You can listen to the Front on your smart speaker every morning to hear the latest episode. Just say play the news from the Australian. From the Australian, here's what's on the Front. I'm Claire Harvey. It's Wednesday, August seventh. White hot tensions in the Middle East, with the United States rushing military assets to the region in anticipation of a war between Iran and Israel. That story is moving fast. Check out the very latest right now at the Australian
dot com dot AU. Senator Linda Reynolds says the late Labor Senator Kimberly Kitchen told her Labor was going to weaponize Brittaney Higgins rape allegations against her. That's the latest bombshell in the defamation trial where Reynolds is suing Higgins and her husband David Charaz for mortgage holders. No rate cup this time the Irbas kept the cash rate at four point three five percent and ruled out a cut for the next six months. It's a welcome bit of
certainty after days of chaos on global markets. So what is going on with the share market and what's it all going to mean for US superannuation balances. That's today on the front. The stock markets have an unsettling habit of about once a decade going into complete meltdown, prompting the rest of society to have to start paying attention to what it is they actually do in their pinstriped shirts and expensive warches.
From the Independent News, this is USA tonight.
Today is Black Monday, the day the Dow dropped more than five hundred points. But this crash of nineteen eighty seven is not just an American experience. Around the world, stock markets fell faster than a skydiver without a parafute.
The cliche goes something like this. On a Monday morning, a bunch of twenty four year old stockbrokers go into work. They've had a big weekend partying and they've all got headaches. They've got themselves whipped up into a panic about something that happened over the weekend in international stock markets for the currency trade, and they get on their phones and start shouting sell at one another. The mood becomes grim. People lose money. Like that miss panic, everyone's a path.
Well this week it's all happening again. On Monday. The Australian Stock Exchange's top two hundred index was down three point seven percent, the worst session since May twenty twenty, when the panic was about the global pandemic.
I've been doing this for a while so.
Eric Johnston is The Australian's associate editor. He's m go to expert on business, banking and the economy. The last time I had him on the front he was explaining why I shouldn't be in a rage about multi billion dollar bank profits. Eric is very zen. He doesn't tend to panic.
When I saw stock markets around the world starting to crash, you always think, in the back of your mind it was sort of bottom outed of fall about two percent, two point one percent or so on. But to see the markets keep getting lower and lower, crossing a three percent threshold, that's a red line. Certainly when you look at it as a financial journalist seeing shares in Japan crash by twelve percent, they are numbers that you just don't see. They're once in a lifetime type figures.
But every time this kind of market panic happens, I can't help myself. I go and check my superbalance. I'm a bit worried about this because last time I did this, one of these things happened. I checked my superbalance and it was way down.
Eric.
As soon as I heard about market chaos, the S and P falling, the Nasdaq in crisis, I immediately went and checked my superbalance.
Is that something you would recommend people do.
No, definitely not. Remember your super is long term, so that's for your career. You've got another twenty or thirty years worth of working, Claire, So the super is going to go up and down from day to day, so kind of meaningless in the biggest sense of that focus on the long term trend.
It does make me worried though, that a bunch of twenty seven year old stock traders wearing pin striped suits and shouting at each other are potentially going to wipe out all this money that I've been saving over the years in my super account.
Well, the first point I have to put you up on, I'm not sure they wear pin striped suits anymore.
I'm a twenty years out in my references.
So they're all sitting at trading desks and behind screens, and it's actually big boxes in the back of Gold and Sacks or City Group or something actually do in the trading. Those traders don't exist The broader point is, though there are big global forces that often influence the value of our shares that we sort of park away. These things rise and fall on global currents.
Okay, so this time what caused the big panic.
So initially Australia was reacting to quite a violent sell down in the US on Wall Street on Friday. What we're starting to see is what's called the unwinding of the carry trade. The carry trade is when you borrow money from a country where the interest rates are very low and reinvest that money somewhere else in the world where returns are much higher. So you might borrow money from Japan, which have near zero interest rates, and put those funds in, say the United States or in Australia,
where interest rates are much higher. You get that return that represents your profit on that investment. That only works as long as interest rates in the borrowing countries stays low and stable, and markets remain stable as well.
Right now, in Tokyo, it's a sweltering, humored late summer thirty three degrees. The locals are drinking ice cold cans of milky soft drinks and listening to twenty four carrot gold Genesis. The chart topping single from a sixteen member jpop band called The Rampage from Exiled Tribe Genesis. Yeah, and there's something else making everyone sweaty. The economy is going through a massive change. Interest rates are going up for the first time in nearly twenty years.
So what happened last week was the Japanese central Bank, the Bank of Japan, increased its interest rates and suggested that there could be more increases to come. At the same time, you're seeing the prospect of interest rates in the United States coming down faster than expected. That's because of a fear that the economy there is slowing. So you're seeing this great arm wrestle, this great reallocation of money.
