thomas Keily: [00:06:39] Is indexed to inflation. So the one point is I think would be the CPI measure for that financial year. Right. So yeah, the debt is indexed to inflation, so it goes up by inflation. And what that means is that its purchasing power remains constant through time because it's indexed to inflation. If it wasn't indexed to inflation, it would be the same amount. And the economy prices and the economy would keep going up, which means that that debt would become cheaper and cheaper and cheaper. And so just to keep that right. What the real value, what we call real after inflation, keep the real value of the debt constant. It gets indexed to the CPI indexed to inflation, which is what that one point eight percent is. And that's so that's how we make things real and stop the sort of the purchasing power degrading over time of the debt. [00:07:29][50.3]

Adam Keily: [00:07:30] So pretty much what I said. [00:07:31][0.7]

Adam Keily: [00:07:32] Yeah. Yeah. Apart from a bit of shuffling in or out. Yeah. [00:07:37][4.8]

Thomas Keily: [00:07:38] It's not really connected to interest rates. That's not right. But I mean beside that, I mean what you can think about is all interest rates have a nominal and real component. So, um. What what you can think of as one point eight per cent is a real interest rate of zero percent plus one point eight per cent for inflation, and all interest rates you're paying in the economy have that component to them. They have the real rate of interest, plus something for inflation so that you like your home loan or whatever at two and a half percent. What that saying is that the real rate on the interest rate is zero point seven percent plus one point eight per cent for inflation. Right. Because the the the lenders need to cover themselves. They would need to get a return for the risk that they're taking in. That's in the real component. And they need to cover the inflation and make sure they're not losing money on they're put on a purchasing power basis. So they have inflation baked in, plus the real rate of return, which is why the increase in bond yields is is interesting because that comes into this. But maybe, [00:08:42][63.6]

Adam Keily: [00:08:42] yeah, we'll come back and hopefully that's hopefully that's answered Adrian's question. He probably still going to feel any better about having to pay that one point eight percent, but at least he might know what it is. Don't forget, you can, of course, email us at equity markets, dot com or head over to the website equity match.com, forward slash KVA. We had another email from Kieran and Kieran was asking about and he said, can you explain the negative effects of letting the Australian dollar rise against the US dollar, against the US dollar? So this one is in my wheelhouse. Tom, this is easy. [00:09:18][36.1]

Adam Keily: [00:09:21] You stop me [00:09:24][3.8]

Adam Keily: [00:09:24] if I'm wrong, but it makes Australia more expensive, right? It makes Australia more expensive to the rest of the world. So therefore, it becomes hard for us to sell things. It becomes hard for us to attract foreign money into Australia. It becomes hard for now that it's a big issue at the moment. But for people wanting to travel here, they can't get as much for their money when they come visiting. So so that's really the main the main negative of the Australian dollar. Rising is it's going to stop money coming in, is that right? [00:09:53][28.5]

Thomas Keily: [00:09:54] Yeah, yeah, yeah. I wouldn't say yeah. Now that's that's pretty much right. I don't know about the money coming in, but it makes it makes our exports more expensive. Makes it harder probably. There's another thing we haven't really talked about on the show yet is that when it makes imports cheaper and imports our cost of production, which and that feeds through into inflation. So an appreciating Aussie dollar makes imports cheaper, which makes goods in the domestic economy cheaper, which makes inflation lower. And we're in a situation right now where we're underneath the RBA target band for inflation. We're at one point eight per cent as we just come. And the RBA, its target band, is two to three per cent over the business cycle. So they want to be two, two to three per cent. So they want more inflation. So if the an appreciating Aussie dollar works against that and gets in the way of their inflation target of them hitting their inflation target. So that's one of the reasons that's the other side of the coin. We don't really talk about that so much, but it's something that the RBA is concerned about, like a massive expansion in the appreciation in the Aussie dollar makes it much harder to hit their inflation target. [00:11:00][65.7]

