IIn this episode, Ryan and Terry dissect the truth behind the barrage of headlines endless screaming ‘rates hikes are upon us’. There are three parties who’s intentions aren’t necessarily to inform us, and this episode you’ll see how and why that’s the case. Knowing what’s really going on behind the scenes is how you avoid overreacting in any direction, and keep your cool amidst the uncertainty.
What you'll learn
Ryan: Welcome back to the passive income project. Terry. All I’m hearing about is interest rates right now. Is it the same for you?
Terry: that’s all I’m going to be at night. Every time I open up my phone, I go into any feed. It’s like interest rates, housing prices, crash, collapsed, calamity. What’s going on?
Ryan: Right? It’s causing me to turn off the TV at the moment. But there is a real issue here, which is, you know, the cost of living is rising and it’s putting this upward pressure on the need for interest rates to rise. And you know, we’re also at a point in the time, like we talked about in the crypto series where maybe the economy is not as healthy as what we’re told.
Terry: Yeah, it definitely ends. it’s creating a lot of uncertainty and that’s why we just keep saying these headlines, you know, cause it’s got people’s attention and whatever’s got people’s attention. You’re just going to keep seeing more and more of, so I feel like it’s a good one to dig into because.
What we’re going to talk about here is how we’re potentially being misled by the media, by these headlines. And what’s behind that, right? Because the government’s got a dirty little secret and the RBA, the reserve bank of Australia, they play a role in helping them keep that secret. And then the media is blowing the whole thing up.
So what we want to do is get beyond those headlines and figure out what is going on here and what is the likelihood that rights will rise and. By how much what’s gonna actually happen. What are the, what are the odds here? Basically? We don’t know what’s going to happen in the future. We cannot predict. All we can do is look at the information learned from the past and really understand what the incentives of all these players are. And that’s what we’re going to be doing in this episode. Isn’t it,
Ryan: Yeah, and I think like this topic is so important. I know for me, because you know, it just helps you feel a little bit more level headed. About everything that’s going on? It gives you this level of balance that I guess you don’t get swayed too heavily in any direction by the headlines.
You can also see it for what it is, which just means that, you know you’re able to keep your head and you don’t become consumed by those headlines. it can be common in the middle of the storm. And obviously we want to be calm so that we can make clear decisions. We want to be able to make sure that in any environment that we can position ourselves for success. And so that’s what we’re going to be doing.
Terry: it’s vital mind. Like you’ve gotta be able to think clearly to be able to know how to play it so that you don’t get played. And trust me, there are a lot of people who will get played in the next couple of years because of everything we’re going to be talking about in this episode.
But it’s not just going to be about what’s going on. What’s happening. We’re also going to be discussing how we say it and how we’re applying it. What do we think’s going to happen?
And then how are we positioning ourselves because it is going to be a period of high on certainty. So we’re going to be saying, what are the odds? And then what are the moves that we’re going to be making? And one of the important things to keep in mind. So for homeowners, for people who are looking to buy.
And also even for you, if you’re a renter, so don’t tune out if you’re listening to this and you’re going on interest rates, all these homeowners interest rates, there’s definitely implications for you as well. And when we talk about that right at the end.
Let’s start with, why do we keep hearing about interest rates, rising? Why these headlines is just, it feels like a barrage every day and waking up as some sort of thing on the fin review. There’s some sort of article getting sent to me about interest rights. At least it’s talking to me about it. What, why is this happening?
Ryan: Yeah, it’s because of this inflation that’s rising. And basically in the past, something that has to that the mechanism that’s always been used is you increase interest rates so that there isn’t this over demand from consumers for goods. So the, the idea of inflation is, the basket of goods that you buy, the cost of living is going up.
And so the way that the central bank combats that is to increase the interest rates so that people have less money to spend on those goods. So that there’s lower demand, meaning that prices come down because you know, the supply side of that, the producers of those goods, the manufacturers of those goods, they actually have to sell it for. And so it brings that, you know, 5% down, I guess they’re always aiming for somewhere between two to 3% inside because it’s so high. It’s like, how do we kind of squeeze it. And so that the cost of living comes down using interest
Terry: It’s a bit of a sledgehammer. It’s pretty harsh. It’s basically saying, yeah, you’ve had all this money. I’m going to take it away from you. And then those that are trying to serve you. They’re just going to have to compete for that dollar hotter and hotter, and they have to push a process down to make it happen.
Ryan: Yeah. And a big cause of this ultimately has been what’s happened through COVID, which has been the stimulus, you know, massive increase in the supply of money. And so people have just been flushed with cash. Because of this money that’s being poured into the system. And so that’s actually caused a, a greater demand for purchasing.
And so that’s caused process to go up. There’s also been obviously the war that’s happening in Russia, Ukraine, which meant that the price of fuel has gone up. I didn’t pack CPI and that’s probably had quite a big influence on this recent figure. So, and just the supply constraints as well, money actually may not able to move across borders and being able to get into countries. Men said there’s less supply, meaning the demand has gone up as well. So people have to pay more because it’s harder to get at the same time.
