It’s 12:41 pm right now. By the time you read this, the RBA will have already made their rate announcement at 2:30 pm. No doubt the journalists writing for the newspapers have already got both their articles ready – one for the “In a shock move there was no rate rise” scenario and one for the “as expected the RBA increased their interest rates by 0.25-0.4%”.
Bernard Baruch was a legendary speculator and was one of Americas richest and most powerful men in the early 1900s. His saying was, “show me the charts and I’ll tell you the news!”. In other words, the media just makes up a story to suit what’s already happened. When the market is going up, they have reasons and explanations. And likewise, when the market goes down, they give you alternate stories. The reality is they have no idea because they haven’t been able to accurately predict anything.
In saying that, it’s virtually impossible to find an analyst that is predicting a scenario that doesn’t include a rate rise now, given the hawkish comments by the RBA. While individually we’re terrible at predicting the outcome of anything in the immediate short term. It turns out we’re remarkably accurate as a collective. One trick that the trading desks at Wall St used to use was to call around and ask everyone they knew for a prediction, and the average of those predictions was usually an excellent approximation of the outcome.
It’s widely anticipated that there’s a 70% chance of a 0.25-0.5% rate rise – that seems a near certainty. As markets are forward-looking this would almost certainly have already been priced into asset markets. We don’t expect a big change in either the prices of stocks or real estate as a result of the announcement.
The new federal treasurer labeled inflation as the “defining challenge of the economy”. While this may be true the inflation is mostly coming from supply-side issues as we have mentioned in the past. Interest rates are a tool to moderate demand though. What I mean by this is that the increase in prices is coming from port lockdowns and factory closures in Shanghai, Guangzhou, Shenzhen, and the reduction in the supply of oil, wheat, and other soft commodities due to the war in Ukraine. Increasing interest rates does nothing to open factories, build new container ships, unlock ports, or un-invade Ukraine. We’re just killing demand for no reason and it’s likely that this will be reversed towards the end of the year.
Just 12 months ago the central banks were trying to stoke that “stubbornly missing” inflation but no more. The narrative can turn on a dime – now people are watching the 0.1% fall in property prices in May and speculating that the market is collapsing after forgetting the 29% increase we’ve just had in the last 21 months! Watching these month-to-month moves is like trying to predict the arrival of a tsunami by watching the wind-blown chop on the surface of the water – it’s largely pointless. We’re far better off stepping back and looking at the big picture if we hope to get any clarity about what’s going on in the market. We’re still in the early stages of a macro bull run in east coast property. We just have to be in a position, holding property and waiting for the market to come to us.