What's going on?
As we mentioned in our last overview, global market volatility will be with us for some time.
So, what are the issues?
· US inflation is 8.60%
· The US Federal Reserve (the US equivalent of our Reserve Bank) recently increased interest rates by 0.75%, the biggest increase since 1994
· Oil prices are still very high (increased by over 45% since January 1)
· Supply issues are still pushing up prices
The good news is that China is trying to open up again, which will see an increase of goods to and from that country.
Investment markets are continuing their downward trend. So far this month the ASX200 has reduced by 11.0%, pretty much following the US500 fall of 11.56%.
Cause and effect
Inflation in the US is a major issue along with the real prospect of that nation being in recession.
The inflation rate of 8.6% is the highest since December of 1981 with energy costs increasing at alarming rates:
· Gasoline 48.7%
· Fuel oil 106.7%
· Electricity 12.0%
· Natural gas 30.2%
Basic food costs have also ballooned with meats, poultry, fish, and eggs rising by 14.2%.
In Australia the current inflation spike of 5.10% is directly related to oil prices and supply issues (particularly goods from China).
· Oil prices have increased by 65% over the last 12 months
· Transport costs up by 13.7%
· Food & non-alcoholic beverage up by 4.3%
· Housing up 6.7%
The cost of housing will become a major issue with the shortage of trades, cost of goods (due to supply) and increasing interest rates. At some point there may be a perfect storm with demand for new dwellings falling to the point where there’ll be surplus building materials and trades out of work (or charging less & earning less income).
The graph below shows the decline in new home sales since interest rate increases were announced. This downward trend is likely to continue.
Will increasing interest rate help stop the current inflation spike?
Probably not. We’d need to see some relief from high energy prices, which means increasing oil and gas supply. This may not eventuate during the Russian invasion of Ukraine.
We also need to see the supply of goods increase from China.
Increasing interest rates will likely put pressure on mortgage holders and the property industry. But the underlying cause of inflation won’t be fixed solely by RBA interest rate increasing.
Is Australia heading into recession?
Probably. The Reserve Bank of Australia (RBA) has explained the last recession in 1991-1992 as follows:
The early 1990s recession mainly resulted from Australia's efforts to address excess domestic demand, curb speculative behaviour in commercial property markets and reduce inflation..…… countries in other parts of the word, in particular the United States, also entered recession, compounding the effect of tighter monetary policy in Australia.
The RBA will probably follow the US lead and increase interest rates again in July. So, Australians will have the double effect of higher prices due to external forces plus higher prices due to increasing interest rates.
The graph below shows crude oil prices since February 1946. The grey lines are recessions in the US. It is likely that the June quarter figures will show America in recession. Australia may soon follow.
Hang in there
This year is going to be a financial shocker. All markets are likely to be in negative at June 30 (stocks, bonds/fixed interest, property).
There will always be exceptions to the rule and you just need to follow the money. In Australia there are two sectors on the ASX that are booming:
Energy 1 year return +18.60%
Utilities 1 year return +20.93%
These may well turn into the worst performing sectors next year as share prices return to longer term averages.
There’s really nothing to do other than live the life you want to live.
As we also say, don’t focus on your money, focus on the things that are meaningful and that make you happy.