Terry: And those, those two countries, Ukraine, and yet Russia, they’re big exporters of different commodities. And those commodities they’re used to make a lot of different things. And so that means a lot of makers are going well, our prices have gone up and they push those prices through to the consumer. And that’s why we’re seeing high costs of things like cars. And we’re seeing high food costs as well. Food and fuel are two big ones when it comes to inflation. So, you know, you can’t do nothing. And that’s why everyone’s kind of assuming that and talking about going, w I means that interest rates are gonna rise. And then this is going to collapse the housing market and it’s created this big, further, I guess.
Ryan: Yeah. Yeah. And one of the thing we should probably do is dive into the idea of inflation for a second as well, because I know in the crypto series, we kind of define it in different ways cause there’s consumer price inflation, but then there’s also purchasing power based off the amount of money that’s in supply. Yeah. How would you define the inflation that we’re talking about right now?
Terry: Yeah. So we’re talking about the price of things. And that’s at CPI metric and it’s, it’s basically a basket of goods and services that I kind of look at and say, well, how is the price of these things changing with Tom? And it’s probably important to note that it’s, it’s not a comment on the price level.
It’s a comment on the rate of change of those prices. So last quarter or last time it was reported, it was like 2.5%. Now it’s 5%. So that’s a doubling in the rate of change of prices. And I should say it’s quite a dirty metric inflation. It’s very inaccurate and it’s pretty misleading as well. Everyone has their own personal inflation rate because your inflation rate depends on where you live, what you need and what you want.
If you’re living in Sydney and you want to buy a house, your inflation white, real like Sade’s 5%. I can guarantee you that right now. So saying that inflation is 5.1. In Australia are saying like it’s 25 degrees today in Australia and it’s sunny. That’s completely not true. Right? There’s different spaces.
It’s all different everywhere. So it’s a very broad based, dirty measure. But they need a kind of give you something. And it’s also easier to say that it’s lower than it actually is. So I know a lot of people, their personal inflation rates a lot higher than 5.1%. the other thing that it doesn’t do is it doesn’t actually account for the way that consumers, you and I change our purchasing decisions when prices change.
So yes, if we’re buying, we’re buying more cereal because it’s cheaper. They’re like, well, the price that’s not changing much. And so we actually flock towards the things that are more resistant and which means that that measure it’s only it’s reflecting the most resistant price changes. It doesn’t always actually sort of talk about what’s really going on because if you are tracking your food costs and you aren’t tracking your fuel costs, you can guarantee that 5.1% is pretty deep.
Ryan: So what you’re saying is there’s definitely people in Australia, you know, some parts of Australia that are experiencing much higher inflation right now, it might be like 10%, 12%. There’s other positive stride that aren’t experiencing inflation. It’s purely based off where they are and how they live and what they’re doing.
And, I guess, uh, you know, if we think about why inflation is, I guess, scary for a country as well, it’s scary because the cost of things go up, but are at incomes going up at the same rate or at a greater rate, meaning that we can actually buy more of the time. that’s the issue inflation’s going up, but our income is not rising at the same. Right. And so that’s where the issue stands. S saving capacity is getting squeezed and increasing of interest rates. Does that actually have.
Terry: This is where it starts to get interesting because the lag effect of inflation is that then employees demand higher wages and then it becomes entrenched. And then you deal with actually like a longstanding problem where you’re saying, I can’t afford to live on this. I need you to pay me more to do it. And the business is saying, well, my costs have gone up as well, so I need to push them up again. And it creates this kind of reinforcing cycle. And here’s the thing, like the people that have studied inflation, nobody says that. Nobody said, cause it’s as much a psychological phenomenon as it is a real world material problem.
And so, and that’s the reason why I’ve I expect prices to go up. Then I’m going to be asking for more and you’re going to be having to ask for more as well, and we’re going to keep going in this cycle. So that’s why, this idea of inflation that bitch always trying to keep it in his target band.
We want to keep it at this level where it’s not, it’s just insidious enough to just slowly happen, but not with not sort of happened below your conscious level of awareness, not anything that you’re really aware of, what politicians height is fuel becoming as expensive as it has.
And that’s why you’re seen those price controls. They remove those exercises that make it more expensive. And I hate when, when food goes up as well, because that means that the everyday person’s feeling it and that’s all kind of reflecting on them.
Ryan: And as you mentioned before, when people start to ask for more wages, the reality is higher increase in at high interest rate. That’s also happening to organizations. So it’s a cost of borrowing. Yes. It’s happening for households, which creates a higher demand for income. but that’s also happening to the organization as Well, Usually if they’re using debt as a tool. and so, yeah, it’s, uh, it is a bit of a vicious cycle that, um, I guess the tool that’s being used to suppress inflation is also creating another issue, which is a whole nother story, I suppose. But anyway, so we’re going off topic.
And so what we’re going to come back to is earlier, you said most of what we’re saying and hearing is most likely to be overblown. What makes us.
Terry: Well, the reason is, is because as you were kind of just pointing out, like we’re all in debt, the world is very leveraged. We live in a credit system and we are so leveraged now that even the smallest increase can have a massive, massive impact. And if you want some evidence of this, going back to March of 2020, when COVID first happened and you watch how fast the markets fell.
