11 February 2023

Central banks killing inflation is negative for asset values. Don’t even consider gearing investment property or buying a house with a large loan.

 The US Federal Reserve has signaled that it intends to squeeze the life out of inflation with its latest interest rate increases and accompanying announcement.  The Reserve Bank of Australia has little choice but to follow. We can expect a couple more interest rate increases. Anyone believing that interest rates will subsequently reverse down to the very low rates of a year ago will be sadly disappointed. Interest rates are likely to stay higher for longer until the Fed and the RBA are satisfied that they have the inflation bogey under control.

Rising asset values over.

 The inflation of asset values is effectively over. Expect house prices to fall further. Asset prices are unlikely to go back to where they were unless interest rates charged by the RBA to banks go back to near zero and central banks including our RBA are prepared to reinstitute massive quantitative easing—i.e. make vast quantities of near free money available to banks and governments. This is not going to happen. The Covid response is over and central banks are conducting their clean up.

When politicians are too weak to restrict spending the clean up ends up being done by central banks. The USA, European economies and Australia are all heading towards higher interest rates for longer, reduced asset values and a significant jump in unemployment. 

Assets in trouble.

 Buy Now Pay Later company shares are already in deep trouble. Across the spectrum of ‘tech’ stocks we have been witnessing almost daily announcements of staff job cuts. This is likely to prove to be the first of several rounds of cuts.  As interest rates rise, the valuation fundamentals on listed property trusts change as rising bond rates are the key element in their valuations. Industry superannuation funds who have been much to slow to revalue property and infrastructure assets are at serious risk of being massively caught out. Expect members to switch to cash options in large numbers and force funds to announce large asset devaluations. Forget crypto as a solution as the interest rate increases burst various bubbles. Crypto will be severely stressed. Don’t even think about gearing into a residential rental unit. Rising interest rates and increased unemployment will crash values. The coming increase in unemployment will send lots of youngsters back to the spare bedrooms in parental houses. New company share floats have dried up and it is likely to be a couple of years before capital markets open up.
 

Water does not flow up hill.

 A sustained share market rally in a period of rising and sustained higher interest rates would be the   economic equivalent of water flowing up hill. So would a rally in housing prices.
 

Where to?

 My family superannuation fund has a heavy weighting of cash and bank hybrid securities. I am moving more toward these assets. I see little prospect of a sustained share market rally and am wary of the periodic ‘dead cat bounce’.

Naturally I urge readers to do additional research and take cautious professional advice. Be extremely wary of advice to purchase shares at this time.
 

Independence And Disclosure

 I am not a representative of any accounting practice, financial planning firm, business or marketing consultancy. I spent 33 years as a business and financial adviser to mainly dental, medical and veterinary specialist and general practitioners. Since I retired as a director of a financial services group, of which I had been a founder, on 30 June 2020, I am no longer licensed as an investment adviser. Readers should treat the above as general advice and take professional advice as required.
 

General Advice

 I sold my interest in a financial services and accounting group on 30 June 2020 and have no intention of starting another financial services business. My website is now available at grahammiddleton.com.

Those who find my newsletters of value to them are asked to consider making a donation to the Delany Foundation, a registered charity which assists schools in Papua New Guinea, Ghana and Kenya. Delany Foundation c/- Holy Cross College, 517 Victoria Road Ryde NSW 2112.
 
Best wishes to all readers,

Graham Middleton