As I sat down to write today’s blog on this afternoon’s interest rate announcement, it occurred to me that how we got here was a case of the butterfly effect. The most popular use of the term came from the film Jurassic Park where Jeff Goldblum’s character was trying to explain chaos theory by saying “if a butterfly flaps its wings in Peking, you get rain instead of sunshine”. Quite frankly, I thought this was a terrible explanation, but the meaning is that everything that we’re witnessing now is an accumulation of the effects of everything that has come before it. Exactly like in any film that explores the physics of time travel.
The interest rate drop we saw and the subsequent rise we’re currently watching, the shortage of consumer goods, the energy crisis, food shortages, and the potential unwinding of globalisation can all be traced back to the pandemic and the war in Ukraine. But first, let’s have a quick look at the interest rate situation.
Today all analysts are watching the 2:30 pm announcement. A 50-basis point hike seems baked in. This will bring the cash rate up to 1.35%, and while many people are worried about this, this will still be 0.15% below the pre-pandemic cash rate of 1.5%. We’ve been here before, and we were fine. We’ll still be fine when we get there again.
We all suffer from recency bias at times, where we put more weight on recent events than historical ones. Most of the time, this is unwarranted, and looking at history gives us comfort and helps keep our emotions in check. Having a sound emotional state is something we all need to be successful investors.
Interestingly the rise in interest rates doesn’t seem to have unduly affected consumer spending. They have also been offset by the strength of the jobs market somewhat, with unemployment at 3.9%. Having said that, it’s hard to imagine that today’s interest rate rise won’t slow the economy up a bit. The problem is the RBA is always behind the eight ball when it comes to data. This means the timing of their rate changes is never quite right. They will always overshoot or undershoot and need to course correct afterward.
One other effect the pandemic and the war in Ukraine have had is that it has highlighted the fragility of global supply chains and just-in-time inventory management systems. The West has effectively outsourced its manufacturing (and pollution) to the East in the name of corporate profits.
Globalisation made prices cheaper and effectively kept a lid on inflation but as we are now finding out, it also means that natural disasters in one part of the world are quickly felt in other parts of the world. Initially, this came in the form of mask shortages, which became everything shortages. In essence, we traded security for cheap goods.
Most recently, we’re seeing fertilizer shortages. Belarus, Ukraine, and Russia make up 40% of global phosphate, and it takes ten years to bring a phosphate mine online. America used to get the bulk of its phosphate supply from China. But the Chinese are also facing their own food security issues and have banned the export of phosphates. We’re likely facing the worst global harvest in years – we don’t know what the fallout will be yet, but we’re already seeing higher food prices. We’re fortunate that Australia is still reliant on primary production, and we remain a net exporter of food.
All this can be scary stuff for investors, but just like the interest rate situation, we’ve been here before as well. In times of uncertainty, people have historically tended to put their money in property. It’s likely that this time will be no different.