And that is indicative of people that are being forced out of their positions in the markets, people that didn’t choose people that got margin cold, and those, those positions were exited automatically. So what do I mean by that? I mean, that people have leverage on different positions in markets, and if it drops to a certain level, they don’t get asked.
At basically happens automatically. You get sold out of that position. And I take my call. And so when you say balls that happen that fast that’s what’s going on. And so the world we’ve been existing in this credit economy here for 30, 40 years, we’ve been sort of moving up that, in that way the money supply has been increasing, and the world’s become more and more interrelated.
So, yeah, even in Australia, so our house prices have gone up 89% since 2012. So that’s a lot more borrowing, but we just haven’t really kept pace. So we’re borrowing more money to do it. Okay. And so that means that the share of our income it’s already higher than it was then. So if you’re going to put up right where I’ve, I’ve seen numbers quoted like six and 7%, sorry.
But if it gets to 7%, like we’re in a, we’re not in a recession, we’re in a depression. so they don’t have to do much at all to make a big change. Things are very tightly wound, if that makes sense. So that’s why these figures that you’re seeing quoted in the news. If we get to that point, like they cannot afford to take us there. and I can’t afford it from our perspective and I can’t afford it from their own. And we’ll talk about that a little bit later.
Ryan: And like, if that was happen, basically you’re tripling the cost of debt right now. Like how many people can afford to triple their mortgage for benefit. So I don’t think that’s quite possible. And there was actually a great article that stood out to me and I actually sent it to you and you’re like, I’ll have read this. It’s a good, fresh breath of fresh air in the, uh, the mix of the headlines at the moment, which was by a guy named Greg Jericho.
Terry: Yep. That’s him.
Ryan: Jericho yet I’m in the guardian and I’m just one of the comments he made, which was the cash rate of 1.5% would say monthly repayments for the current average loan go up by $615 a month. and the share of income going towards the mortgage would be equivalent to the level. It was in 2008. When the RBA increase the cash rate to 7.25%. So the cash rate at 1.5% now would be the equivalent of 7.2, 5% in 2008.
Terry: and that’s because house process, uh, so much higher than they were then, and it just means that there’s really not much room to move in that sense. We’ve go, we’ve taken on more debt. So a smaller change actually creates a bigger effect. You know, we always talk about how there’s two sides to debt and it’s sort of, it’s a lever.
So it’s like a small change here creates a big change over there. We’ve taken out way more debt to buy our properties now. So they can’t afford to take us to those rates that we saw in the past, because that would collapse everything. And the job of the RBA is not to collapse. The economy actually is to stabilize the economy.
So yeah, that’s what they’re up against, right? This is where it’s hard. I think they need to be seen to be doing something about inflation, but if they do too much, that will actually cause a bigger problem, much.
Ryan: And I just want to maybe put some numbers, this just kind of try to tangibilize what we were just saying. So an 89% rise in properties. So let’s say there was a property worth, a million dollars in 2012. And now that property is worth 1.9 million. The person buying that property, then might’ve had to borrow 800,000. Let’s say they’ve got 200,000 in deposit that they can put up. They had to spend 800,000. Now they’d have to borrow 1.6, 9 million to purchase that property. And so it’s a difference in the amount of.
That you would have to use to purchase that. And so it becomes relative. So for the person that spent 800,000, they can experience at great a rise in the interest. Right. Whereas somebody that’s bought that property now at 89% increase that borrowing is a 1.69 instead. And so if it goes to 7%, Yeah. That’s, that’s disastrous that’s, it’s not possible for them.
And so yeah, you just got to kind of keep it relative to, you know, yes. Interest rates before have gone to, or been at 7%. Doesn’t mean they can go back there because the amount of borrowing that’s happened since is too great. So yeah, it’s, um, it’s probably a bit of a common misconception that at once and has been there.
So why can’t it go back there?
Terry: Yeah. And I used to say that. You know, interest rates that can only go up and your assumption is always that the conditions are the same. They’re not like we’re in a completely different world right now. We’re in so much debt globally. We’ve yeah, we’ve used so much credit globally. This is a quote from Jeff Booth and Jeff’s a better expert and he’s going to be coming on the podcast to talk us through this.
very soon, this is a quote from his book, the price tomorrow. If we stopped adding to the debt, we’ve already accumulated globally and started paying it back at $1,000 per second. How long do you reckon it’s going to take us to pay it back? What do you reckon?
Ryan: may take a guess. I already know
Terry: I know, you know, the answer. Did you know that it was 8,000 years? It’s a thousand years. That’s how much debt we’ve accumulated. All right. So saying that interest rates used to be 18% and that’s where they could go again. That’s not going to happen. That can’t happen because everything is kind of tied into that. And it just it’s this impossibility, there’s an economic impossibility.
And the U S debt in 2021 in June, it was 28.4, 2 trillion us dollars. Right. So why are we saying U S debt? Because everything stems from the federal reserve, , our whole systems all will link to that. So that’s why it’s really important. So let’s just try and put that into context here for a second. And this is from the second article that we’re going to be sharing with you in the show notes. I highly recommend you read this article. If you really want to understand how the bond market works, how interest rates kind of come into that.
