Good morning all,

Yes, it has been a while as I have been very busy working away and momentarily lost my communication skills when it comes to writing an email. On the home front I still have two children at home Jett and Jenna, with Jett being 17 and Jenna turning 16 this month. Yes, I am finally getting down to a few more years before becoming an empty nester but one doubt whether the purse strings will be put away anytime soon. Dear Lord, the middle child who lives independently, in a house that I rent, with a boyfriend and two flatmates is the most expensive by a distance. I have just finished with the braces which is minor compared with car repairs and life costs. She is a child that I have failed in my teaching of the word money and cashflow and budgeting and lifestyle choices. If only she could be like her older and younger sister who have the longer arms even compared with Ebenezer Scrooge. My eldest is the best, you only need to borrow $10 for a paper and coffee when there is no pay point, and you get reminded in the afternoon that the $10 was going towards groceries and needs to be returned ASAP. She has not changed even now that she works for Rio Tinto as a maintenance planner earning more than 85% of the Australian population. I know, I checked the stats and understand her need for the $10. My second child is now independent as well and driving trains buying his own house and raising his boy Jaimee (AKA Redneck), well as a Grandad you have the rights to a nickname I reckon. Oh yes, just to let you know the youngest Jenna had her year 11 ball Saturday night- and how-time flies and what war paint does for a young lady is a shock for any father.

Onto the markets which is a main reason for the email.

As most of you know I spend many hours of my working week looking at statistics and economic reports to see how the economy is going and attend many seminars with world class advisers on the trends and movements within the world markets. Having said that I have concluded along with many of the economists and money managers that we are heading for an economic event that is going to cause the markets to correct that will conclude with a drop in the price of shares and property. The reason for this statement is simple, due to markets going up for so long and the severely overpriced assets on the USA market,  the term what goes up must come down is now going to happen. We have all seen this before in the 1970’s, 1980’s and 2010 when we had the GFC and once again it is time for a market reversal. The main problem as we are all aware is that because of inflation both the USA Federal reserve and the Australian Reserve Bank have increased interest rates to try and cool the economy and push inflation down to the desired 2% long term average. Unfortunately, inflation has not cooled with the latest rate hikes causing interest rates to be pushed higher and hence the overall cost of borrowing in the market has increased with the base interest rates nearing 4% without adding a risk premium for borrowing . As we know the higher the cost of borrowing it will make profits harder to achieve and hence will force many businesses to either close their doors or decrease the amount of employees they hire. So far with the latest rounds of rate increases this has not worked and more worryingly share markets have increased in value which is increasing wealth and money supply not decreasing it as the desired rate hikes want. Due to inflation remaining, further rate hikes are imminent and will continue until they get it to stall and drop. This will cause pain for many borrowers over the next two years.

With all the noise in the market and the uncertainty surrounding where the market is going the two year and 10-year Bond rates have inverted. You would have heard this on the news, but it simply states interest on a 2-year bond is higher than interest on a 10-year Bond, meaning price is rising and the economy is heated meaning a recession is imminent. Since the 1960’s every time the bond yields have inverted a recession happens within a year. Because inflation is here, they will keep increasing the interest rates until people stop spending money in the economy to slow down money supply and lower prices. What tends to happen now is they usually increase interest rates passed the point of cooling the economy and it then tips into recession which tends to always happen. There are many arguments about what is included in inflation and how to lower it without the rising of interest rates, but simple economics 101 is hit the interest rates and cool the economy before more damage is done with rising prices. Rising prices are harder to control for the government and very unpredictable as turning up the interest rate cycle takes spare money out of the economy and slows down money supply, this is a lot quicker which stops people spending and demand for goods and services slows when consumers have less money to spend.

So, having said all that my advice is that we are going to start to get very defensive on your portfolios and have already started selling in the areas we think are going to be the most effected. As most of you know me, I am usually the glass half full type person and usually upbeat about the markets and positive that we can achieve a above or better than average return on your money. As you have noticed over the last year as with all fund managers the returns have been flat. As I am concerned about the coming two years and with the noise around the recession growing, I have become defensive and am now selling the most at risk funds within my own portfolio. What this means is I am taking money out of the USA markets and selling anything geared or borrowed money as they will be at risk. I will be selling small companies as well. I will be keeping infrastructure and Australian dividend yielding investments as they are less likely to suffer any severe drop. I will also hold emerging and developing markets as they are currently down in value. As I have said we have started this and will be doing this in an orderly manner over the coming months and putting the money into cash and or fixed interest. At this juncture cash and fixed interest are better than shares due to the risk premium we need with the economy being in an uncertain position and the real possibility of a market and or credit event.

My other advice now is getting your financial house in order and do a budget and be careful what you are spending your money on or is it better that I hold cash now that prices are increasing. Most of you don’t do budgeting very well, in fact 85% of you don’t do budgets due to the pain it causes when you do it by showing you what reality is and many of you are not prepared to suffer the reality check. My advice again is, know thyself, know what you spend money on, what your cost of living is and be very careful over the coming two years as Bank interest has not peaked and money supply will contract. In simple term the economic tap is being turned off and many of you will struggle to meet budget. Why wait until you start to struggle why not get on the front foot and fill in the form at the top and see what your real cost of living is. I have been preaching this sermon for years now and with those that have done a budget it is so pleasing to see people be so smart and proactive in learning about their habits. As Molly Meldrum stated many times on Countdown “do yourself a favour” do a budget. Do it, email it to me, I would love to see it and be surprised. Be forearmed and prepared.

I hope this email gives you a bit of a jolt to your financial position and you look at it so you can have a realistic insight into your spending habits and life’s balance sheet as sometimes you need to do that for your own piece of mind.

Until next time take care and if you have any questions please ring.

Regards

Allan Butson

Managing Director

Wealth Merchants Australia Pty Ltd