Global sharemarkets at dizzy heights + where Bill Gates invests

Hi everyone,

A massive week for global interest rates with meetings from the central banks of Australia, the US and Japan. 

Also in this newsletter:

• Retirement trivia that will make you rethink your super strategy.

• Global sharemarkets continue to climb to dizzy heights.

• Billions being paid out in dividends next week.

• Latest employment and population figures.

• Where does one of the world’s richest people invest?

• The colour of your car could increase your insurance premium.

• And my challenge to Jim Chalmers to take the leap from disciple to economic messiah.

So before I start, something to think about as you plan your superannuation and retirement strategy. 

We all have an age when we think we’ll retire (according to the Bureau of Statistics it’s 65.5 years of age) and often we won’t focus on maximising superannuation until we get to, say, 10 years before that retirement target. 

But data shows only 30 per cent of Australians retire when they planned. Which means 70 per cent don’t retire when they want to. Which means something happened to muck up their plans. 

For 30 per cent of Australians, that’s having to retire early because of ill health and another 7 per cent because of the ill health of their partner. Another 11 per cent are made redundant.

If late maximising of superannuation is cut short like this, it can have a devastating impact on your retirement payouts.

Moral of the story is to start maximising your super early and factor in a few unexpected hiccups.

Central bank meeting #1: Australia

Reserve Bank Board meeting week and, as expected, official interest rates were kept on hold. But there was an important change in the statement explaining the announcement. As I’ve said before, the words are now more important than the actual decision.

From saying “a further increase in interest rates cannot be ruled out” in September, this week’s statement said “the Board is not ruling anything in or out”.

A small, subtle change but one which many economists see as an indication the RBA believes interest rate settings are currently about right.

But as I’ve said before, as she breathes new life into the RBA and the role of Governor, Michele Bullock has become Australia’s financial therapist.

At this week’s press conference she continued to put a “face” to the traditionally faceless RBA Board and her down-to-earth approach is powerful. She connects. And she uses the platform as a financial therapy session to get into the hearts and minds of average Australians.

She knows you can analyse economic data all you want, but the key to success is impacting the behaviours of Australians and bringing them along for the ride.

The economy isn’t some inanimate economic model, it’s a reflection of the behaviours of 26.8 million living, breathing human beings who make important economic decisions as consumers, employers and workers.

Getting inside their heads and influencing those behaviours is a powerful tool to manipulate future economic data.

Bullock knows this is a fragile time for the economy. It has been tough for average Australians to cope with the fastest, sharpest rise in official interest rates in our history, while they also fight the effects of raging inflation.

The RBA has put the rate squeeze on every Australian household with a mortgage to help bring inflation back under control towards that 2-3 per cent preferred target range. As a result, unemployment is shaky, business insolvencies are rising and the economy is looking fragile.

But it’s working and inflation is trending down nicely.

The danger for Bullock is that we all let out a collective sigh of relief that the worst is over, rates have peaked, there is light at the end of the economic tunnel, rate cuts are coming and… we all go out and spend so inflation comes back.

Yes, we’re past the crossroads, but we’re in that sensitive period where all the good work from the economic pain we’ve endured can be reversed and the shock of another rate rise could be needed.

Which is the last thing we need.

Yesterday’s unexpected fall in unemployment back down to 3.7 per cent is what Bullock is afraid of. The RBA has warned all along that a tight jobs market fuels pay rises which, in turn, fuel inflation.

The previous month’s increased unemployment to 4.1 per cent was seen as good news for interest cuts in the second half of the year. Yesterday’s drop is bad news and could indicate that rate cuts are further away than many people expect.

The strong debate within financial markets is whether the first rate cut will come in August or later in the year.

So, Bullock-the-financial-therapist lays us all out on her couch, explaining that while the anti-inflation campaign is working, she would like us to stay in the bunker for a bit longer to make sure the inflation genie stays in the bottle.

Even this week we get told higher interest rates “cannot be ruled out”. It’s why in the Bullock press conference she said the economy and rates “are finely balanced”.

The fear of rising interest rates keeps our behaviour in check.

The RBA statement announcing the decision to keep interest rates on hold again had statements like:

“The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the board is not ruling anything in or out.”

“We are not ruling out what we might have to do next. We’re not ruling in or out anything.”