And the the older interdependencies that are creating, the issues that we’re seeing, here’s how he explained it. He said that in June, 2021, the U S government, the U S was in 28.4, $2 trillion with debt that’s money that they already to other countries. All right. They have bought their bonds that have bought their debt. All right. And he says, if you’ll just try to count to $1 trillion, counting up by one digit per second, you would have to start counting that around 29,000 BC, you would have to start counting into what 29,000 BC to get to where we are now.
That’s how big that number is.
So everything’s kind of tied in we’re in so much debt that small, small adjustments have massive ripple effects, huge ripple effects globally for everyone. And it’s not just us at the movie’s level, it’s others as well.
So let’s get into, I guess the incentives behind this. All right. So I really want to talk about the three different parties that we’re kind of hearing from and hearing about, the first one of those being government, sorry, you know, we always talk about this and I think it’s the most important thing to understand when it comes to finance. Charlie Munger says it all the time. Look at the incentives, understand what people’s drivers are. If you want to understand that behavior, understand where this self-interest is, and you will be able to much better predict what’s going to happen. So let’s go through government, mate, what are the, what are the incentives
Ryan: the biggest incentive for governments is obviously to maintain position. So they’re going to make decisions that help them stay in power and make decisions that increase public perception of how they’re running the country. you know, it’s an interesting one at the moment with the election going on in Australia, where historically, anytime there’s been a right reprise during an election, the political party, that’s in power right now, the prime minister in position right now has lost.
And so that’s a big influence on, you know, what’s happening in this upcoming election. And so we’ll see what happens there. the other thing is they want to be able to keep their overheads low. And so, you know, I guess the common perception around this is that for governments to spend they’ll rise tackle. And that’s kind of the primary mechanism that they use for spending on infrastructure and everything else. but it’s not really true. Actually, most of their money comes from issuing bonds, which is the same as basically taking out debt. So like you and I might borrow from a bank, what the government does is they issue bonds, which is either they’ll borrowed from you.
If you buy a bond or a super annuation funds or any of those bigger markets that kind of buying bulks, or other countries like the fed feds, a good example, the fed can buy a lot of bonds, you know, from Australia. And so basically they issue bonds, which is the same as borrowing money because they have to pay interest on it. And that goes towards purchasing or spending. and that’s what funds the stimulus, for example,
Terry: yeah. That’s that, that. That was coming from a bond that was issued and the buyer was the reserve bank of Australia or the fed. It wasn’t probably wasn’t UME. That’s how they came up with it so quickly. It was like the Fed’s like, yeah, we’ll take it, we’ll take it. But there’s an interest cost. And that’s where I think this has gets interesting. Right? Because we talked about the dirty little secret the government has. Well, the dirty little secret is easy. If interest rates go up, then their cost to service the debt. They already have goes up too. So of course they don’t want. And that’s why they’ve gotten lower and lower and lower for the last 30 years because that debt has been accumulated. So if you’ve got more debt, you don’t want higher interest rates, do you? And this is where I think there’s a huge misconception, you know, it’s just right to go and have to go up. Well, not necessarily, they can actually keep them low.
And that’s what I have been doing artificially by continuing to buy these bonds. And it’s suppressing those interest rates, artificially it’s, what’s called monetization of debt because you know, the lower you keep that number and the higher you let inflation run, it actually gets easier for you to pay back that day. It’s almost like a soft default. It’s a soft way. It’s an easy way to pay back debt that you can’t actually pay back. I don’t know if that makes sense. Is that making sense?
Ryan: Yeah. it does. Absolutely. And so like, if you’re putting into context, it’s like GDP, which has gross domestic product, which is a measure of productivity is increasing because people are actually spending more for the same amount of goods and services. and that means that there’s more taxes and there’s more kind of being returned to the government in that way. So in those times they want to keep their cost of their debt down because their income has increased. And so it’s like me earning more money, but my debt staying at the same amount, meaning I can pay off that debt faster. So they actually enjoy a benefit from high inflation with a low cash rate for their own borrowing.
Terry: This is the playbook. It’s not new. This has been done before. Go back to the 1940s and you’ll see the same thing happen is really inflation here. And it’s interest rates here. And that’s how I get out of the positions I’ve created for themselves and keep things going because ultimately let’s go. We got to keep the game going. That’s the whole, that’s the whole name of the game, I guess. But there’s, there’s one other thing I wanted to add to this too, is, you know, we talk about government here in terms of like a collective, but governments made up of individuals and those individuals, the people that are setting policy and they’ve got their own bias.
And their own sort of self-serving ways of wanting to be or ways of wanting things to be as well. I thought it was an interesting stat that was written by an article in the property Tribune. Liam Wignall was the guy who wrote this in April of 2021. And so politicians have to disclose all their assets and what they have. And one of the stats that was interesting to me was 58% of politicians own two or more properties. Now that’s compared to 10% of everyday Aussies have two or more properties. So a lot more politicians have a lot more property than the average housing.