Adam Keily: [00:11:00] You're right. They go find a one from a different Adrian this time. But Adrian, again, now he's been reading, which is always dangerous. I say Adrian, gotta be careful. He's confused about a comment he read in an article regarding house prices and he's provided the quote. ANZ senior economist Felicity Emmett said removing stimulus packages, including job seeker, job kaper and home builder could cause a surprise surge in house prices. He thought that increasing spending and stimulus in the economy heats up. The economy increases the potential for inflation on restricted assets, which I think housing is, or at least increases demand and therefore prices. How will withdrawing their stimulus policies create an increase in house prices? Has Felicity gone rogue? Adrian, I was hoping you can help demystify this for me. [00:11:52][51.9]

Thomas Keily: [00:11:53] And pulling any punches, Adrian? [00:11:54][1.4]

Adam Keily: [00:11:55] No. Well, simple answer, Adrian is yes. Felicity has gone rogue. She's gone completely off script. [00:12:00][5.3]

Adam Keily: [00:12:02] She's just out there improvising. And we now and I just hope we get Rihanna back in before she does some permanent damage. So, I mean, even now that Adrian and there's probably only. So Thomas thoughts is the I think [00:12:19][17.4]

Thomas Keily: [00:12:20] the line of thinking you've got there. I do. I think is right. It's a bit of a convoluted argument that erm it's making here. I don't find it hard to follow. What she's sort of saying is if you keep interest rates low, that stimulates the housing sector. If you pull away the support that that thumps the real economy and then you get an imbalanced economy which somehow causes house prices to surge. Didn't maybe they just didn't report that. But I mean, you remember the context. She was. Speaking at the Urban Developers Australian Property Development Outlook Summit, which, as I understand it, is a shameless spruik for the construction industry. And so they were just they don't they don't want a home builder to be wound up. So they trotted out an economist to make some convoluted argument, [00:13:09][48.6]

Adam Keily: [00:13:10] which is how the real world works. Kids. Well, there you go. I was pulling no punches. Either it would say or invest. [00:13:18][8.2]

Adam Keily: [00:13:21] All right. Very good. Well, I'll tell you what, why don't we pause here and get a quick break, maybe a word from our sponsors and then we'll come back and we'll talk all about bond yields and what they did to the share market. [00:13:32][11.9]

Thomas Keily: [00:13:33] 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 for it 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. [00:13:59][25.8]

Adam Keily: [00:14:01] Welcome back here on comedian versus economist, and we're talking bond yields, Thomas, first of all, what a bond yields. [00:14:08][7.3]

Thomas Keily: [00:14:09] So, yeah, the bond yield is the return on that. You're getting on your bond. So a bond is a fixed interest instrument. So the government lends out, you know, money. So maybe you creates a bond for 100 hundred dollars and they say you lend us one hundred dollars and we'll pay you two percent a year for five years. And at the end of five years, we'll give you one hundred dollars back. [00:14:35][26.2]

Adam Keily: [00:14:36] Right. So it's always for a fixed term. [00:14:37][1.1]

Thomas Keily: [00:14:38] Yeah. Yeah, yeah. [00:14:38][0.8]

Adam Keily: [00:14:39] Like it. You have to you have to set that term upfront. You have to go it for five years or 10. Yeah, yeah, [00:14:43][3.9]

Thomas Keily: [00:14:43] yeah, yeah. Normally I think it's like five, three, 10 and 20 and 30 or something like that. Right. Yeah. Pretty, pretty regular terms. [00:14:51][8.0]

Adam Keily: [00:14:51] All right. And so last week we were talking about the economy booming. You listed off 10 reasons why the economy was set to boom. So and I noticed this is playing out in both America and in Australia or maybe Australia is following America, which it seems to do for my extensive experience in the share market, tends to just follow on. But bond are increasing. Bond yields are they are a reflection of that that booming share market or that booming economy. Sorry. [00:15:19][27.6]

Thomas Keily: [00:15:19] Yes, but not super directly. It's a reflection of largely the increase in bond yields was driven by the inflation outlook. But the market's starting to rethink the outlook for inflation and thinking that there might be more inflation coming then than had been priced in. So remember what we're talking about with interest rates and how, like there's a real right and a nominal right on top, if you know so Adrian, it was adream with the with the help that. Yeah, yeah. He's got it. He's got his one point eight percent. So that's all inflation. So if inflation went up, it's zero plus the one point eight. Now, if people thought the inflation is going to be more like 2.5 percent, then it would go up to two point five a B zero plus two point five. That makes sense. [00:16:04][44.7]

