Inside the RBA's May board meeting + ease into retirement

Hi everyone, happy Friday

It’s good to be back on deck after a terrific three weeks off in Sicily and Malta on holidays, plus visiting our youngest daughter in London.

But back to reality.

In this week’s wrap up of the most important news affecting your money:

• The public pass judgement on the Federal Budget

• Inside the Reserve Bank’s May board meeting

• Investing summed up in one chart

• Who funds the US’s massive debt?

• The financial strain on relationships

• Tips to ease your way into retirement

• Stock of the Week

But first, don’t forget to watch out for the cost-of-living special this Sunday night on Spotlight on the Seven Network. I’m part of the panel with some good tips on how to cope with the cost-of-living crisis.

Next, the sharemarket is looking a bit fragile after the big falls on Wall Street this morning. The markets are fixated on when interest rates will be cut. The Federal Reserve is indicating cuts in the US will be further away than many think and that’s why markets are showing their disappointment.

But remember, the US and Australian markets are at near record highs so investors have had a great run.

In other news, the artificial intelligence computer chip manufacturer Nvidia is a market phenomenon this year. It reported a great earnings update this week and its share price rocketed yet again. But interestingly Ireland is limiting the amount of Nvidia’s computer chips that can be imported.

AI chips need a huge amount of electricity to operate and Nvidia’s operations are overloading the Irish power system and causing blackouts.

Makes you wonder whether other countries will follow suit. A couple of weeks ago I wrote about the study which found the amount of electricity being consumed by data centres, AI data centres and crypto mining was equivalent to the amount of electricity used by Japan over a year.

Pretty amazing statistic, isn’t it?

The Federal Budget gets a thumbs down from consumers

After all the expert opinions, the last word on this month’s Federal Budget is from average Australians… and they’ve marked it as a slight fail. Consumer sentiment is not as bad as the previous three budgets but not as good as the one four years ago.

I reckon the energy and rent subsidies would have helped, plus we have the tax cuts coming in five weeks.

Inside the Reserve Bank board meeting

The minutes from the May RBA board meeting were released this week. They pretty much reflected Governor Michele Bullock’s latest press conference, outlining the decision to keep interest rates on hold as expected.

The key difference between the March and May board meetings is that the board considered raising interest rates in May while at the March meeting there was no discussion.

It appears the reason for the discussion in May was centred around the stronger than expected March quarter CPI figure (and other unexpectedly strong economic figures). The fear being that this stronger data could fuel inflation.

But the RBA board concluded most of this data was not being driven by consumers going out on a spending spree.

They were right to make that differentiation. Since the May board meeting there has been a lot of economic data showing the economy is slowing and consumers are staying in their bunker.

The unemployment rate lifted to 4.1 per cent, suggesting a loosening in the labour market that risks being less gradual than the RBA expects (RBA forecasts a peak unemployment rate of 4.3 per cent by June 2025).

As well, the March quarter Wage Price Index indicated wages growth peaked in late 2023 and the CommBank Household Spending Insights (which analyses customer credit card spending habits) also suggests consumer weakness continued into April.

A further indicator: The Westpac–Melbourne Institute Survey of Consumer Sentiment Index for May fell and suggests around 80 per cent of the 1 July income tax cuts will be saved rather than spent.

What this batch of figures show is that we all continue to tighten our financial belts and be very cautious with our money – which is exactly what the Reserve Bank is hoping for.

But the question now is whether our belt tightening has gone too far, and the economy is slowing way faster than expected. As I’ve said before, our huge immigration intake in the last year has masked the fall in consumer spending. While 500,000 new migrant customers have hit our shores – and the shops – existing customers have been slashing spending.

Have a look at this chart which shows how on a per capita basis real household spending has been falling at the fastest and longest rate since the 1970s. That’s a bit scary for retailers and hospitality businesses when the government has committed to slashing immigration numbers over the next year.

