30 Sep Money Cafe

The Money Café with Alan Kohler

Alan Kohler announces his upcoming retirement from the ABC at the end of the year while discussing significant shifts in global finance. The

Key takeaways

• US 30-year government bond yields reached their highest levels since 2002, impacting global cost of capital.
• The 'Japanese carry trade unwinding' is identified as a potential driver for rising US bond yields.

Main topics

• Alan Kohler's ABC retirement
• US bond yields and mortgage rates

Notable quotes

It's an existential risk to humanity is one of the risks of the investment in anthropic.

Conclusion

The episode highlights a period of intense economic transition driven

Transcript preview

Speaker 1 (0:11) Hello, I'm Alan Kohler, Editor-at-Large of Intelligent Investor and Finance Presenter and Columnist for the ABC. Speaker 3 (0:17) And I'm James Thompson, Senior Chanticleer Columnist at the Australian Financial Review. Speaker 1 (0:22) And we are The Money Cafe. Good morning, James. G'day, Alan. How are you? On holidays. Thanks for getting up early and, you know, being a part of our regular thing, even though you're on leave. It's great. Good on you. I Speaker 3 (0:36) couldn't resist. There's so much to talk about. I know. There is. Speaker 1 (0:42) There's so much to talk about. And one thing we need to talk about initially is that my retirement from the ABC is to be announced today. Speaker 3 (0:49) What? Today? Speaker 1 (0:51) Oh, Alan. Speaker 3 (0:53) Is this a good news retirement or an otherwise retirement? Speaker 1 (0:58) I don't know. What's an otherwise one? Speaker 3 (1:00) Well, you mean sacked? I Speaker 1 (1:01) haven't been sacked. Speaker 3 (1:03) Yeah, you haven't been sacked or you're not sick or anything like that? Speaker 1 (1:06) I'm not sick. No, no. In fact, I'm healthier. I think it's fair to say I'm healthier than I've been for a very long time. Oh, good on you. So, look, you know, I've got six grandchildren I want to spend time with. Look, I've been at the ABC 31 years. It's a wonderful place. I love it. Speaker 1 (1:26) I feel like it's time to move on. I'm going to continue to do Money Cafe, among other things. So I won't be retiring entirely, but I will be finishing up at the ABC at the end of the year. So not immediately, just at the end of the year. Speaker 3 (1:44) Well, the country will miss you, Alan, and I do mean that in all seriousness, I think. So, as you know from all the feedback you get and the suggestions of graphs and occasional critiques, you know, it's a real, it's a part of people's daily lives. And I think, you know, Robert Gottliebsen did this and you have carried that torch of bringing finance and markets and all that stuff to people's homes in a way that's very accessible. So, congrats on the great innings. Speaker 1 (2:17) Thanks. Yeah, Bobby Gottliebsen's still going at 85. He's unbelievable. Oh, of Speaker 3 (2:22) course, yeah. Speaker 1 (2:24) May Speaker 3 (2:24) we all be still going at 85. I Speaker 1 (2:27) know, he's an inspiration, isn't he? Totally. As is Mick Jagger, let's face it. Speaker 3 (2:32) Yes, yes, that's a good point. Speaker 1 (2:35) He's 83, he's about to tour again. Goodness gracious. Speaker 3 (2:38) Yeah. Speaker 1 (2:39) Anyway, so let's get on to the news of the day. Last night, the 30-year… US government bond yield went to its highest level since 2002, so rates are still going up, even though the US Treasury under Scott Percent has been trying to get it down. He started trying to do that on August the 19th, and that did not go well, has not gone well. Yeah, yeah. This Speaker 3 (3:05) has gone from sort of, well, I think it's gone from alarming to almost weird. Speaker 3 (3:14) It's understandable that there's some upwards pressure on bond yields. We've talked about all the reasons. There's inflation around the world. The war in the Middle East keeps adding to that. The US is running a big budget deficit and that budget deficit is not going to get better anytime soon. The higher interest rates go, the worse the budget deficits gets because the interest bill gets bigger and bigger. So all that is well understood. What's probably less, you know... explicable is why the yield just keeps rising. Now, I've spoken to economists and investors and they reckon the 10-year yield, which is about 5.3%, I think, is around fair value. It's about where the bond yield should be given AI growth, inflation, deficits, and all that stuff we mentioned. But yields just keep pushing higher and higher. You know, I've heard this theory that it's about what's called the Japanese carry trade unwinding. So, the interest rates in Japan have been very low for 30 years. So, what Japanese investors and others have done is borrow in Japanese yen and invest in other places like America where they could get better returns. That is now unwinding because Japanese interest rates and bond yields are going higher. So that allows Japanese investors to repatriate their capital from America and other places and reinvest in Japanese bonds. What do they do to facilitate that? They sell treasury yields and that puts more upward pressure on the price. But yeah, Scott Percent. Donald Trump, they've got a problem here. I mean, these 30-year yields, 10-year yields, they're not theoretical. This is the cost of capital. It's the cost of borrowing, and it is going up at an alarming rate. Speaker 1 (5:17) It's also what influences the 30-year mortgage rate, which is what most people in America have got. So it's actually, for them, it's like a rate hike. Yeah. Speaker 3 (5:27) Yeah. Speaker 1 (5:27) Like a cash rate hike. In Australia, all the mortgages are variable, right? So what matters is what the Reserve Bank's doing, which we'll get onto in a minute. But in the US, what matters is the 30-year bond rate. Yeah, Speaker 3 (5:39) you're looking at this and you're not moving. I mean, you know, the housing market in the US has been weirdly stuck for some time because in the pandemic, everybody locked in these incredibly low 30-year mortgage yield, mortgage rates. But now, you know, no one can move because to do so means you need to take out a new mortgage at something like 8%. compared to the 2 % you're on at the moment or, you know, sub four anyway. Speaker 1 (6:11) So you would have, on your holiday, you would have taken time out from the family to watch Michelle Bullock's press conference, I guess. Did you? I'm just kidding. Speaker 3 (6:20) No, I did. Because I'm Speaker 1 (6:22) a Speaker 3 (6:22) loser, Alan. I did, yes. Speaker 1 (6:25) Jesus. Speaker 3 (6:26) What did you think, Alan? Speaker 1 (6:28) What? Speaker 3 (6:29) What did you think of Bullock's performance yesterday? I Speaker 1 (6:34) thought it was pretty good. I mean, what am I missing? Speaker 3 (6:37) I Speaker 1 (6:37) mean, look, to be honest, I sat there, I was sitting on the ABC's set watching it with Patricia Carvellis because I went on the afternoon briefing show immediately after Michelle Bullock's speech and we were at the press conference and Patricia and I were watching it together. Anyway, so I kind of was trying to understand it and take notes and all this. Yeah, I thought it was all right. Why? Yeah. What do you think? Speaker 3 (7:06) I guess I thought there was a little bit of a contradiction between how hawkish the statement was, you know, basically saying we can't get on top of inflation, we need to do more, we need to do more. And then Bullock was a bit more, well, maybe we don't need to do more. Maybe this will be okay. Maybe a third interest rate, you know, a third interest rate rise is not a given. And I thought she was trying to sort of calm the horses a bit. We do see that. We see that a lot with the US Federal Reserve. Jerome Powell, the former Fed chair, he was a classic for sort of being the statement would come out hawkish and then by the end of his press conference he'd convince Devran, oh, don't worry too much, I've got this in hand. Speaker 1 (7:46) Yeah, no. No, I think you're right, there's a bit of that. In fact, that's shown up in the odds of a November rate hike, which Speaker 3 (7:54) yesterday Speaker 1 (7:55) morning were 88 % and this morning... It's 40 % Speaker 3 (8:00) for a Speaker 1 (8:02) November hike. So I think that the markets responded to what Bullock said, not to the statement, but to what Bullock said and responded to it. And it was interesting. I mean, we saw it in the dollar too, which was up immediately after the rate hike and then ended up lower on the day and went under 70 cents last night. Speaker 3 (8:22) Yeah. Yeah. I'm a bit surprised at that. I mean, I don't quite see how. the inflation problem is better by November. And in fact, it could get a lot worse. If we get the US government putting export bans on diesel, then the price of diesel is going to jump sharply higher, let alone whether you can get enough supply. So I'm not entirely sure what that has been based on or that... optimism is based on but yeah i mean the the bond market is telling you that story you know i think uh we're recording on wednesday morning there's a monthly inflation number coming out on wednesday all these numbers take on a a lot of importance now um But, you know, not to jump too early into our questions, Alan, but there's one from Natalie right down the end of our, you know, right down the bottom, basically making a point that we get a lot saying, you know. Speaker 3 (9:27) The spending is being heavily driven by debt-free cohorts. Here's looking at you, asset-rich retirees, who are actually enjoying these 5 % plus yields on cash. But it's very hard out there in the, well, quite real world where mortgagees, younger households with families are doing it tough and isn't there a better way? Unfortunately, there's not. But, Alan, I mean... Interest rates work with the classic long and variable lags. I've had four now. These are going to be rattling through the economy, not just for 12 days or 12 weeks, for the next 12 months. I really start to worry about how much damage is going to be caused here. And to Natalie's point, how much damage is going to have to be caused to younger... in that sort of important family time of their lives and they're going to have to bear the brunt of it. It's pretty brutal. Speaker 1 (10:31) Yeah, and the problem is that the inflation that the Reserve Bank is battling is not caused by the conventional causes of inflation, which is sort of overheating economy, overheating markets, property market and so on. I mean, the economy is not overheating at the moment. The reason for the, the number one reason for the inflation is productivity growth being weak, which has meant that... unit costs for businesses are rising even though wages are not rising. She was explicit about that. She said she acknowledged that wages are not overheating, wages are not rising much, even though unemployment, she says, is the labor market's still a bit tight. So she's kind of saying, acknowledging that wages aren't going up much. But the reason that unit costs are rising is because of weak productivity. And so interest rates will not. have anything to do with that obviously and the other reason the other reasons for