Adam Keily: [00:16:06] I was hoping you wouldn't come back to the nominal interest rate and the real interest rate stuff, because I didn't really understand that when you were talking about before. So I kind of just I assumed Adrian was was listening and making sense of what you were saying are largely tuned out of. [00:16:24][18.3]

Adam Keily: [00:16:27] See, you found large portions of the normal interest rate explanation. [00:16:34][6.7]

Thomas Keily: [00:16:35] Yes, so basically, if investors are thinking that inflation is going to be higher than they thought, then for the same bond price they need, they need a bigger return. Right. Okay. So that so that increases the yields [00:16:49][14.7]

Adam Keily: [00:16:50] because of the risk, [00:16:50][0.6]

Thomas Keily: [00:16:51] because. Well, they want to be covered for inflation, otherwise the inflation. So it's something like, yeah, we want we think, you know, because it's over three, five and 10 years. So action in Australia is the five year one that gets most commonly charted, but. Right. Yeah. So it's sort of like what's the outlook for inflation over the next five years? You need to take it, take a bit of a punt at that and think about that and then come up with a rate that has you covered that you're not going to be losing money. You were saying [00:17:14][23.4]

Adam Keily: [00:17:15] before the RBA doesn't make any any bones about that. Don't make any secrets about that. They're trying to get inflation up. So they're saying their inflation target, inflation target is two to three per cent. Well, if it's if it's at one point eight now, it's definitely gonna go up. So it has to be. [00:17:30][15.0]

Thomas Keily: [00:17:30] Yeah, you'd think so, but. [00:17:31][0.9]

Adam Keily: [00:17:31] Well, maybe not definitely. But I guess if they're in control of it. [00:17:34][2.4]

Thomas Keily: [00:17:34] Well that's right. But they're not in control of it. They have undershot their target for the five, six years now. [00:17:39][5.6]

Adam Keily: [00:17:40] No. No performance bonus for the RBA. No, no. Yeah. [00:17:44][4.0]

Thomas Keily: [00:17:44] So it's more of an aspirational target. And they're saying they'd like to get it back there if they could, but they they haven't been able to do it. And that's because they've only really got one tool to work with. And there's a whole bunch of other factors that are constraining it. But naming a target, an inflation target and hitting it are quite different things. Yeah, right. So what we're finding and so no one's and so particularly out of covid, no one, you know, there's like. Yeah, yeah, sure. Two, three percent whatever is probably going to be much lower than that. And central banks are going to really struggle to get inflation up. Yeah. So until until recently no one sort of thought inflation was coming. No one thought the central bank's going to be able to hit their targets, but they've just starting to think like, oh, maybe, maybe they were. Maybe there is there is a sort of inflation impulse coming through the economy. [00:18:31][46.9]

Adam Keily: [00:18:31] Right. And so just to get my head around these bond yields, so the bond yields, then they kind of they're they're advertised at a at a rate that people can buy them, buy them out for that five, like the five year bond yield has an advertised price. And is that what was going up or is it kind of a supply and demand type thing? As more people bought the bonds, then that pushes the price up, or is it the forecasting that's going up? [00:18:56][24.6]

Thomas Keily: [00:18:56] Oh, none of the above, but yeah. [00:18:59][2.7]

Adam Keily: [00:19:01] So I thought that's a really good question. I thought there was. Oh yeah. It was a lot of words in there and I had all the words that [00:19:10][8.3]

Thomas Keily: [00:19:10] just weren't in the right order. And so you, you think about use in the same sense of like property use is maybe like is something that people get their head around a little easier. So, you know, the property has a price. It has the amount of rent that it generates each year and then put those to in a ratio. You get the yield, which is the return. Now you've got so you've got two elements of that. So either if the return goes up, then the yield can go up or if the price goes down, then the yield can go up. So that makes sense because we're talking about a ratio. What sort of seemed to happen in the US is that the government, when it went to issue a bunch of bonds and people went, yeah, now we're not really wanting them right now. And it wasn't particularly successful option demand was low, therefore the price was low. And because the price was low, the yield went up so much since [00:20:02][52.3]