This week, Australia’s largest listed automotive dealer, Eagers Automotive, updated shareholders and gave a pretty gloomy outlook. It basically said sales were slowing and they’ll have to cut their profit margins to sell the backlog of cars they have available for sale.

Is this a so-called “canary in the coal mine” of consumer spending? They are walking away from buying big ticket discretionary items like cars. If you own shares in any retailers, take this into consideration.

Also, maybe this is the reason why the latest unemployment figures are higher than expected. Businesses are feeling that slowdown in consumer spending, are wary of the future and are starting to cut staff. At the big end of town, Telstra laying off 2800 staff could be a precursor of what’s to come on a wider level.

Watch unemployment figures carefully because, along with reducing inflation, protecting jobs is a key objective of the RBA. I said a couple of months ago that if unemployment reaches 4.5 per cent, rate cuts become a distinct possibility.

This chart says it all

I was following some of my favourite analysts online and this chart tickled my fancy for its sheer simplicity. Sometimes we can overthink investing when, in reality, this is what it all boils down to.

Whether it’s investing in shares, property, collectibles or whatever, it’s all about investing at the bottom of the cycle and taking profits at the top of the cycle.

What is China’s financial power over the US?

I often talk about the size of US budget deficits which is leading to a blowout in its government debt. The size of debt is just mind boggling: US Federal debt is at $US34 trillion and is growing by roughly $US1 trillion every 100 days.

To fund that debt, the government borrows money by issuing bonds. The interest bill is running at about $US1 trillion a year.

About half the amount borrowed is loaned by overseas investors. It has often been said that this is one of the greatest weapons China has over the US. If China pulls the plug on its loans to the US, then it could cripple the US economy.

So, I was fascinated to see this chart from Eleva Capital and Bloomberg showing the drop in the financial influence of China and Japan on the US economy.

Yes, they are still the two biggest financiers of US government debt, but their role has diminished.

Back around 2010 China was financing 9 per cent of US debt, now it’s just 2.4 per cent. Likewise, Japan’s level has dropped from around 10 per cent in 2005 to 3.4 per cent now.

It’s little wonder the US can more confidently take a tougher stance against China.

Money causing relationship issues for more than 75 per cent of Aussies

They say money can’t buy you love – but sometimes it does help. More than three quarters of Australians say the rising cost of living has impacted their relationships or ability to socialise according to new research from Compare The Market.

One in five people (23 per cent) said money issues had put a strain on their relationship with their partner or spouse. But romantic connections aren’t the only dynamic under pressure.

One in ten people (10 per cent) said financial problems had damaged their relationship with their parents while 8 per cent said rising costs had caused a rift with their children. 

It comes as a growing number of Australians turn to their parents to buy a home or cover the cost of household expenses.

Over a third of Australians (36 per cent) said they had to say no to social outings because they couldn’t afford them.

Millennial marriages have been hit the hardest with 38 per cent confessing that rising costs have caused the tension. They’re the generation hardest hit by rate rises because they’ve taken out more debt to buy their houses. The cash rate has risen by 4.25 per cent, well above the 3 per cent that banks use for stress testing.

Renters aren’t much better off with the nation’s median rent at more than $600 per week, according to CoreLogic data.

More than a third of Gen-Z and Millennials also blamed rising costs for causing tension in their relationship with their parents.

On the flipside of this, Gen-X and Baby Boomers said the cost of living has put a strain on their relationship with their children (39 per cent and 27 per cent respectively).

One of the keys to any healthy relationship is to be transparent about money.

It’s important to be open and honest about your finances. If you’ve been invited somewhere you can’t afford, don’t be embarrassed to suggest a cheaper alternative. A good partner or friend should support you and understand your situation and your bank account will thank you for it.

Essential steps to ease into retirement

Retirement is one of life's great crossroads. It is an exciting and challenging period where most people take stock of their lives.

For some retirement is a joy, for others it is a time of worry. So here are some good tips on how to make the change as smooth as possible and hopefully give you a springboard to a terrific retirement.

