Dive into the world of high inflation and interest rates with Warren Ingram and Bastian Teichgreeber, Chief Investment Officer at Pressient Investment Management. Gain insights on potential positive developments in interest rates, the South African economy, and the cruciality of a long-term investment outlook. Don’t miss this episode filled with expert insights for navigating today’s complex economic environment.
Questions/ Topics:
Have a question for Warren? Don't forget to voice note your questions through our WhatsApp chat on (+27)79 807 8162 and you could be featured in one of our episodes. Follow us on Twitter, LinkedIn and subscribe to our YouTube channel for more Financial Freedom content: @HonestMoneyPod
Dive into the world of high inflation and interest rates with Warren Ingram and Bastian Teichgreeber, Chief Investment Officer at Pressient Investment Management. Gain insights on potential positive developments in interest rates, the South African economy, and the cruciality of a long-term investment outlook. Don’t miss this episode filled with expert insights for navigating today’s complex economic environment.
Questions/ Topics:
Have a question for Warren? Don't forget to voice note your questions through our WhatsApp chat on (+27)79 807 8162 and you could be featured in one of our episodes. Follow us on Twitter, LinkedIn and subscribe to our YouTube channel for more Financial Freedom content: @HonestMoneyPod
brought to you by Pressient Investment Management. Informed by science, guided by insight. Pressient Investment Management is an authorized FSP.
Speaker 2:Welcome to Honest Money. I have to start with the dad joke. Today we've got an interesting topic. We're talking about interest rates and will they ever come down again? I'm really pleased that we've got Bastien Tachkribbe to join us. Bastien, I always have to have a drink before I say an end to make sure I do it properly. He's the Chief Investment Officer at Pressient Investment Management. Thanks so much for joining us. Thanks for having me on the show, warren. So we're in an environment where it feels unique to us in South Africa that we've got high interest rates and that we're suffering with inflation, but it's almost a global phenomenon. I can't think of lots of countries around the world that are in the opposite position to where we are. Everyone seems to be struggling with some form of inflation and higher interest rates than normal, and the question I'm getting asked from everybody is are we here? Is this it? Is this the new normal? Will interest rates ever come down again? And I don't have the answers. I'm very glad you're on the show.
Speaker 3:Thanks, warren. Let me start with some good news. Then Interest rates will definitely come down again over the long term. So it's very important to differentiate between structurally higher rates, which we don't really see, that we are experiencing that or if you have more cyclically higher rates, which is exactly what we see. So, trying to say in simpler terms, we are of the view that structurally, there's no reason why interest rates should be higher than previously, or pre-COVID if you want to. But we are just going through a period where the US economy is extremely strong and with that, the US economy can afford itself to have higher interest rates and with that, all the central banks globally are following the Fed on this path to higher rates.
Speaker 2:So maybe there's two phrases there that I just want to expand on a bit more. So we've got structural and then cyclical. So structural would be we're at 5% for argument sake interest rates in America, and if it's structurally higher, that means it stays there forever, and if it's not that, then it's the opposite, which is cyclical, which means it goes up in, and it could be cycles of months or years. It doesn't have to be cycles of days or weeks, they can be relatively long cycles. And so if we're talking about cyclical, which is what you're saying, then you measure it with some confidence, because you know why it went up and therefore why it will go down again.
Speaker 3:Exactly that, and there's a lot of reasons why, cyclically, interest rates are higher. Look, first of all, the US economy is doing very, very strong, which is hard to believe. If we are like looking into the South African economy, obviously our economy is not doing so well. If you look into the European economy, the European economy is not doing so well. If you look into other emerging markets like China, the economies are not doing so well. But if we focus on the United States, the economy is actually doing exceptionally well. There's a lot of reasons for that.