And so do they want their own borrowing costs to go up? Do they want their asset prices to fall? And if you’re in charge of the laws and the pen, you know, the policies that settle this stuff, are you going to create something that’s going to ruin you? You probably don’t want to write.
Ryan: Even if it’s not conscious that exists. If you’ve got , 20 people sitting around a board table and basically 60% of those people have two or more properties. And then obviously the rest might have one. Then there’s this unconscious influence bias that’s happening in the decision that ends up being made at that
Terry: Yeah, that’s what I reckon. Politicians should have no financial stake in anything they’re making decisions on. I don’t think they should have any, no stakes, no incentives. They shouldn’t have any skin in the game.
Ryan: Yeah. That’s.
Terry: I don’t know how that would happen, but it would make things a lot fairer.
Terry: um, so, so that’s,
Ryan: Good luck with that.
Terry: well, that’s my recommendation. so let’s the government. Let’s talk about the RBI. All right. So again, we’ve got this perception that the RBA has this kind of.
Ryan: Hang on a second. What’s the RBI.
Terry: Yes. Thank you. Reserve bank of Australia, and I’m glad you got me
Ryan: always used to do that to me. I’m glad I got.
Terry: Yeah. So RBA reserve, bank of Australia. All right. So, what do they do? They’re the bank of banks. They’re the bank that loans the money to the commercial banks, that loan Ooma. Alright. And, they also, the bank that buys the bonds from the government. They had whole thing is to keep the economy humming, to keep the game going. And the other incentive they have is to be the people, um, the guy or the group of guys, or the group of girls that have all these leaders to Paul and we’re in control and we’re in charge. It’s a centralized method of control.
All right. So that’s my incentive. Well, I’m in charge and we’ve got to keep it stable. I’m at the top, I’m keeping it stable. You can rely on me. And you know, they’ve got a dual mandate, which is to do that. They’ve got to keep unemployment low and I’ve got to keep productivity high. And so that’s the thing, the problem. The FBI has run out of some labors to pool. When the cash rate is very low, it’s one 0.1%. Right now, I can’t really low writes anymore to stimulate demand. And, you know, in terms of the, um, the buying of bonds they’ve been doing that, they’ve been trying to slow that down and they’d be trying to stop that.
And that’s why they’ve been talking about, and this is what’s very important. They’ve been talking about raising rights and I’ve been talking about it. And the reason is, is because they want you to think differently. I want you to paint. I want you to be uncertain and I want you to slow things down. I want a temper demand because I’ve created all this demand, but the buying of the bonds and the new money coming in.
And now they’re trying to temper that back. The demand they created by saying interest rates are going to rise. Look out, look out, look out. Have you noticed that that’s all we’ve been hearing, but for the last 137 months, all they’ve done is keep them where they were. We haven’t seen it right at Ross. It’s called Joe Barney. Joel burning means you’re going to use your position of authority or power to pressure someone to do something. And so the main tool that the RBA uses is perception and the way they do that is I get all these messages out there about, well, watch out when this happens, watch how this, if this happens and that’s how they’re trying to manage people’s perceptions and behavior in the economy. That’s why these headlines are just relentless at the moment, because that’s the main tool they have. They’ve run out of all these other tools.
Ryan: Yeah. And if you go back to what we’re saying before, if you can keep interest rates low, but reduce inflation through this mechanism, through the use of jawboning, then you keep running costs low and enjoy the benefits of that. but you also fix the problem of, you know, life costing too much for everyday
Terry: exactly. So that would rather do that and then raise the rates. And that’s why we keep saying it. And that’s why it’s it’s and you will, you won’t stop seeing it cause that’s going to be, that’s the one word that’s just going to keep going. They one would as much as I possibly can. so, I think that that context really matters and it can help you, inoculate you from the stress that comes from all these headlights, you know, just know that that’s what’s happening. They’re trying to do the thing that’s going to hurt everyone. The least.
Ryan: Now I know you’ve got an epic example of this, how this has been used, and it comes from the book of the guy that’s going to be in our next episode from this Jeff Booth that you mentioned before, who is, somebody that sees things as it is sees things as they are. And, he’s got a book called price of tomorrow, which I recommend everybody to read. And so what’s the example of Joel burning that you’ve got.
Terry: so I’m going to read you some excerpts that Jeff put in his book and these excerpts are from a guy called Ben Bernanki. Ben Bernanki was the chair of the federal reserve who presided over the global financial crisis. So when everything hit the fan, this was the guy who was supposed to be in charge, supposed to be in control, supposed to have it under control.
Ryan: Yep. And just to clarify, the RBA, the reserve bank of Australia is the central bank of Australia and the federal reserve is the central bank of the U S Yeah. So he’s the head of the central bank in the U S
Terry: So these quotes come from, from, from Jeff’s book and he’s collided these cards and I just thought it was so fascinating to look at. so Ben Bernanki, I’m the guy in charge. I’m the guy control. I’ve got your back. We’re all good. all right. So he’s been, been achy in November 15, 2005 we’ve never had a decline in house prices on a nationwide basis. So I think the, what is more likely is that house prices will slow. Maybe stabilize might slow consumption, spins. I don’t think it’s going to drive the economy too far for its full employment path though.
