Almost 40 years ago, economist Dr Don Stammer coined the term "Factor X", which he defined as "a powerful influence that was not even thought about when the year began ... but which has a big effect on business conditions".
X-factor effects on investors can be positive or negative. Recent negative examples are the near-meltdown of global banking in 2008, and the initial effects from the outbreak of COVID-19 in 2020.
In contrast, X-factors resulted in better-than-expected returns in 1991, when Australia's trend inflation collapsed, and in 1998 and 2008 when our economy showed unexpected resilience during the Asian financial crisis and the global financial crisis, respectively.
Obviously COVID-19 was the X-factor last year, but Dr Stammer has broken interesting grounds with his choice for 2021.
He calls it "the fracturing of the long-dominant view that low inflation is here to stay". In layman's terms, this means that there are two different views in economic circles about where inflation is going, and what central banks can do about it.
It was simpler in the "good old days". The economy would boom, inflation would become rampant, the central bank would exercise a combination of credit squeeze and raising rates and, lo and behold: "the recession we had to have."
Things are much more complex today. Even before COVID-19 hit, interest rates were at record lows in most countries in the world. Then when the pandemic began, governments printed trillions of dollars to protect their economies.
As a result, asset prices went crazy and widened the gap between the haves and the have-nots even further. But booming asset prices were not the end of it.
Thanks to a combination of COVID-19 and the relentless move to drive the world to renewables irrespective of the cost, we now have massive shortages - which of course drive-up prices. A classic example is the link between gas prices, which are soaring, and the shortage of nitrogen-based fertiliser: the EU is facing a fertiliser crisis that may soon become a food crisis. The rising price of gas, combined with the shortage of urea, drives up food prices.
There is no doubt that inflation is rampant. In Australia, builders cannot complete houses because they can't get materials; restaurant owners are paying huge sums to get staff; it takes months to get a car, and food prices are going crazy. On top of that, petrol prices have been at record highs.
The big question is whether this is temporary, or whether it is part of a long-term trend. According to Dr Stammer, the world has changed. The US inflation rate in the 12 months to November was 6.8 per cent - the highest in 40 years; Canada, Korea and New Zealand have already raised their cash rates.
Australia's Reserve Bank is between a rock and a hard place. The purpose of increasing interest rates is to slow down the economy, but this inflation is caused by lack of supply, not by excess demand.
In any event, there have been few, if any, instances in which inflation has been successfully stabilised without recession. Increasing interest rates and putting up the average worker's mortgage repayments won't do a thing to fix the inflation that is upon us right now. Nonetheless, increasing rates appears to be what central banks all around the world are doing; therefore, at some stage it will happen here, so be prepared.
Dr Stammer points out that the existence of one or more X-factors does not - and should not - stop people forming a view on where the economy, inflation, shares, property, interest rates and exchange rates seem to be heading.
Instead, it's a reminder that investors always need to allow for the surprises and over-reactions that drive returns up or down at short notice. Risk-management - including sensible diversification - is always important to successful investing.
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Could I use a redraw from my home equity loan to make a contribution into superannuation and then claim tax on interest paid on the loan?
You can certainly borrow money to make superannuation contributions but the interest will not be tax deductible. The two main issues should be whether your superannuation fund could earn a higher rate than what you would be paying on the loan, and how long it is before you reach your preservation age - when you would have access to your superannuation. To put it simply, the nearer you are to your preservation age the more feasible this idea is.
I'm 50 and my partner is 54. Our plans are that she retires at 65 and I retire or at least go part time at 62. We are both working hard to build up our superannuation, but our financial advisor has suggested that I focus on building up my wife's super because that way we can access the funds earlier. It does make sense, but I'm concerned about the effect on the compounding of my balance. I'm targeting $1.4 million, which is mind blowing considering where we have come from. Would that be affected by moving some of my super each year to my partner's super?
It's great that you appreciate the power of compounding and I agree with your adviser about boosting your partner's superannuation. Her ability to access her superannuation four years before you could be extremely valuable when you want to retire. Remember, compounding works on the total balance so provided that both your super funds are offering the same rate of return, there is nothing to lose by building up your partner's superannuation at the expense of your own. The same overall balance should be working for you as long as the relationship is secure.
My wife and I are in negotiations to purchase a retirement villa.
In your opinion, if we cannot sell our apartment at a reasonable price, would it be reasonable to draw on part of our superannuation, together with cash, to purchase the villa, keeping our apartment, and renting it out? I am 75, and my wife is 67.
It's certainly a possibility, but you would need to balance the potential of the apartment with what you feel you could achieve by leaving your money in superannuation.
Furthermore, if you are receiving any age pension, and you rent out the house, you would be converting an exempt asset for age pension purposes into an assessable one and this could have a major effect on your age pension.
There are also the ongoing costs of maintaining the property and the fact that it will lose its CGT exemption to a degree once you start to rent it out. In view of your ages it may be difficult to re-contribute the property proceeds to superannuation, but depending on your other circumstances it may be possible to contribute under the downsizing rules. There are many issues involved here and you should be taking expert advice.
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