Speaker 3:It's very consumer led economy and the economy, the consumer in the States, can still afford these higher interest rates for several reasons. Some of them would be that the savings rate was very high. Some of the reasons would be that they received a lot of checks post COVID which didn't necessarily need to be spent. So with that, the US economy is consumer driven, very strong and with that, the Fed has no need to bring down rates. But now ask yourself, is that a structural thing or is that a cyclical ring Though it's a cyclical thing because obviously it doesn't mean that long term anything has changed. So that phenomenon which we are experiencing right now, that the SAVA just happens to have a lot of money and that the US economy is doing so well and unemployment is so low. That's something which is great and hopefully actually hopefully it lasts for a while longer, but it's not something which has now structurally changed compared to where we've been before.
Speaker 2:So if it was structural, that would be because something happened where a new measure of kind of permanent salary increases, because it was a law that was passed and minimum wages went up or something that caused it to fundamentally never move again At the moment. If it's cyclical, it's because there is, I mean at its most basic, in all economic supply and demand. There is an extra demand for something. Prices are going up, and when that demand peters out, we'll see prices going down, I mean at a real kind of overly simplistic level. That's what we're talking about now.
Speaker 3:Exactly that. Look, there has been a lot of argumentation that structurally rates are higher and that structurally inflation is higher. That's what we often hear, and then it's often linked to COVID. We don't really see that. If you look structurally especially what has changed post-COVID the answer is actually not that terribly much. You have a lot of gains in productivity, but that is something which is not inflationary. That's actually deflationary, with more deflation, obviously, the ability to have lower rates, the usual long-term structural forces like demographics or higher debt levels those are all still very well in place, more in place than ever before. They are all highly deflationary, not inflationary.
Speaker 3:That's why we are not surprised that inflation in the States is coming down sharply. It also came down sharply in South Africa. We are in the middle of the band With that. Eventually we can lower rates again. As I said, it's just that the Federal Reserve doesn't have to rush to cut rates because they can simply afford to keep rates so high because the economy is so strong. None of this should make us think that rates will be higher for good. It does feel they are higher for longer because everybody is once again, on a monthly basis, stunned how well the US economy is doing. There's a lot of upside surprises there. With that there is a stickier higher level of interest rates, but again it's not structural.
Speaker 2:I think one thing with inflation is it's partly a physical thing it's about prices rising and it's partly a psychological thing it's about people anticipating that prices continue to rise. The psychology here is important because if workers feel prices are going to continue rising for the foreseeable future, they're going to start demanding higher wages. That could become an inflationary story all on its own. I don't want to get too technical, but I think it's worth just talking about. We see in the last days and weeks the auto workers in America starting to flex their muscles. Their union leader who I don't think people could have named the union leader of the auto workers in America over the last decade All of a sudden he's a feature on the national stage in the US. They are flexing their muscles for higher wages and quite significantly You're still okay that that's not a structural thing, it's a cyclical thing.
Speaker 3:Yes, I mean that is potentially look. A shortage in labor supply generally could be something structural which then pushes up wages, which then would lead to like a wage price spiral, exactly as you basically mentioned it that prices would spiral higher and higher and higher. But we really don't see that. Yes, it is quite concerning to see the labor unions in the States flexing their muscles, as you call it, but if we look a little bit deeper then we can see that it's purely politically driven. It happens because we are close to the election in the States, or getting closer to elections in the States. It's also happening in very selective areas. It's happening mostly in the Rust Belt, so everything around Detroit, where there's the auto industry. And why is it happening there? Because those States are called swing States, because they can swing between being electing Democrats or Republicans. So they're incredibly important from a political point of view and that's why they basically receive a lot of attention right now.
Speaker 3:But is the worker and the auto industry really going to drive inflation on a broader basis structurally higher? We really don't think so. So if you look deeper, you will see that it's actually quite small share of laborers in the States which are unionized and, secondly, that even higher wages don't necessarily have to be massively inflationary if they can be offset by productivity gains, and that's exactly what we are seeing. So you can afford to pay your laborer much more, but your auto worker much more if you now just need one worker instead of two, so then it wouldn't be necessarily inflationary. In the broader scheme of things. That's exactly what we've seen post-COVID. We always like to use a McDonald's example. You used to have a lot of people at the till at McDonald's and now you basically have to type in your own order, and that's just a good example of massive productivity gains, massive disruption, which are actually deflationary in a good way.
