| Welcome to the September issue of the Select Wealth Management Dashboard Newsletter. As the end of the third quarter nears, the finish line for 2019 seems to be rushing up. I wouldn't be surprised to hear the odd Christmas advert creep in on radio or TV soon. For many of us, the final quarter of 2019 will pass even quicker than usual as we get wrapped up in the Rugby World Cup. The opening game is in less than a week, and the final is scheduled for 2 November - 6 weeks of rugby heaven. Will the AB's make it 3 in a row?
For this newsletter, I thought I would talk a bit about a subject that in my opinion is being somewhat overlooked - the Consumer Price Index (or CPI), better known as inflation. Sounds exciting, doesn't it - but bear with me, I am working towards a point... The inflation figure is updated every quarter in New Zealand, and the most recent reading was for the end of June. The figure came out at 1.7% for the year - slightly lower than the long term average of 2.15% for this century (since 2000). Most people understand conceptually what inflation is - the idea that goods and services get more expensive over time. We all agree that the cost of a loaf of bread in 10 years' time will be more than the cost of a loaf of bread today. However, few people understand why we need inflation. Why is it necessary for the cost of things to increase over time - doesn't that simply erode the value of our money? Well, the need for inflation is as much a psychological phenomenon as it is an economic phenomenon. Imagine you are considering buying something - a new lounge suite for instance. You've had the old suite for 15 years, and it's looking a bit tired. It still works and is still reasonably comfortable, and you could squeeze a few more years out of it if you had to, but an upgrade would be nice - the new ones are so much fancier these days. So, should you buy the new suite, or hold off a bit longer? In a world with inflation, you believe that the new suite you are considering buying will cost more next year than it does today. This makes the decision to buy the suite today compelling. You're going to have to replace the suite at some point, and now is as good a time as ever - it's not getting any cheaper. So you walk into the local furniture store, place the order, get out your eftpos card, and walk out the proud owner of a new lounge suite. This is where the magic starts... The sales person at the furniture store is excited - she just made a sale and earned a commission. The factory that makes the suite is happy - they're selling loads of these suites. In fact, they need to employ another person to keep up with all the orders. The freight company delivering the suites is run off their feet - they can't keep up. They need to buy another truck! So many trucks on the road - the petrol companies are making a fortune. At the end of the day, all the workers meet up for a beer at the local bar to celebrate their successful day. The bar owner loves it - everyone is drinking in his bar these days. This virtuous cycle continues, and it all started with the purchase of that lounge suite... Now imagine a world with no inflation. Or even worse, a world with deflation. You believe that the suite you are considering buying is going to cost less in a year's time than it does today. Perhaps you should hold off a bit longer and squeeze another year out of your old suite - after all, it's still pretty comfortable. The sales person at the furniture store is gutted. She just missed out on another sale. No-one seems to be buying suites these days. "Definitely not going to the bar to celebrate tonight", she thinks to herself. The factory is getting worried - there are no orders in the pipeline. In fact, they're going to have to lay some people off soon... The freight company is teetering, there seems to be no more goods to deliver. Perhaps they'll try sell one of the trucks? The only person drinking at the bar these days is the owner. It's not good for business (or his health). You can see how this would become a death-spiral. Now the above examples may seem exaggerated, but they are in fact quite realistic. The great depression was characterised by a lack of inflation and persistent deflation. For 4 years between 1930 and 1934, prices fell - by as much as 10% per annum at times. Why buy today if it'll be 10% cheaper next year. Why employ someone today when you can employ them at 10% less next year. Inflation is important. But you also don't want rampant inflation like there was in the 1970's and 1980's either. If the cost of goods increases by 15% every year, it doesn't take long before everything becomes unaffordable. So the Goldilocks inflation rate is somewhere between 2% and 3% - a target that most central banks around the world acknowledge and work towards. Deflation is the enemy! So our inflation rate of 1.70% for the year as at June 2019 seems reasonable - we're not a million miles from where we need to be. Importantly, this also makes our current bank deposit rates look quite reasonable. You might think back 10 years to the days when you got 6% from bank deposits, but then inflation was running at 4%. Your "real return" was only 2% - the difference between the deposit rate and inflation rate. Today, deposit rates are much lower, but so is inflation. The "real return" is not wildly dissimilar to 10 years ago - it just doesn't "feel" as good as getting a 6% deposit rate. In terms of the markets, the past 30 days have been kind. All major markets are up. New Zealand had the weakest performance at positive 0.5%, while at the other end of the spectrum Hong Kong had the best performance at 7.1% after some political stability returned to the region. Interestingly, this is an exact reversal from last month where New Zealand was the strongest performer at 1.5%, and Hong Kong the weakest at -11.20% - a stark reminder that last month's winners aren't always next month's winners. Currencies were mixed, with the Pound Sterling being the most volatile as Britain limp their way towards an ultimatum on Brexit. (Please just make it end - what a circus!). Deposit and mortgage rates continue to slide lower. Here are the numbers |
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In terms of your Select Wealth Management portfolio, the major development is the fact that Select Wealth Management have reviewed their fees. I am very pleased to confirm that your Select fee will be reducing as of 1 October. This will be a modest saving (about 0.05% per annum in most cases), but it is a gesture of good faith that Select Wealth Management continue to make every effort to deliver a quality service at a competitive cost. There is nothing you need to do to take advantage of this reduction - it will be automatically applied as of 1 October. You will receive a written notification from them shortly confirming this change. Finally, a quick update on our Giving Back program for Hutt Valley Gymnastics. We are now nearly half way through the campaign, and a bit behind reaching our target of $2,500. However, the pipeline is full, and I am hopeful that we will be able to get across the line on this one! You can learn a bit more at www.mifinancialplanning.co.nz/giving-back.html. Once again, thank you so much for the referrals of your friends and family so that we can continue to fund this program - we really appreciate it. Warm regards Dave and the team at Isaacs Financial Planning dave@mifinancialplanning.co.nz |
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This newsletter is intended for general distribution and does not constitute personal financial advice. Copy of my primary disclosure statement and secondary disclosure statement.