How Do You Feel

Contributed By: Mike Phipps Finance on

“It’s the vibe of it. It’s the constitution. It’s Mabo. It’s justice. It’s law. It’s the vibe and ah, no, that’s it. It’s the vibe. I rest my case”
Dennis Denuto, Lawyer for the embattled Kerrigan family.
The Castle, 1997 Australian Movie Classic.

By the time you read this, dear comrades, we will either have the same government we have today, a new majority labour government or, God help us, a coalition of the mad, the bad, the misguided and the plain crazy. However, the numbers fall we can be sure of one inescapable truth, we live in a world where facts no longer matter and the vibe holds sway.
Don’t believe me? Here’s a simple example.

Recently I had the pleasure of travelling on a domestic aircraft. A Boeing 737 800 in fact. The pre-fligh t check in included a request to remain at least 1.5 metres from other passengers while boarding. Seems reasonable in these days of Covid hysteria. The message even has the right vibe, you might say. Anyway, let’s set aside the obvious problem of being squeezed cheek to jowl once seated and concentrate on the 1.5 metre request. The aircraft has 162 economy seats and 12 business seats. That’s a maximum of 174 passengers with each requested to remain 1.5 metres from the next. The simple maths suggests that in spite of the vibe we’ll need 261 metres if the plane is full and we comply with the social distance rule. According to Boeing the 737 is about 40 metres long of which the cabin is about 25 metres. You see the problem. While the vibe is great the maths doesn’t work. In fact, to maintain 1.5 metres in the aisle of a domestic airliner you would need to reduce maximum passenger to a point where the airline would simply go broke.

And that’s my worry. The vibe in much of public debate now takes precedent over fact-based discourse and no one seems to be checking the maths. Take inflation as another example. We predicted some time back that excessive money printing combined with supply chain disruption would ultimately put upward pressure on prices, and so it has come to pass. Setting aside a slight feeling of self-validation that I finally got a prediction right, this is good news for no one. Incredibly the response from some politicians has been to suggest wages need to keep pace with inflation. Ok, seems fair, cost of living going up, lets help working families, it’s the vibe. Again, the maths suggest otherwise. If it is true that inflation is a product of too much money chasing too few goods then one might quite rightly suspect that increasing wages, of itself, is akin to poring fuel on an already raging fire. Increased wages are not going to magically fix supply chain issues, sort out our ongoing blue with China or improve productivity.

More concerning, increases will reduce business profitability with a certain knock-on impact for business investment. These assertions can be costed and tested mathematically but no one seems to care. With businesses struggling to get back on their feet after Covid I believe all we need is a wages blow out to send us into recession. In fact, there are signs that it may already be too late.

To make matters worse I believe we now live in a country where the tough decisions are avoided and the popular vibe rules. Take the NDIS. No one with a heart would suggest that we should not look after our most vulnerable and challenged. However, with systemic rorting and cost blow outs expected to exceed $60B by 2030 (and dwarf Medicare spending) no one with access to a calculator could suggest that the scheme, in its current form, is sustainable. The maths doesn’t work but don’t hold your breath waiting for a politician to call it. The only way to fund such a scheme is increased taxes or print more money, maybe a magical combination of the two. In a perfect world we could fund all the initiatives that improve people’s lives. Sadly, the maths doesn’t work.

I cling to hope that a political saviour with the guts and vision to call things as they are will emerge from the swamp, but I’m not holding my breath. Here’s a few things to consider while we wait.

Interest rates are going up. How far, who knows. If you believe the CEO of our largest bank (yes, a stretch I know) the cash rate will hit 1.35% later this year before levelling off at 1.60% mid-way through next year. To put that in perspective the cash rate prior to the last RBA board meeting was .1% (thank you Anthony, you may put your hand down now) and now stands at .35%. CBA argue that rate rises within the range they expect will cool demand and put the inflation genie back in the bottle. I think they may be right. I’ve got a vibe.

The property market is correcting. How corrected, who knows. What we do know for sure is that politicians want to get involved in home ownership. Some would have the government (taxpayers) do a joint venture in first home ownership while others would allow access to super. Make no mistake, the access super option also involves taxpayers. Less super at retirement = more reliance on taxpayer funded pensions. Of course, if house prices rise substantially over the working life of the first home buyer and that buyer downsizes into retirement the whole thing just might work without imposing on the long suffering taxpayer. Sounds a bit like government sponsored speculation or is it just the vibe?

Mortgage defaults will explode. How big an explosion? Well actually, not very big at all. Australian borrowers do something that very few other borrowers do worldwide. They pay off debt faster than the credit contract says, and they build up advance payments for a rainy day. So far as statistics tell us only Canada has a similar borrower profile. In fact, new research from the Australian Prudential Regulation Authority (APRA), released recently, shows that Australian mortgage holders are on average 45 months ahead on their repayments. This is up from 32 months recorded prior to the pandemic.

Investment decisions will be more critical than ever. How critical? Very! Here’s where I caution you not to rely on anything I say and to seek appropriate professional advice.

I’m not a financial advisor, just a simple bloke who’s made and lost a few bob punting on various get rich quick schemes. It’s probably important to make one underlying confession fr om the get go. Most of the investments I’ve made over the years that relied on lots of analysis and many spreadsheets have performed modestly, while those decisions made more from a fundamental understanding of the asset, some emotion and the vibe have done significantly better. The lesson I’ve learned is that the more analysis required the less likely the investor has an understanding of the opportunity and asset class. So, if you’ve got a few dollars sloshing around in these troubled times might I suggest looking at asset classes you know or industries you can study and understand pretty easily. It’s really important to know enough to sort the fact from the fiction. As an example, I know a bit about finance and economics but bugger all about anything else. What amazes me is that when I read commentary and research in the press from so called finance experts a lot of it is simply not accurate. For example, a senior economist at one the major banks talked about fixed rate expiry refinance risk recently. Thing is, if you’ve got a 25 year home loan and you come off a fixed rate after the first 3 years there is no refinance risk. You simply convert to variable or take another fixed rate option. This is not a refinance and to suggest to mortgage holders that they have such a risk is either reckless or, at best, careless.

Bottom line. Do your research, make sure the maths works but don’t ignore the vibe.
Mike Phipps F Fin
Director | Phippsfin Pty Ltd

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