Don’t panic

The decisions you make will affect the rest of your life, so relax and take your time. Often Australians retire with a sum of money the size of which they’ve never seen before. But remember it will have to last you the rest of your life, which could be another 30 or 40 years. It’s a big decision.

Seek financial advice

Don't even try to work out your superannuation. It has become so complicated and the tax treatment so individual that you must speak to a professional.

Get the advice from preferably two different reliable sources. Usually your superannuation fund will have an alliance with a group of financial planners or have their own in-house, so start there – but also add a couple of others. Shop around for the options which best suit your lifestyle and the income level you wish to achieve. Decide what you want your money to do for you before deciding what to do with your money.

Pay down debt

The worst thing that can happen to a retiree is to be over your head in debt and not have a regular salary coming in. Ask your adviser how to use your money to pay off debt: savings, redundancy, benefits or superannuation.

Decide where you want to live

This decision has many implications for both your lifestyle and financial future.

Don't over-invest in your home at the expense of income. A common problem for many retirees is that they become asset rich and cash poor because they’ve tied so much up in their own house.

Check land values to make sure rates will not be an unforeseen problem and, in a growing number of cases, whether land tax will cripple you financially.

Consider the emotional stress of moving immediately and maybe put it off for a year or so until you’re settled.

Get a comprehensive health check

This will hopefully detect any problems so you know where you stand on health issues. It’s amazing how many people retire and then suffer health problems as their lifestyle changes. So don’t underestimate the need to keep healthy, fit and active.

Make major lifestyle decisions

Know where you stand with major expenditures in retirement such as holidays or a new car. Also pick up some outside interests or hobbies, otherwise you will drive your spouse batty. It can be an enormous step to go from full-time work to literally nothing. Start planning early on how you’ll fill the time to keep your brain and body active.

Discuss it with your partner

Talk to your partner who will also be affected by any decisions you make. They may have some valuable advice to contribute and deserve to know what you are doing. After all, your relationship should be just as exciting and fulfilling in retirement as it was when you were working.

Find purposeful work

Find something meaningful to do with your time. 50 per cent of retirees expect to do some sort of work, if only on a part-time or voluntary basis. But make sure the work fits your values, skills, interests and personality type.

Love and relationships

Most women who have retired or have been at home for a few years have concerns about their partner retiring to ‘run the home like they run the office’. This transition time needs patience, understanding and communication.

Work on your social life

This one is for the men as women generally do better at being socially active. Men are traditionally poor at maintaining relationships outside of the workplace, so in retirement, cultivating new friends is often a challenge. A proactive strategy for men is to start developing some personal relationships before you retire.

Cultivate hobbies, interests and creativity

Build a plan that allows you to experience many different activities – variety really is the spice of life. Have a go at something you’re interested in and be open to trying things you think you won’t like. It’s surprising what we learn about ourselves as long as we’re prepared to give new things a go.

Maintain intellectual growth and learning

At long last you can learn how to build that dining room table, restore the antique bike, learn what your computer can really do, or even go to university to fulfil a lifelong dream. In other words, try to keep your mind active and engaged with ongoing projects and the wider world.

Join something

This is a combination of all the above, but there is an organisation covering just about anything and everything you have ever thought of. Staying socially connected, mentally challenged and actively engaged in your community are the keys to living a long and healthy life.

Stock of the Week: Challenger Limited

Challenger Limited is a fund manager which specialises in retirement income products; things like annuities and private pensions. It has always been regarded as one of the most boring stocks on the market.

It came up on my daily share investment show, The Call, (on ausbiz.com.au) and it is no longer boring.

Daniel Ortiz from Stock Doctor and Mark Gardner from MPC Markets were the expert panel and they liked what they saw with Challenger at the moment.

Both dubbed Challenger a “buy” and suggested it provided a better option for investors wanting income returns than the big four banks.

Both Daniel and Mark believe the banks are overvalued at the moment and their view is that it offers an opportunity for investors to take profits and switch to Challenger instead. Naturally, get your own individual advice before making a decision.