Speaker 2:So I mean, I think that I think it's a nice kind of a nice part. To close there, I want to kind of jump on to on to central banks. So you know, we tend to think of central bankers, as you know, extremely sophisticated, very deep knowledge, very rational, very calm and, and if not perfect, pretty reliable, pretty predictable. And for me in South Africa, I feel that I think we've been blessed with fantastic central bankers.
Speaker 2:But I'm looking at America and I'm thinking, you know, this central bank team were the ones that said to us this inflation thing is transitory.
Speaker 2:I think they've probably banned that word now in the in the Fed in America, because, because that wasn't the case, and to me it feels like and I'm not sure if it's a fair critique, but it feels to me like they misread the inflation story at the beginning and and so they kept saying it's transitory, it's just going to, you know, kind of come and go and it didn't go as fast as they thought. And then all of a sudden, you know, interest rates went up and it feels to me like they went up from kind of 0.5 to kind of 5.5, you know, just very simplistically, you know, if you had a mortgage, that's. That's a heck of a jump in your mortgage repayments. So now, looking at this with a bit of benefit of time, are we wrong to kind of doubt these central bankers? Or they still do? They still kind of know what they're doing? Was it just a mistake? Or or am I being too harsh?
Speaker 3:I almost think we are generally too harsh on them to be honest with, and I think that they are incredibly smart and they're making very good decisions still, and that hasn't changed, so I think they deserve much more credit than we tend to give them. You are right, though, that the phenomenon of inflation was initially underestimated, and nobody expected inflation to go that high as fast and then remain so sticky. That is true, and that is a that is a mistake which potentially, central bankers will have to earn, but to own. But, but the reality is, we had so many ideas and credit shocks, like a war in Russia, like a China zero covid strategy, like massive disruption in terms of, like port traffic, etc. And then post covid, and those are shocks which are very harsh, very hard to foresee, so they potentially just couldn't.
Speaker 3:They were right about the forces of inflation and being supply side driven, and that in itself, normally is something temporary, and if we look at top line inflation right now, in the end, yes, it was more sticky and yes, it stayed higher for longer, and much more so than they ever anticipated it looks like a V which is turned on its head right.
Speaker 3:It came down to medically, and we are now below 4% inflation and we're going to go all the way down to two. So if you look at a long time series, we, we, it has actually been transitory sounds odd, but that's really what it will have turned out to be. One last point on that as well, and I think, which is potentially even more important yes, they got inflation under control. I think they remained very credible, but they also engineered the soft landing which is quite, quite remarkable actually where they had to run inflation rate Sorry, interest rates very high because of the risk of Because of the risk of, basically, inflation getting out of control. They managed to contain inflation and they did so without actually stalling then the economy entirely and without having the unemployment rate spike, and that's something which is quite remarkable. So, long story short, I think they actually deserve much more credit than me tend to give them.
Speaker 2:I'll be, I'll be a bit more generous in my commentary of them, bastion, that I think maybe just two things to touch on there. One is this, this soft landing, and and then just you know the future what that looks like. So, so, so, this soft landing, it feels a bit to me like that. That pilot, you landed the, the jumbo on the Hudson River. You know it's possible, and, and we saw it happen, but, but I would guess not 999 times out of a thousand. It's not going to work out as well as it did. And and so to give them their due, you know, if the US economy comes out of this in six months or a year from now, whether it went into a little bit of a recession, or or or or kind of just slower growth, they've achieved a soft landing. They have actually landed that jumbo on the Hudson.
Speaker 3:It's exactly like that, warren, that's exactly how I would put it, and it's very tough to do that because you've got such a massive lead lag between Monetary policy and the impact on the real economy. So basically, your tight and interest rates today and you will really feel the effect only like 12 to 18 months later, and that makes it very, very tough. It looks so that they really got it right and I think also like to our topic, why we think interest rates are going to come down Eventually. They got it right in the way that inflation problem on all measures seems to really be going away While the economy is still fun, so they, as I said in the intro, they can afford to keep them higher for a little bit longer, which is feels a little bit painful for us if we are running like a mortgage bond or something. But other than that, they have achieved exactly what they wanted to achieve and that's quite remarkable and I do think they should get some credit for that.