Adam Keily: [00:20:03] I was with you. Yes, I was with you up until until up until you said that the price went down like I was I was expecting it to go up because if the demand was low, that says to me that the price was wrong on the bonds. So then they'd have to put the return up a bit. And we're not talking about the we're talking about the price of the bond, not the return on the bond. [00:20:23][20.3]

Thomas Keily: [00:20:24] It's yeah. We're in. We're in. Yeah, we're in intermediate finance territory. I mean, even just getting your head around the way the the prices and the yields, that sort of ratio works because it's sort of when we're talking about yields, we're looking at the end result of that ratio. So it's not is not normally something you consider. [00:20:41][16.8]

Adam Keily: [00:20:43] All right. If the bond was a potato, OK, I've got to put up do it right. Let's break it up. Let's bring it up a bit, though. I feel like I'm struggling with enough information to even ask good questions, though. So I apologize to the listeners if if maybe you're sitting there yelling at your your earbuds as you're out for your walk thinking I've got half an hour in the middle of the day, I really came here, bond yields. And I don't even understand the question. I mean, it's it's it's it's complex. [00:21:19][36.3]

Thomas Keily: [00:21:20] Let's zoom out a little bit. So you used to used to think about bonds sort of being the. Of stocks that went, stocks were going up, bonds were going down, so in a risk on environment where it's like growth happening, everyone wants to get into stocks, they're selling out of their bonds, which are like bonds are risk free because they're coming from the government. You know, you're going to get your money back. You know what you're going to get on the on the bond. They're safe. Yeah, they're safe. There's almost zero risk. And so in a risk of an environment where everyone's like, let's get into the share market, it's all happening. People are selling their bonds and getting into the share market, you know, so the share markets are going up, bonds are going down, the price I'm talking about here. And so they kind of inverse in a risk off environment where there's like, oh, things are getting a bit dodgy. I want to get out of shares. People start retreating to safe options and they go to bonds. Right. And so the classic theory was that these two would work in inverse to each other. So one of the challenges as an investor is you have your portfolio allocation. So you've got you know, what what are you exposed to? Are you exposed to domestic shares, international shares, bonds, commodities, crypto currencies, whatever that all of that mix that's called a portfolio. So there's a theory for a while about lazy portfolio allocations. They're saying, like, you know, as a pundit investor, you shouldn't be trying to read the economy and deciding your portfolio and allocation in real time. You're much better taking a lazy portfolio approach and going, like, I'm just going to go with this. You're going to have 20 percent in domestic shares, 15 percent in international shares, Timpson commodities, whatever it is, and just and just looking for it, rebalancing each year. But to saying this is the mix, I'm going. I just went [00:23:03][103.0]

Adam Keily: [00:23:03] I went lazy. I went to Tesla and after pay and that's it. [00:23:06][3.4]

Adam Keily: [00:23:09] It's diversified across countries, but it even spread because some of us, some Australian Keiller companies can go wrong. Yeah. [00:23:22][12.3]