“The headline monthly CPI indicator was steady at 3.4 per cent over the year to January, with momentum easing over recent months.”

The statement once again made numerous mentions of a “highly uncertain outlook”. Just in case you didn’t get the message, there were seven references to “uncertainty” in the statement. Yesterday’s unemployment drop was an example of one of those uncertainties.

Timing is going to be everything for the RBA economy. The ideal is a “Goldilocks economy” — not too hot and not too cold.

But economies are hard to turn around, both on the way up and on the way down. The red-hot, inflation-driven economy has definitely turned down towards RBA targets. But now that downward momentum can’t run out of control as, at some stage, it needs to be slowed to level out within the target ranges and stay there.

The economy is so finely balanced that I suspect we’ll be having quite a few more sessions with our financial therapist over the coming months.

Central bank meeting #2: The US

The US Federal Reserve Bank also held its benchmark federal-funds rate steady in a range between 5.25 per cent and 5.5 per cent – still at a 23-year high. They didn’t significantly change their outlook for delivering interest-rate cuts later this year, despite solid growth and firmer-than-anticipated inflation in recent months.

But in the traditional post-decision press conference, Fed chairman, Jerome Powell, hinted that he expected three rate cuts before the end of the year.

That sent US sharemarkets into party mode. More on that in a minute…

Central bank meeting #3: Japan

Then Bank of Japan went against the global trend and actually lifted interest rates this week to… 0 per cent. That’s not a mistake.

Japan is our second biggest trading partner behind China and its economy has been in the doldrums for years. Its economy has been in recession, deflation has been rampant and interest rates have been negative. Yes, negative.

But the Japanese economy is starting to show signs of a turnaround. So this month the Bank of Japan lifted interest rates to zero. Hard to believe that while we’ve had interest rate shocks, Japan is the opposite.

It’s also a great example of how negative inflation (deflation) and interest rates can be just as destructive to an economy as high levels.

Bank of Japan’s interest rate settings:

2006: 0.0%
2007: 0.5%
2008: 0.5%
2009: 0.1%
2010: 0.1%
2011: 0.0%
2012: 0.0%
2013: 0.0%
2014: 0.0%
2015: 0.0%
2016: -0.1%
2017: -0.1%
2018: -0.1%
2019: -0.1%
2020: -0.1%
2021: -0.1%
2022: -0.1%
2023: -0.1%
2024: 0.0%

High migration figures and low unemployment… now that’s unusual

That drop in unemployment yesterday from 4.1 per cent to 3.7 per cent has rocked economists, particularly those pencilling in an interest rate cut in the next few months. The drop is one of the many “uncertainties” that RBA Governor Michele Bullock has been warning about.

You’d think big migration figures would be adding workers to ease the tight job market. It’s strange that it’s not.

September quarter population numbers (they take a while to come out) were also released yesterday, with net overseas migration running at 548,800 over the past year. There were 145,000 net overseas migrants in the September quarter; more than the 123,500 recorded in the June quarter but less than the 158,800 this time last year.

Overall Australia’s population rose by 2.5 per cent in the year to September 2023.

US sharemarkets make a triple record

All three major US indexes hit record highs during this week and again this morning… something that hasn't happened since 2021.

The S&P 500 index traded into uncharted territory, gaining 0.9 per cent; the tech-heavy Nasdaq index surged 1.3 per cent; and the Dow Jones lifted over 1 per cent.

The continuing surge in US technology stocks and the Fed’s prediction of three interest rate cuts this year means the sharemarket is celebrating.

And don’t forget it is a US election year, which always brings a higher sharemarket with it as the incumbent President pumps up the spending to look good to voters.

Big dividends are on the way to share investors

Next week nearly $19 billion in cash will flow through to Australian share investors in the form of dividends. A lot of them with a 30-cents-in-the-dollar tax credit from being fully franked.

While share investors watch the daily price changes of their stocks religiously, we tend to forget about the dividends… until they land in our account. Dividends can certainly supercharge returns.

From an investor perspective, dividend payouts are incredibly important.

Regular income payments to investors can cushion portfolios from bouts of volatility in sharemarkets, preserving capital. And the extra cash put ‘back to work’ in the sharemarket could help stabilise or even support the ASX in uncertain and ‘challenging’ times.