Speaker 3:And and yeah, it's a tough task, but it looks like they they got it right doesn't mean that they will ever be. No, never be a recession again. There will be a recession, but it was just not as imminent as we all anticipated earlier. So there has been quite a quite an extinct period of economic growth now and we still experiencing it globally, and that's good. Not necessarily global, but in the States. So I think you know people make too much of this recession thing.
Speaker 2:In my opinion, you know, if the economy in America ends up growing by half a billion dollars or it shrinks by half a percent, that percentage difference is not enormous either way. So actually what you don't want to do is you don't want to end up with the economy shrinking by 5%. So if you end up with a slight recession and the media is going crazy saying now the American economy is in recession, I think it's overdone and I think to give them their due, you know, if it ends up with the year or two of kind of just muted growth in the US and then a recovery, well done to them. So I mean, I want to focus on the good news here, because there is good news. If interest rates, let's say, if inflation is cyclical, that means that the weapon to manage that is interest rates. And if they all start to come down as well and to me you know my kind of simplistic view is that's extremely good news for people who invest in growth assets, whether there be shares, property companies, even bonds.
Speaker 3:Yeah, most definitely it is, and that's something which makes us a little bit more optimistic on some of these asset classes. Look, I mean, if we really speak asset classes and expect returns on these asset classes, we have to obviously dig a little bit deeper. We have to see that there's also structural headwinds from the point of view that generally in the global space, the global economy might be slowed down structurally Now really using the word structurally by issues in China which we didn't necessarily see before and we also would have to see more cyclical again short term, that a lot of these asset classes have become incredibly expensive. So I don't want to say, because inflation is coming down and growth is holding up, that we are outright positive on every asset class out there. But you are right from, if we want to call it, financial conditions point of view, there could be tailwinds very soon when interest rates finally come down on the back of just much lower inflation globally.
Speaker 2:And so I think it's not a fair question to ask you when all of this is going to happen. I think you know, but one of the kind of flags that we would look for to say, okay, gee, the stories. Now you know, pay attention, the stories happening. This is the next move we will see will be an interest rate decrease. Are there some sort of things we should be all looking at to figure this one out?
Speaker 3:Yeah, I mean it will be linked to inflation and the real economy. So those are the two factors. Potentially, inflation continuing their way down will eventually create space for the Fed to cut, and that's probably the most important indicator to look at is simply just inflation. There is a lot of real-time data available out there on where interest rates are priced, so you can see on a daily basis exactly where interest rate expectations sit. But normally the market is not a terrible predictor in terms of predicting where interest rates are going to go. So if I look at that right now, the expectation has been pushed out for rates to come down all the way into the next year and actually only into the second half of next year. So meaning, yes, rates will potentially stay higher for longer, but they will eventually really, really come down, and I guess that's what we have to focus on.
Speaker 2:And I think that that's always the thing about investing is we're not worrying about today, we're always looking into the future.
Speaker 2:And if we're doing that, every other investor is doing the same thing.
Speaker 2:And so just to understand that you can't be an investor in growth, let's just say something like shares, growth assets like shares, and then say, well, I'll invest in the stock market once interest rates have come all the way down again, because unfortunately, the recovery in markets then might already have happened, and it's always going to be the case.
Speaker 2:You can't wait, and my own sense of this is avoid the market timing question altogether. That would be the first prize. But certainly if you're sitting there with lots of dollars in cash and earning the 5.5 percent and you feel really clever now, well done. But just understand that those that 5.5 percent will be coming down Bastian's telling us that we're not sure when it's going to be, but it's going to happen and then you want to already, by then, have been in the other asset classes where you'll start to be rewarded for that. And I think this is the market timing thing that people get so fixated on and actually almost think we should focus on how much we have in shares, how much we have in bonds and property and stay there and just forget this market timing thing. It's only ever going to cost you money in the long run.
