Something I've spent a lot of time thinking about — and learning to understand — for the better part of a decade is financial markets and my place in them.
I want to walk through how I'm thinking about where Australia is right now and how I think the next little bit plays out.
I'm by no means an expert, and I strongly believe you shouldn't trust anyone claiming to be. Economists are largely a fugazi of numbers and metrics and are mostly useless at making predictions. Me included. But I've felt an urge to share some public thoughts on what's going on and how I'm processing it.
Iran is the focal point
How the US, Israel, and Iran dance around each other is mostly what's going to determine how things play out globally. For the moment, I don't believe this is a short-term game that resolves in the next few weeks. I think it's longer than that.
Australia barely refines any of its own oil
We have two remaining refineries — Ampol Lytton in Brisbane and Viva Energy in Geelong — and together they cover less than 20% of what we actually use. The other 80%+ we buy as refined product from Asia. South Korea, Singapore, Japan, Malaysia, and China are our main suppliers.
My concern is that Asia will stockpile — naturally, to preserve supplies for their own populations — and leave Australia with minimal amounts. China has already banned fertiliser exports to preserve domestic supply. The pattern is there.
We're already starting to see the government whispering about work from home, rationing, and urging the public not to hoard fuel. All of which I see as softening the public so that if restrictions return as a way to preserve supply, it won't be new information — and we'll accept it.
Gold is showing the way
There's a saying: "People buy gold when they're worried about the future, and sell gold when they're worried about the present."
Gold peaked above $5,200/oz in early March and then sold off roughly 10–12% over the following two weeks. I think this illustrates the point well. The market is pricing in a reality where the Iran situation isn't just temporary.
Inflation is picking up — and it's not just fuel
I've held the base case since COVID that inflation will be persistent throughout the 2020s — a money-printing hangover. But I've somewhat changed my tune. I now think inflation will pick up strongly from here.
We're seeing it immediately in oil prices, and when you think about what oil contributes to — plastics, clothing, electronics, fertiliser, transport, manufacturing, you name it — the flow-on is obvious.
We're now seeing it in fertiliser and wheat futures too. Fertiliser prices surged roughly 21% in early March. Wheat has been volatile but trending higher. The market is starting to price in the reality that the base commodity of our world economy is under threat.
Oil up. Transport up. Manufacturing up. Prices up. Rinse and repeat.
The RBA is stuck
The 5–4 split in the decision to hike rates to 4.10% tells you they're reluctant. They can see the consumer pain and the consequences of going harder, but they're trying to balance inflation.
Some major banks are forecasting aggressive hikes for the rest of the year — CBA and NAB both expect another hike in May. But others disagree — Westpac is forecasting cuts by year-end, and ANZ thinks March was one-and-done.
If inflation plays out the way I think it will, I believe they'll reverse quickly in the name of their bigger priority — financial stability.
What we're looking at is an era of stagflation. Inflation persists regardless of what the RBA does, and the economy struggles to grow.
So what happens to asset prices?
Honestly, that's largely unclear to me. But if there are significant supply constraints from the Iran situation and the government responds with enforcement measures, I see no other outcome than the money printer being turned back on.
And as we found out in 2021 and early 2022, that skyrocketed real estate in this country as people took on as much leverage as possible and had nothing else to spend their money on.
The bigger picture
All of this is mostly to say: be aware of the bigger picture. Relying on the news to inform you is long gone.
I don't know where this road leads long term. But for now I'll keep it simple — in an inflationary economy, assets tend to go up.
This is not financial advice. Just a broker sharing how he's thinking about things. If you want to talk about what any of this means for your mortgage or your next move, book a chat.