The 'Thelma and Louise' moment coming for global economies

Carrington Clarke (0:02)

This is an ABC Podcast.

SPEAKER_2 (0:06)

Hello, listeners. This is Planet America's John Barron.

SPEAKER_3 (0:08)

And this is Planet America's Chas Luchadolo.

SPEAKER_2 (0:10)

And both of us are here to have a fireside chat. Yes, that's right. Planet America's fireside chat is back. We're talking a lot about the midterm elections, which are coming up in early November, Chas. These are crucial for President Trump, although he's not on the ballot, and this won't stop him being president, but the stakes are still pretty high.

SPEAKER_3 (0:29)

They certainly are, and we're going to tell you why, and so much more on Planet America's fireside chat podcast on the ABC Listen app, or wherever you get your podcasts.

Carrington Clarke (0:42)

Gerard Minack is known for being able to make sense of the big economic picture to look through the noise of markets that are particularly volatile to give us an idea of where they might be heading. What is the big through line currently in the global economy? Those insights are obviously very valuable to the investors that he personally advises, but they're also helpful for those of us who are sitting on the sidelines trying to sift through those market moves to see exactly what is important. Today, we're going to be talking about some of those big macro themes, including the AI investment boom, what's going on with debt markets, and where to now for Australian housing. I hope you enjoy the chat.

Gerard, welcome to the podcast.

Gerard Minack (1:29)

Thanks for having me, Carrington. Good to be here.

Carrington Clarke (1:31)

It is a particularly volatile time in markets. I mean, I know journalists kind of are at pains to say this all the time to keep people watching, but it feels like we might be on the precipice of something. I want to start kind of globally, particularly with what is happening with bond markets and the cost of debt.

A couple of weeks ago, it felt like every day we were hitting another kind of highest yield X amount of years when it came to the 30-year treasury in the US or the 10-year treasury in the US. Can I just ask, is there a particular yield that you look at, or that the market looks at, at which point we're in real trouble? How does that work?

Gerard Minack (2:09)

I don't think there's any magic level. Arguably, the most important yield in the world is the yield on the US treasury bond market, focused on the 10-year, for example, that's yielding around five and a quarter percent.

At the moment, now, that's high by the standards of the last 15 years. But on a long view, the aberration was the very low yields that we saw in the aftermath of the GFC. And what we're seeing now is the return to much more normal rates, the rates that we became accustomed to prior to the GFC. And that's why the 10-year, which had its very lowest point five years ago, was yielding just half of 1%, 50 basis points. And it's up almost 500 basis points, or 5%.

And it hasn't done seemingly that much damage to anything. We are starting to see some effects. But really, the reason most of the world can cope with rates at these levels is because we are going back to normal.

What's driving us there is a reversal of some of the big factors that pushed yields to very low levels in the aftermath of the GFC. We had an excess of saving. We weren't seeing much investment. Well, all that's been tipped on its head now. We've got massive investment, a lot of it around the AI boom, but it's not just the AI boom. And on the other side of the story, we've got governments through the developed economies running enormous budget deficits by the standards of where we are on the cycle. And those deficits are soaking up a lot of the world's saving. So we've just got a real competition for funds. We want to do capex. We look at the pool of savings to fund that. There's not much there because of the large budget deficits. And voila, we have these rates that, as you said, back to the levels not seen pre-GFC, which sounds scary, but in a way, it's back to normal.

Carrington Clarke (4:01)

Back to normal. And as you say, maybe things don't seem to have gone awry yet, but a lot of debt was taken on 10 years ago at very low rates. And some of that is rolling off. Will we potentially see problems? You know, we look at the Australian government, when it has to issue new debt, it's paying much higher rates on that new debt. The companies, similar things, some of them might have made investment decisions when debt was much cheaper.