Thomas Keily: [00:23:22] So the first lazy portfolio was Rick Perry's two two portfolio mix, I think it was called. Yeah. And basically was the idea was you have 60 percent shares, 40 percent bonds. Wow. So when in a risk off environment, the bonds would have you covered and you wouldn't lose, you wouldn't be a disaster in a risk on environment. Bonds go down, but the shares are going up. So happy days. And so that was sort of the way to balance it. What happened, though, was like that that held for like a generation, generations that worked until quantitative easing kicked in around 2008. From that point on, rather than being inversely correlated, they became correlated so that shares and bonds would go up together in shares and bonds would go down together. Right. And so it got a bit confusing. And even now even now, like with with this story, bond yields cause share prices to fall. That's two ends of a chain that has a number of causal effects between here and there. It's not as simple that there's no logical. Well, that's not to say there are a few reasons why rising bond prices can cause share prices to fall. There's three that are worth considering. The first is that because it's a risk free rate effectively is the benchmark interest rate in the economy. And so if that goes up, then all other interest rates in the economy go up as well. Right. And so if for corporates with debt, most corporates have debt, that means their debt burdens go up. That eats into their cash flow, which can affect their profits, which therefore theoretically can affect their share price. That's one transmission mechanism. But, you know, debt levels aren't crazy high. It's you know, it's not such a not such a drama. The second reason is the way that you calculate the value of shares. So theoretically, you know, the share entitles you to a future income stream from the company in the way of dividends, entitles you to a share of all their future profits. How much you valued that future stream depends on how much you value money today versus money tomorrow and money in the future. And that's called the discount rate. And the interest rate has a huge impact on the discount rate. Yeah, if interest rates go up, then you value money more today than you do in the future. And so you value the future income stream less, which means you value the share of the company less. [00:25:50][147.8]

Adam Keily: [00:25:50] Wouldn't but doesn't inflation have a role to play there too. Like isn't. Like in that in that equation, you know, the the value of money is going to be higher or you value more money today is going to be lower than it is if inflation is at three percent as opposed to if it stays around one and a half year. [00:26:07][16.7]

Thomas Keily: [00:26:07] All other things being equal. So assuming the inflation outlook is the same. Higher interest rates mean lower share prices because you're discounting the future more, right? [00:26:18][10.3]

Adam Keily: [00:26:18] Yep. [00:26:18][0.0]

Thomas Keily: [00:26:18] So, um, but I don't think any of that really matters. I think what the real story is that we've got super cheap money right now. The Fed's printing hand over fist Congress is spending hand over this. RBA here is printing a lot of money, Treasury spending a lot of money. And so you're talking about it, money gushing into the economy and causing quite an unprecedented way and a quantum and quite an unprecedented rate, you know, in the general vibe in the share market is like this is amazing, is going to be awesome for companies, money, supplies through the roof. You know, everyone's going to have heaps of money to spend. Sales are going to be our revenue is going to be our profits are going to be up. Therefore, share prices are going to be up. And so a lot of it comes off this easy money reality. So but what happens, though, is that when the market readjust its expectations for inflation, that creates a potential trigger that if inflation looks like it's on a trajectory to break through the balance of the central bank. So the central banks are targeting a particular rate, two to three per cent in Australia. If it looks if the market starts to think like, hang on, we've got there's an inflation shock coming through the system, we're going to just bust straight on through our target band and inflation's going to be a lot larger than we're expecting. That potentially triggers the RBA raising interest rates. Right. And starting to to tighten monetary conditions. And so what the rise in bond yields reflected was a fear that inflation was starting to take hold and and potentially get away from us, and that that, in turn, might cause the central banks and the governments to start reining in all the money that's been promised and all the money that had been supporting the outlook for shares. I think what happens is people start looking at, you know, particularly when we talk about tech stocks and tech stocks got hit the hardest on Friday. Tech stocks, the valuations are, you know, bumping the earnings per share. Projections are awesome, like the talking about the best of times because it's built on super cheap money. But if there's a danger that that super cheap money is going to be taken away, then you're looking at like, well, maybe this isn't the best of times. Maybe Tesla is just a just a good company, not like a super amazing company. And maybe, you know, maybe we've overpaid because all this money that we've been promised isn't going to come and isn't going to juice the economy in the way that we thought it did. I thought it was going to. And so that's that. I think that's that's the transmission mechanism that happened, is that the fear that inflation was taking hold, which was reflected in the bond prices, but is kind of that's just one manifestation of the real core issue, was this increasing expectation that inflation was going to happen that caused people to think maybe that was going to be less money coming into the system, which then meant that they start looking at the outlook for shares and go like, oh, maybe it's not as awesome as we thought it was going to be. [00:29:19][180.1]

Adam Keily: [00:29:19] Interesting. So I hope you're following along at home or you're listening to this. There's a lot to take in there. One thing that I did pick up on, though, and I think we've talked about this before, is I thought if we were looking at inflation and heightened levels of inflation, then you didn't want to be holding cash. You want it to be invested in things that were going to perform like. [00:29:41][22.0]

