17/07 Indices, page-149

"In 2019 after the last rate cuts which were probably unnecessary (maybe their brains had already stopped working by then), we never actually got to see where inflation settledInstead we ended up dropping rates to 0.1% which caused all these issues."

Hiya Fadz!

It is interesting that you think that interest rates may already have been too low even before covid became a convenient excuse for low interest rates.

Everyday symptoms such as a shortage of some types of workers in a tight job market, and long waiting lists for some goods and services, indicate that demand remains high and inflation is far from beaten. But I think that you are right that interest rates won't rise much more, if at all, because I think that the RBA has a bias towards interest rates that are too low. Rates were almost zero during covid, then the RBA was slow to raise rates when inflation soared, then didn't raise rates as much as other central banks. Thre are plenty of excuses that make the RBA's low interest rates seem plausible to many, but I think that most of the reasoning is questionable.

The following are my opinions about why I think that the RBA is not fit for purpose and why I think that interest rates are too low and will continue to be too low.

--------------------------------------------

All the following comments are just my humble opinions.

Some say that exceptional abilities will be required to lead the RBA through the coming period of change that has been precipitated by the recent review of the RBA. I suspect that the changes will be used as a convenient excuse to obscure the more important task of defeating inflation, a task that the RBA is clearly reluctant to perform, with a too-high inflation target and its timescale of too-many years.

One requirement for the leadership of the RBA is to have somebody who is not influenced by the moronic media volcano that erupts every time that there is even a minimalist interest rate rise. Also required is somebody who will lower the RBA's 3% inflation target to match most of the western world's target of 2%. Also required is somebody who is able to move more quickly than the RBA's current plan of getting inflation down to 3% by the end of 2025. What an easy life the RBA awards itself, setting an inflation target that is anomalously high and giving itself years to achieve this easy target. And there are no penalties for the RBA if it doesn't achieve any of its goals. There ought to be imperatives such as "get inflation down to target within a year or you are out and, by the way, you don't get to choose your own target".

But by far the most important requirement for any new leader of the RBA is a track record of getting economic predictions right. This requirement should automatically have ruled out the entire RBA as leadership candidates. This requirement is particularly important considering that the RBA is independent of the govt, which means that the govt can't intervene, not even when the RBA adopts apparently nutjob economic fantasies that could have been dreamt up in fairyland, such as for example "no rate rises until 2024".

Bearing all this in mind, as a result of the exceptional decision-making abilities that only politicians possess, it was decided that the new RBA governor would be a person whose exceptional abilities have propelled her into the top job after only a mere thirty-seven years of time-serving within the RBA. I'm not sure which is the more hopeless, politicians or the RBA.

According to media reports, the new RBA governor apparently has a multimillion dollar investment property portfolio with an unspecified amount of borrowings, so she must have first-hand experience of how property speculators benefit substantially from having low interest rates and rising property values. I don't know to what extent she is aware that a large proportion of the population would be better off with higher interest rates and lower inflation, or to what extent she is aware that low interest rates and high inflation in effect force savers to subsidise property speculators, so I don't know whether her property business will influence any of her decisions. However, I do think that both her property portfolio and her borrowings as serious conflicts of interest. She does not appear to be breaking any rules. It is the rules relating to conflicts of interest that I think are wrong.

At least she probably hasn't yet reached retirement age, although she might do so by the end of her seven-year appointment. She seems to have spent her whole working life in the RBA, apart from running a lucrative property business as a sideline. Considering how very high the RBA salaries are, the millions she has apparently made from her property business might seem trivial to some. I wonder how many other RBA officials play the property game. I also wonder what would happen to interest rates if RBA officials were obliged to hold all of their wealth except for their residences in non-property assets, and were not permitted to borrow large sums of money apart from mortgaging their residences.

I think that interest rates should now be higher, which could have already defeated inflation, which would then enable interest rates to be reduced sooner. High inflation is an unjust and unnecessary economic cancer that destroys the hard-earned wealth of savers. Consequently I regard the RBA's track record of low interest rates and its ridiculously soft inflation targets as proof that the RBA is not fit for purpose, regardless of what plausible or implausible excuses are offered for the RBA's track record.

In summary, I think that the RBA review was a wasted opportunity, and I think that there are major conflicts of interest within the RBA, and I think that Blind Freddy and his guide dog would each have been better picks for the position of governor (provided of course that they have no conflicts of interest).

--------------------------------------------

Now what does this all mean for the XJO?

Based on my opinion that the RBA has a track record of low interest rates, and based on my opinion that there are apparent conflicts of interest within the RBA, and based on my opinion that the RBA does not appear to be good at assessing current levels of demand, I think that there is little chance that the RBA under its new governor will take a strong stand against inflation. I think that the RBA will continue to keep Interest rates too low even though inflation will be too high.

Low interest rates are long-term positive for the XJO. The XJO will always go up and down, regardless of interest rates, because many other factors affect the XJO..

What the RBA does at its next meeting will for a day or two override any short-term technical chart of the XJO. I have no opinion about what the outcome of the next meeting will be. The outgoing governor will still be in charge. I think that his track record appears to be biased towards low interest rates, but it is possible that he might add another 0.25% before he leaves, because he might wish to make his tenure appear to have been tougher against inflation than it was.