All right. Next one, February 14th, 2007, the weakness in the housing market activity and the slower appreciation of house prices did not seem to have spilled over into any significant extent into other sectors of the economy. Thanks, Ben
May 17th, 2007. We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. Okay, good. They’re not
September 4th, 2007. It’s not the responsibility of the federal reserve, nor would it be appropriate to protect lenders and investors from the consequences of their financial decisions. Okay. Are you trying to say they’ve been
January 10th, 2009. The federal reserve is not currently forecasting a recession,
July 16th, 2009, Fannie Mae and Freddie Mac a well capitalized, any no danger of falling by the way, the other two banks, the folk,
September writing 2009, we are in danger of a broad systemic collapse, and action needs to be taken urgently to head it off. We need the authority to spend several hundred billion. That was Hank Paulson, that,
and then September 18th, 2009th, this is Ben Bernanki again, the kind of financial collapse, the way now on the brink off, he’s always followed by a deep, long recession. If we aren’t able to hit this off the next generation of economists, we’ll be writing not about the thirties, but about this that’s been.
And then October 28th, 2008, this is Janet Yellen. she’s saying the downward trajectory of an economic data has been here rising. It’s becoming abundantly clear that we are in the midst of a serious global meltdown.
So these are the guys that are in control in charge of got it all sorted. so. There’s two ways to look at this, right? You can look at this and say they knew what was going on. They decided not to tell us because they were trying to create a perception that everything was fine. All right. That would be probably the worst way to look at it. And that would be assuming that they had bad actives and have bad character, and don’t really care about the people they’re serving.
So let’s give them the benefit of the doubt and say, that’s not the case. I didn’t know. Well, that’s even worse. I didn’t know. They had no idea. They’re the, they’re the ones steering the ship and I don’t know where they go and they don’t know what’s happening. So I guess I were the one that, to bring that up because we kind of show them that we’re being informed by these people, the global economy, the way it’s all interconnected interrelated.
There are so many interdependencies that to assume that one person can hold all that in their head, pull a couple of leavers and make it all better. That’s the height of area. And that’s why we did that whole series on Bitcoin and where we got to with it was like, well, that’s the whole thing that Bitcoin’s kind of been saying is like, perhaps we’ve got it wrong.
Maybe we’re not as smart as we thought we were. Maybe we can’t manage all this stuff with a couple of people. So yeah, that’s Jawbone. That’s Trump create perceptions. That’s trying to create a sense of calm and that like, yep. You can go on us. You can, you can trust us. There’s a guy named Jerome Powell. That’s the game he’s playing right now. Exactly the same guy. Anything you see from him just to share him. It’s all about creating that perception.
Ryan: And now the extension of this, which kind of amplifies it even further is the media obviously, and how they kind of get involved. And basically like their incentive is get clicks at any cost. Yeah. How can we get traffic? You know, how can we get, you know, marketing sides, all that stuff up. And so when they say, central bank say interest rates, They use a language to get people clicking.
And it’s now, there’s going to be huge Hawks in the rise of interest rates. And, you know, the housing market might collapse, and basically, it’s just this spread of fear that goes around because the reality is fear spreads a lot quicker than faith. So they want to create virality with you know, what they’re putting out, they’re going to chase a fear-based headline, which is it’s going to sad that that’s the thing that we click on the most that we get drawn to. but it’s just a survival mechanism. It’s our survival instincts to go, well, if there’s danger, we want to understand it so we can avoid it. and so we lean into that more so than, you know, a headline that might say, you know, things are going stable.
Terry: Yeah. Like this article, we’re talking about the one that’s in the show notes, a guarantee that article got nowhere near that. No one told me no one told me about it. You were the one that shared it with me. I’m like, yeah, I read it. But I’m telling you now that’s not a viral article because it’s not sexy to say it’s okay.
so I I’m glad you used the word hikes too. That’s very deliberate. That word. Why do they keep using the word rate, hike rate hike? What is the image that creates in your head? It creates the image of a sudden movement, a sudden thing happening. And some people being dislocated, something happening fast and like out of your control.
So those words are very deliberately chosen to create a reaction from you to get that click. Why do I need to click from you? I need the click because the only way I get paid from my advertiser, if I get more clicks. And so, it’s not a, like, this is not a deliberate thing, but these three forces. Colluding in a way, the RBAs in bird with the government, they’re playing the same game. And then the media is like, yeah, we’ll get it on this as well. We definitely can benefit from this. and those three things are coming together. It’s almost like a perfect storm of shit. And that’s what you’re being served every day in your social media feed. Absolute shit.
Ryan: For it to be colluding to, they need to know what they’re doing as in does it need to be.
Terry: I think it does. Yeah. And I don’t think in the case of the media, I don’t think they’re thinking let’s get in bed with the government and the ABA let’s get on this thing. And then they’re all in a room sort of making it up. That’s not happening. But the RBI and the government absolutely. That is happening.
Ryan: yeah. It’s more conscious at that level at whereas media level. They’re more just following their nose
Terry: yeah. Just try and make my,
Ryan: Yeah, yeah, yeah. okay, so that’s a lot to digest. How should we be playing this?