Money being sucked.
Out of the US market, particularly there was in high yielding shares such as tech stocks. So you like your Navidia's, your Microsoft's, your Amazons, and that's been reallocated back into Japan. Also, with the Japanese shares falling so violently, you see money sucked out of their Japanese share mark, which has been bit up and moved into Japanese bonds. And what can you do when you sit there watching your Comwealth bank shares rise and fall not much. You just hang on for the ride.
Coming up. Why interest rates here still aren't going down? It's always reassuring to talk to Eric, and you can read his soothing analysis every day by joining us describers at the Australian dot com dot au. We'll be back after this break. It seems every time there is a big story about a big kind of global share market sell off, that what it boils down to is some
exotic new product that has been invented. You know, it's credit default swaps, or it's a CEOs or something that people are selling to each other that nobody else can understand. Is the carry trade another one of these exotic products, or is it something that is more significant?
It's more serious.
This time it really is different. We talk about in markets what we do know, what we don't know, and then what we really don't know. So this time it is different because we do know what the risks are out there. We've got the Chinese economy slowing, but we've known about that for some time. That's starting to play out on commodity prices. The US economy is slowing. What we don't know is the pace of it. Even here, we've just seen the Reserve Bank keep its cash rate
on hold. Although the statement was hawkish, which means that they are threatening further interest rate hikes, we kind of know that they're going to hold on until they watch inflation go down. There's nothing that seems to be lurking in the corners for markets this time. What we do know is the valuations of stocks like your common Wealth Bank shares have been bit up incredibly so Commonwealth Bank
is trading a historic highs and is so overvalued. It's like when we previously walked into a shop and we're paying ten dollars for a lettuce. We all knew that they were so overvalued anyway, must have us still bordered anyway. Common Wealth Bank shares a little bit like that, has been bit up to such an extent that it is overvalued. So that's why this pullback is different. It's not something that we're all sitting here white knuckled and scared about.
We know the risks in the world. We've been living with geopolitical risks for the last two years. We know inflations out there, so the kind of the bad stuff is already out there.
You mentioned that so much trading now is automated. It's done by big box sitting in the corner. Has that created a kind of different mood in the markets? Are they more mature now than they were when a whole bunch of people who'd done too much coke were frantically selling everything at the drop of a hat.
I don't know what the computers are doing, but look, the potentially the valuations and the calculations are going to buying and selling is much more sophisticated than what a desk jockey could ever figure out. So the instinct will come. Wealth Bank hit its turnings targets this year based on what we know about the economy. Yes or no, a computer can figure that out much more accurately. But we are still talking about markets which are driven ultimately by emotion.
You and I still walked into that supermarket and we still paid ten dollars for that letters because how we wanted it and everyone else wanted it at the same time.
Cabbage is just not the same, just not the same.
So look, markets are driven by emotion still. However, there's more buying and selling, there's more turning over. It's easier to buy and sell shares compared to what it was when we're talking about Back in the day of the stockbrokers, you had to physically ring somebody up, you had to place an order, you had to have the money. Now you can just do it at a hit of a button. Big fund managers can just buy and sell and churn
over their portfolios. Liquidity. People often think it's a bad thing, but it is actually a good thing because it helps markets discover prices much more efficiently.
On Tuesday afternoon in the office, I saw you pouring over the statement from the Reserve Bank along with some of our other big brains in the business section. What is the Reserve Bank saying about the future of the economy and what do you think about how we're going to fare over the next few months.
Yeah, this one. There was a lot of scrutiny coming into this Reserve Bank meeting because there was talk just a few weeks ago, real serious talk among economists that the Reserve Bank could in fact be forced to raise interest rates again, and that would be a really hard shock to a lot of people paying mortgages. The Reserve is concerned that there is still quite a lot of spending in the economy, but it's in different areas and it might not be those people that have just bought
into a house or a mortgage. We know that those people are doing it tough, particularly in the late twenties and early thirties. They're the cohort that are really feeling the squois. They've just got a house, maybe they've got a young family as well, so money is just going out of the door like nothing else. There's a category of consumers in Australia net savers. Those people have never
seen it better before and they're spending as well. Another factor is and despite what we hear, unemployment is still quite low in the economy. If you're starting a business or if you're still trying to hire, it's maybe eased up a little bit, but it's very hard to get labor, to get workers in the door. So the RBA is still concerned, like the economy is still sort of maybe a little bit too overheated, and that's why they're talking about potential for the raid hikes.
Eric Johnston is an associate editor with The Australian. Sixteen thousand US marines should be deployed to Australia every year to help us defend ourselves. That's according to a report revealed in The Australian Today. Check it out at the Australian dot com dot au