The big issue over the next six months is inflation. Success in getting inflation down into the 2-3 per cent target band would allow the Reserve Bank to cut rates, giving consumers extra dollars to spend and invest.

More confident and cashed-up consumers would be good news for business revenues and profits.

Which stocks does Bill Gates own?

I enjoy Jon Erlichman’s (from Bloomberg TV) sharemarket newsletter and this week he revealed a list of the stocks Microsoft founder Bill Gates invests in. I always love getting an insight into where the rich and famous invest their money. 

Over the years, Bill Gates has used some of his Microsoft stock and dividends to diversify his net worth. It is an interesting, eclectic mix of tech, environmental, consumer and old-school. Certainly not what I was expecting. But I suppose his 34 per cent holding in Microsoft shares worth over $US15 billion is a big tech exposure. 

Some of the other stocks in which his holding company has big stakes include: 

Republic Services: a US-listed waste management company which looks similar to Australia’s Cleanaway. 

Deere & Co: manufactures agricultural machinery, heavy equipment, forestry machinery, diesel engines, drivetrains used in heavy equipment, and lawn care equipment. You see lots of their machinery being used on Australians farms. 

Ecolab: develops and offers services, technology and systems that specialise in treatment, purification, cleaning and hygiene of water in a wide variety of applications. 

Berkshire Hathaway: the investment company run by financial guru Warren Buffett who is a long-time friend of and Bridge player with Gates. 

AutoNation: a big car dealership network similar to AP Eagers in Australia. 

Otter Tail: in the energy, infrastructure, and production businesses. It operates through the following segments: electric, manufacturing, and plastics. 

CN Rail (Canadian National Rail): rail and related transportation business. Its services include rail, intermodal, trucking, supply chain services, business development and maps and network. Seems a bit like Aurizon in Australia. 

Diageo: UK-listed global alcoholic drinks manufacturers and distributor. Its brands include Johnnie Walker, Crown Royal, J&B, Buchanan's, Windsor and Bushmills whiskies, Smirnoff, CÎROC and Ketel One vodkas, Captain Morgan, Baileys, Don Julio, Tanqueray and Guinness. 

Heineken: manufacture and distribution of alcoholic and non-alcoholic beverages. It offers products under the Heineken, Amstel, Desperados, Sol, Tiger, Birra Moretti, Affligem, Lagunitas, Mort Subite, Strongbow Apple Ciders, Orchard Thieves, Stassen, Bulmers, Old Mout and Blind Pig brands.

My challenge to the Federal Treasurer

Federal Treasurer Jim Chalmers is a self-confessed disciple of Paul Keating. My challenge to Chalmers is to step up from being a disciple of, arguably, Australia’s greatest-ever Treasurer to being this generation’s economic reform messiah. 

In the 1990s Keating (with the support of PM Bob Hawke) reformed the Australian economy and 30 years later we are still benefitting from that vision. He floated the Australian dollar, abolished import quotas, slashed tariffs, deregulated the financial sector, privatised state-owned enterprises, overhauled the tax system, introduced compulsory superannuation and replaced wage-accords with enterprise bargaining. 

It was an extraordinary agenda and, like Jim Chalmers, I’m a disciple of Keating as well. He wasn’t perfect, but he had the intellect and political cunning to reform a “banana republic” into a globally competitive economy and shift our trade focus away from Europe and the US to Asia. 

We need another Keating right now to set the economy up for the next 30 years. Yep, I’m looking at you Jim… and Albo to support you. 

Whenever I challenged Chalmers when co-hosting Sunrise my 89-year-old mother would complain I was too tough because “he seems such a nice man”.

And that’s the root of the problem: the Treasurer wants to be everyone’s friend. But an economic reformer has to be able to make tough, unpopular decisions in the interests of the future of the economy. 

New RBA Governor, Michele Bullock, has recently almost apologised for having to raise interest rates to fight inflation, acknowledging interest rates are a blunt economic instrument which have a massive impact on average Australian families… but it is the only instrument available for the RBA to use. Monetary policy is using interest rates to adjust the speed of an economy. 

The Governor is right, interest rates are an economic sledgehammer, but there are a myriad of other inflation-fighting instruments in the hands of the Federal Treasurer to help. 