Terry: yeah, that’s an interesting one. So, you know, for me, I’ve just been thinking, look, the conclusion I’m coming to her. And it’s where I sit right now and the information we have at hand and everything we’ve just discussed is I do think interest rates are going to go up, but I don’t think they go up anywhere near as much as we’re being told, we’re going to go up because of what we said they can’t.
And the other reason I think they are going to go off is because the RBA, they need to be, seemed to be doing something. They need to create the perception that we’re getting into. But what it also does is it gives them a bit of slack to be able to make the moves back to where they need to, if anything goes wrong.
It’s okay. We’re going to, we’re going to get interest rates back down again. We’re going to stimulate the economy. We’re gonna get the whole thing going again. We’re going to create more liquidity. We’re gonna go back to that sort of, you know, the game of selling more bonds, create more money and create the inflation and we’re gonna fix the inflation that we created.
So, so yeah, I think, yes, they’re probably going to go up. They’re not going to go up anywhere near as much as you’re being told in the media. So don’t, don’t think that that’s the case. And that will go straight back down as soon as the market starts to shut up, which by the way, it already has just look at the stock market today.
Ryan: it’s such a case of, you know, needing to have strong opinions, but hold them loosely. Isn’t it? Because they need to be strong enough that you actually do make moves. Yeah, we know throughout all the conversations I’ve had in this podcast, you know, you have to be making moves.
You can’t just kind of be sitting, still sit on the sidelines, because that’s a guaranteed way to lose basically. But that needed to be held loosely because you know, things can change and there’s so many things that you can’t see and not know. And so this is definitely one of those things where, we’re of the view and we probably shared the view that yeah. they might increase the interest rates, but, you know, 0.2, 5% that never got to feel it out.
What changes maybe another 0.2, 5%. See what happens. See what changes, you know, and does that heavily impact their cost of debt at a government level? can they actually survive that, does that actually influence inflation? And so. Yeah, right. Hawks, you kind of make you think of a 1% increase or a 2% increase, but those levels of increases. So improbable, just because of the factors that we’ve talked about before, which is, you know, if you did that and obviously the cost of that goes way up and, um, you know, they pretty radical changes. Cost of household debt goes way up. What does that mean for the flow and effect to, manufacturers, producers, businesses that trying to sell products to the people, you know, what does that do to gross domestic product, our productivity as a country?
And so they don’t know for certain that if they increase the interest rate, by 1%, all these things will happen and it will be okay. There’s no simulator to do that. It is cause and effect. It is make a change. See what happens. Did it help? Did it not, and then kind of sensemake from there. And so, yeah, there might be increased in the rates, but they’re going to be slow because you know, they’ve spent so much money. Like we talked about in that last episode of the crypto series to help the construction industry. Yeah. I won’t people buying and building because they want to keep unemployment low. I want to keep people lending cause they want the banking industry to be strong.
so to make big changes would be to work really at fast, competition of the decisions that they’ve already made and the actions that were already taken and so, yeah, I agree with you that they might be rises a point 0.2, 5%, you know, maybe 0.5% over a year or two years.
But it’s going to be slow and it’s going to be felt out and. You know, there’s going to be continued learning and there’s going to be continued signals you just kinda have to stay attuned to that, I suppose. It’s gonna be really interesting. I listened back in a few years and go out where we’ll be close or
Terry: who knows, it’s like that’s and that’s probably a really good point to make is we’re just, we’re thinking probabilistically here. We, you can’t be certain because you never know. It might be some hero in the RBA that thinks I’m going to be the guy that fixes inflation and I’m going to be the guy that takes it all on his own shoulders. And maybe he does home. Maybe he just cried as the whole economy. But you don’t know, humans are unpredictable. We’re doing our best to figure out what are people is incentives and what are the odds based on that incentive structure and based on what we’ve discussed, that’s kind of what we think.
So in terms of getting to moves, I know for me personally, I had a chat to my broker about it, and I had to look at the rights. I’m not getting too excited about fixing. At the moment for me, I’ll deal with the 25 basis point rate hike if I need to. but you know, when I got the right rates, according to me, I’m like, based on the rights I got quoted, it could take two to three years to get to that level. So my kind of thinking was gonna just ride it out. And typically, and we’ve heard this from Chris Bates and the mortgage brokers, they’ll tell you that historically, the people that stay variable pay a lot less, because of that.
So that’s not a recommendation. This is how I’m thinking about it for me right now. If you could get a good fixed rate and it’s, you know, you don’t want to take that risk and you just want to know exactly what it is then maybe that is for you. But for me, I’m kind of going based on what. I’ll probably go up. They’re going to go up nominally, not in any significant way and I’ll deal with that as I need to. The biggest move though, for me is actually just getting your loan down, getting your loan, the value down as much as you can, because that reduces your borrowing costs. That’s the thing. That’s the ninja gangster move to do right now. Get it down.