Speaker 3:It's 100 percent right. So it's much more important to get structurally the right exposure to the right asset classes, have the right asset mix to make sure that you can experience long term, that you will be experiencing long term growth. I do agree with everything you said, warren. I mean, yes, at the 5.5 percent interest rates right now at the front and earning 5.5 dollars, we actually like that strategy. Given the uncertainty out there, it's probably a good trade to be exposed to. But, exactly as you said, market timing is impossibly incredibly difficult to hard, if not impossible. So keep the bigger picture at your long term strategic asset location in mind. That is really really more important long term.
Speaker 2:And if you are tempted in the market timing deal, then do it with a small portion of your money, don't do it with everything. If your overall allocation to shares should be 75 percent and you feel that you want to earn some interest now and anticipate things, do it with 5 percent, don't do it with the 75 percent. And then if you're wrong and the one thing about markets always is that they have a great way of humbling us the moment we think we know exactly what's going to happen the markets will teach us differently, and we always invest, I think, as if you might be wrong as well, and then your room for error is always less, and that's very complicated. Sebastian, we're running out of time and I just wanted to check in with you to see is there another kind of point on this interest rate story that you would like our listeners to leave with before we close up?
Speaker 3:Maybe important highlight would be that in South Africa, because like also to bring it home we spoke a lot about the global economy and most particularly about the US. Why are we doing that? The reason is because we are in South Africa, following the Federal Reserve so accurately, and there's a lot of reasons why we're doing it again. It's almost needed because we need to protect our currency, especially when interest rates in the states go higher. We almost are forced to follow them. But what I want to point to is that on the way up, we have followed them almost perfectly. So if the US economy eventually starts to slow and inflation continues to come down, there will be room for cuts in the states and with that, inherently, there will be room for cuts in South Africa as well, especially given that our economy is so much weaker. So, yeah, don't focus on the negatives, don't focus on inflation getting out of control. That's not what we're seeing in South Africa and potentially longer term down the line, definitely room for interest rates to come down again.
Speaker 2:You've made such a fantastic point. You left me with a question I have to ask. So, when we see interest rates coming down in America and our Reserve Bank starts to follow suit, what's the relationship between the counting interest rates in the US and the ponies $1?
Speaker 3:Okay, that's a good question. So generally, us interest rates coming down is generally very, very good for emerging markets. So we would then expect the dollar to depreciate against rent and the rent to do much better I mean the most. You actually, funny enough, you actually put it out earlier like what is the most crowded trade? Everybody would sit and earn 5.5% in dollars because simply you can and that's what you get at the risk free rate. But as soon as that phenomenon goes away, then people will have to look into other markets, also into emerging markets, to harvest higher returns. And that's when the rent, once again, with our bonds, with our equities etc. All of a sudden becomes much, much more attractive again for investors. So yeah, if interest rates come down globally, that should be good for South African assets and with that also for the rent.
Speaker 2:So you've heard it here on honest money, there's some good news to come. We don't know when. It won't be in five years time and it won't be in five days time, but certainly, if we look at rates, the interest rate market, it's telling us the second half of 2024, we could take some confidence that this story that we've just spoken about will start to unwind Interest rates coming down in America and therefore, you know, south African interest rates coming down. So for the mortgage holders in South Africa, that's good news. And then, I guess, for our own inflation, you know, because so much of our inflation is imported and you know, when the rent gets a bit stronger against the dollar, very good news for inflation. And so lots of good news to come.
Speaker 2:But don't get too excited. Don't go again all or nothing. It's going to take a bit of time to unfold. Bastion, thank you. Thanks so much for joining. I think that was possibly our best show of the year so far. I understood all of it. That's why I'm saying it was our best show of the year. Chief Investment Officer of Pressient Investment Management. Thanks so much for joining us.
Speaker 3:Thanks for having me, Warren. Thank you.