It’s called fiscal policy and it’s where the government uses budget measures to impact the economy. Like cutting government spending to slow the economy or increasing government spending to speed it up. Or it can increase taxes to slow an economy or cut taxes to stimulate economic growth. 

Treasurer, instead of being the “good guy” and promising everyone a pay rise (which adds to inflation which then forces the RBA to lift interest rates), use your fiscal policy financial muscle to help the RBA fight inflation without raising interest rates or, at the current stage of the cycle, having to keep them higher for longer.  

The federal government has plenty of financial fire power to introduce much needed economic reform. Last week’s national accounts showed the Treasury is taking in record amounts of tax revenue and the government is spending at record levels as quickly as the cash comes in. 

Despite all the political mumbo jumbo, the federal budget is in great shape… thanks to all of us. And that’s the problem. Personal income tax is at record levels because of an archaic tax system where bracket creep slugs us out of a huge chunk of any pay rise or extra income. 

It’s because the government has so few sources of income. It’s so heavily reliant on personal income tax, company tax and payroll tax. That’s where economic reform must start – the tax system. 

As one of our great former Treasury secretaries, Ken Henry, said recently, “So, less reliance on taxes on labour income and part of capital income.” 

For the rest of capital income — which is interest, rent, and capital gains — we've got to do a much better job of getting similar tax treatment across those various forms of capital income. 

We need to fix up the mess of consumption tax. We thought we fixed it in 2000, but we didn't get as far as we wanted to get. In particular, we've got to get rid of all of those bloody transaction taxes, like stamp duties on insurance. 

And we've got to abolish fuel excise and figure out a comprehensive road-user charging scheme. 

The Stage 3 tax cuts coming on 1 July were meant to be a big step forward for tax reform with the abolition of the 37 per cent tax bracket. So middle income earners would stay at 30 per cent on income earned between $45,000 and $200,000 a year.

But as usual the government backed down at the last minute and that middle tax bracket remains. I agreed that the upcoming tax cuts should have been skewed more to middle- and low-income earners but surely it could have been done without sacrificing tax reform.

If the government backed away from such a simple reform that had been agreed by all parties years ago, what hope is there of any future reform happening? 

There is no chance of a discussion about raising the GST to replace stamp duties and excises. Or reforming personal tax rates and thresholds. Or having a uniform investment tax rate across capital gain and income returns. 

It’s a testament to Paul Keating that he achieved so much reform. 

But he needs be an inspiration for his current disciples to do the same.

Don’t get slugged with a ‘colour premium’ on your car insurance

Think your car looks better in black? If you’re looking to save on your car insurance premiums, maybe check with your other-colour car friends first. New research from Compare the Market (where I am Economic Director) is warning motorists that they could be slugged with higher car insurance premiums based on the colour of their car. 

The car insurance comparison service found that darker-coloured cars tend to attract higher insurance premiums than their lighter counterparts. In fact, on average, insurers who do change their pricing based on the colour of the car were seen to increase their premiums by as much as 8.72 per cent for the same make and model of a vehicle, when only the colour of the car changed from white to black. 

While it can be surprising to see such large discrepancies between some insurance policies based purely on colour, the fact is that some colours may make a vehicle more susceptible to theft or being in an accident and in turn, increase the risk of you needing to claim with your car insurer.

For example, darker coloured cars may be harder to see at night or during storms, which could result in more crashes and potentially drive-up prices. In other instances, novelty colours, such as gold or even purple, may be more challenging to repair if the bodywork is damaged.

These findings are just a great insight into how differently insurers can calculate risk based on historical data, and it’s something to keep in mind when you’re looking at your car insurance renewal.

However, it should be noted that not all insurers have a premium pricing policy based on colour. On average, the research found that the prices of policies with a ‘colour premium’ were still cheaper than the average price of those policies without colour premiums.

At the end of the day, in some cases, going with a brand that does have a ‘colour premium’ may still come out cheaper than the policy you’re on. 

As the team at Compare the Market found in its analysis, most of the insurers who had one single-priced policy, no matter the car's colour, were often still more expensive than some of the more expensive ‘black car’ policies. 

So, there are still plenty of savings to be had, no matter which insurer you choose… or the colour of your car.