Ryan: boring and sexy at the same time. Yeah. And that’s just making sure he got slack in the system, ultimately making sure that your, your debt ratio, for your, you know, your net position, you know, your assets and liabilities is, is strong enough to be able to absorb those punches, and I know we’ve made comment at the end of the crypto series that, you know, it’s a bloody good time to be using that as a tool. I still agree with that. you know, maybe it loses something. Uh, effect over the next couple of years, it may be. And that’s, so it’s just making sure that you do stay nimble and you can kind of adapt and iterate as you go. You know, I think for home buyers, so you mentioned homeowners there, for home buyers. You know, I wouldn’t let fear stop you, you know, get your cash sorted and know what you can afford. And you know, ultimately like Chris Bates mentioned in that episode, you did with him, focus on the asset, find a good asset, a good product that, you know, he’s in a, in a strong position and, you know, let that be a strong drama and then just don’t overextend yourself.
Terry: That’s a really important point. The last part just well-structured debt is a thing not over extended is the thing. And if you secure that against a good, good property, then you should feel okay about that. And it’s probably important to note like, I was talking to a friend of mine a couple of days ago, and this is like, oh, should I, should I not buy? Should I buy, what should I do? And I said, well, one thing that I’ve noticed since I bought is that when the market was hot, lots of good properties run the market. And now that the market’s cold and the more people like you going, Ooh, like this, I’m not seeing anywhere near the amount of good properties on the market.
Actually, when I’m look around my area, if I was trying to buy a place like mine now, I haven’t been able to see one for the last three months, so I couldn’t get it. And so you’ve got to keep that in your thinking as well. You’re, you’re feeling, you’re feeling over pain and you’re feeling over don’t overextend yourself, but feeling overpaying and missing out at that, that might not be the right fear. The fear would be did you not get the right place? And you had to settle it or you missed it completely. And it didn’t benefit from actually having debt being on the government side. Um, because yeah, if you’re on the government side,
Ryan: And, you know, just to go on to touch on property market right now there’s probably similar themes coming out through headlines, the media as well, which is, first declines in house process. What does this mean, rara? You know, just looking at it, knowing the cyclical trends in terms of, when auctions happen sometimes a good time, winter sends to be a bit colder. And so there’s these cyclical trends that just get blown up at the same time. So you have to kind of look underneath that and, um, as you said, kind of pay attention to the incentives. What else do we have there?
Terry: arc. And if you’re a renter, there’s something for you to think about it. So, because you might have an unscrupulous landlord that just looks at their headlines and makes it an excuse to up your rent dramatically. So see if you can do your best to actually lock in your rants at the level I did that during the pandemic two year, two year lease and whilst process rose, I didn’t have to deal with it. And so if you know where you’re going to be, and that’s where you want to be, it’s probably not a bad idea to do.
Cause they cost they’re going to be gone. They’re going to try to pass those costs on to you. So some, some to think about that from, from your perspective, if you’re renting,
Ryan: Yeah. Cool, cool. And so quick summary, what do we talked about? So main thing here is, you know, we’re kind of, uh, concluded that you anticipate interesting. Mike up probably will go up, but nowhere near as much as what we’re being taught and, you know, we’ll likely come right back down at the first signs of trouble.
Yeah. Because what they’re doing is creating slack in the system so that they can reduce interest rates when they need to, if something were to happen, like a pandemic, for example. And we just don’t want to get spooked into locking your mortgage at a right. That’s a whole lot greater than what the variable right is.
And it’s kind of making rash moves with it. Yeah. There’s sings. They’ve got time to kind of feel them out. and we just don’t want to be sitting on the sidelines at all times waiting to find out as well. And so we still want to be making moves if the asset as a good asset and you probably, it’s smart to be making that move. As long as obviously you’ve got the cashflow in order and not overextending yourself and, you know, you’ve got your debt, as you said, structured well.
Terry: And the other thing he I’ll just add before we finish up is like, just take everything you read in the news with a grain of salt. Don’t assume you’re being informed. Assume you’re being manipulated.
Ryan: Mm Hmm. And so this is probably one of those episodes where I’d strongly encourage you to rate a couple of the articles that are in the show notes, jumping they’re digging some deliberate a rating, just because there’s probably just some lies that exists that waiting go to on this episode in terms of the mechanics that influenced things here, that when you understand them, they definitely help you find that equanimity that I mentioned earlier, just find to kind of understanding it. It helps you go, oh yeah. I can see why the headlines, for example, a hobby and honestly as possible as what they’re saying they are. And so it helps you kind of level out some of those things. That’s good mind, good stuff. Any other notes?
Terry: Nope, that’s it. If you love this episode, please share it with somebody and subscribe. If you haven’t already subscribed, please subscribe, but try and get as many as we possibly can because more subscribers helps us reach more people.
Ryan: yes. And jump into the community as well. You’ll find when you get into the show notes page, there’s a community button there, sign up to the community. You can jump in there, create a free account in the community. And I want you guys to join the discussion on this, where, uh, we’re just talking about it right now.
So if you’re listening in April or may in 2022, jump in there and join the discussion because we’re going to get a feel for what, how you’re saying it, what you think might happen. And, just to kind of bounce this around as well as we sense make this together. And so we’ll see you in there.