Adam Keily: [00:29:42] I thought this might have been my mistake in hindsight, but I thought we should buy stocks because I thought that was [00:29:52][9.7]

Adam Keily: [00:29:52] the place you wanted to have your money. If inflation started getting out of control because you didn't want to have it in cash, you didn't want to be left holding a cash baby when inflation took hold because you might not be worth a lot less than what you thought it was going to be. But you're saying everyone's worried about inflation going up and that's why the the bond yield is going up and therefore, the share price of most companies was going down because everyone was worried about inflation. I thought people would stick their money into into the share market if they thought inflation was going to go higher. [00:30:25][33.2]

Thomas Keily: [00:30:26] Hmm. Yeah. I mean, that's mostly right. I mean, it's a little bit unconventional to think of stocks as a hedge against inflation. [00:30:32][6.8]

Adam Keily: [00:30:33] That's that's not well, you know, it's not the most. Yeah. [00:30:38][5.3]

Adam Keily: [00:30:39] I like to just make my decisions based on some of the information. [00:30:42][3.2]

Adam Keily: [00:30:49] But I mean, this is right. [00:30:50][1.3]

Thomas Keily: [00:30:51] This is right. Like, it's it's a good news story and. This is the perverse world that quantitative easing has created, good news is bad news, so it's normally good news that we're talking about an economy ramping up, activities happening, you know, that's causing inflation. That's one of the byproducts of an economic activity coming to life and running a bit hot. So even in a you know, with inflation picking up, we're still talking about an outlook for companies that is bumper, you know, should be really good. Right. The other thing that happens is that we're talking about less money, less crisis response because we're no longer in a crisis and that means less money, you know, being injected through governments into the system. And that's bad for share prices because people think there's not as much money now. So even though real the real economy is supporting share prices, the government money story is not supporting share prices and it's how those balance out. And what we're seeing is that a lot of current valuations are based on, you know, the promise of super cheap, easy money. And that's obvious, right? So we had a global pandemic smash GDP across the world and the share markets hitting all time highs. It's not on the back of the real economy. It's on the back of promised super cheap money. [00:32:14][83.3]

Adam Keily: [00:32:15] So is it a is it a bubble, though? It was like. Like, is it is it all these tech stocks and all these companies that have that have done really [00:32:22][7.5]

Adam Keily: [00:32:22] well over the [00:32:24][1.3]

Adam Keily: [00:32:24] the last six or 12 months, you know, after after March 20, 20, I was saying it's a bubble, that now this is some big correction that's happening. There's a lot of people shouting, buy the dip, [00:32:34][9.7]

Adam Keily: [00:32:36] which I love. I'm all for a catchphrase for my making my investment decisions. But are we in a bubble? [00:32:42][6.8]

Thomas Keily: [00:32:45] And I don't think so. I mean, you never know. You never know until without the benefit of hindsight. But like, I think like I think there is an argument to make that valuations are rational based on the outlook for the expansion of the money supply. Like you think about the US into broad money measure that's gone from one trillion prie covid to four trillion. [00:33:09][24.3]

Adam Keily: [00:33:09] Now, what's that? What is the broad money measure? [00:33:12][2.2]

Thomas Keily: [00:33:12] Uh, it's like it's money, it's currency plus deposits and something else. [00:33:18][5.3]

Adam Keily: [00:33:18] I guess the amount of money that's going around. [00:33:21][2.6]

Thomas Keily: [00:33:21] Yeah. Amount of money in the economy, you know, so it's gone from one trillion to four trillion in 12 because, you know, there's a massive expansion in the money supply. We didn't see that in the GFC because we didn't have the Fed's money printing cycled through Congress in the form of fiscal spending. We didn't see in Australia because we didn't even have money printing them. Um, but this time we've got both. And so we've got an expansion in the money supply in Australia to. [00:33:46][24.6]

Adam Keily: [00:33:46] Right. And all of that has gone into the economy and then gone into the share markets and going, well, it wasn't going into bonds because the bond yield was so low. Is that fair to say? [00:33:56][10.4]

Adam Keily: [00:33:57] It's because you talk about the ratio and the balance and the yin and yang of of bonds and shares, it was true, wasn't that that during covid shares went up and bond yields went right down? Like I remember I remember going to see a financial adviser for didn't actually end up going with them and paying for the actual advice, just went saw them and they said, we think we probably should put a lot of money in bonds. And I was like, Athans boring. [00:34:22][24.9]

Adam Keily: [00:34:24] Um, but that was going [00:34:25][1.3]

Adam Keily: [00:34:25] to be like a ten year bond thing and it was going to return, I don't know, whatever it was. I thought that it doesn't sound very interesting, but I'm glad I didn't because during covid, like, all of a sudden these bonds were worthless and shares were going up. [00:34:38][12.5]

Thomas Keily: [00:34:38] Yeah. Which is not what you expect, you know, and that's the thing like that, that old rule like that, that to fund portfolio mix, that lazy portfolio is a disaster right now. Like bonds don't protect you in the way that they used to write. So and we need to rethink bond bonds. I think everyone sort of thinks bonds. I mean, yes, they are safe, but, um, you know, but they also have a I also have a price and that price can go up and down. So it's like, yeah, it's not just, you know, there's a guaranteed return, but the price if you had to sell them, that fluctuates with the market. Um, yeah. So in the quantitative easing year that kicked off after the global financial crisis, the relationship between bonds and stocks has has changed. And we've now got something that's quite different. Right. [00:35:27][48.7]

Adam Keily: [00:35:29] All right. There's a lot to digest there. I think we're going to leave it there for this week. Hopefully you're listening at home, got something out of it. Do you have something you wanted to add that [00:35:36][7.8]

Thomas Keily: [00:35:37] I know this is going to say hit us up with any questions. If you if you got. I think I'm going I'm going on the on biz show with the equity boys tomorrow to talk a little bit more about it, maybe tick off a bit more there. But yeah. You got any questions here to [00:35:49][11.8]

Adam Keily: [00:35:49] catch Thomas on Osbey is the equity mate show on Aussies find it on on the Google if you need it. I don't have the [00:35:57][8.3]

Adam Keily: [00:35:58] address for it right now but [00:36:02][4.1]

Adam Keily: [00:36:03] yeah. And as Thomas said, hit us up with any questions. I think there should. I think there'll be a few, to be honest, if anyone's making as much as what I am, I think I've still got a few questions. But we're running out of time for this week, so send us an email and look [00:36:17][14.7]

Thomas Keily: [00:36:18] is also OK, because, you know, I read a lot this week, and it's not it's not a clear reason why bond yields and stock prices are connected. There's no mathematical formula that connects the two. It's just that it reflects underlying conditions in the market. And there's a lot of people who don't really get it right and don't stress too much about it. If you don't, we're into sort of intermediate financed territory here. [00:36:39][20.8]

Adam Keily: [00:36:39] But thanks. Are you talking to the listeners? We break that fourth wall? Um, yeah, absolutely. So send us an email cve@equitymates.com or equitymates.com/cve, you'll find a contact form there that you can use to get in touch. I did do my best to attempt to answer some of the questions this week. I don't even think I'm going to attempt to answer any questions on how bond yields work. But please enthrone Thomas. Ken Thomas can get onto them for you. Also, don't forget, there's a bunch of podcasts now that are coming out through equity markets. We've got the new one Meet Pay Love, which is really fascinating, interesting chat about finances and managing your money in relationships, which is and those guys are doing some amazing work, girls, I should say. And of course, equity rates investing podcast find it all at EquityMates.com. So thanks again for listening. Thomas, did you have anything else you wanted to add this week? [00:37:44][64.8]

Thomas Keily: [00:37:45] No, I'm good. Thank you. [00:37:45][0.9]

Adam Keily: [00:37:46] Thank you. You're welcome. All right, guys, we'll catch you next time on comedian versus economist. See you later. [00:37:46][0.0]

[2114.9]