Arch talk.

Arch Capital 2021 Budget Response

Arch video transcription – Budget commentary

Jim –Nigel BakerArch Capital – How are you?”

Nigel – “I’m well Jim, how are you?”

Jim – “Yeah good, look thanks for giving us a few minutes to talk about what your take is on the budget. Everyone’s calling it the ‘Care Economy Budget’ with support for women, support for child-care, support for aged care, disability. Lots of debt being built for Australians to take on for some time. But fundamentally for anyone listening to this, in particular Arch Capital’s clients, how will it affect them do you think?”

Nigel – “For our clients there are a few little changes, nothing too major. Particularly, some of the tinkering around the super, specifically, the change in the work test. The eligibility, there used to be minimum amounts you had to get paid before your employer had to pay super. There’s a downsizer rule that’s come in which is quite generous for those over 60. Little tinkering’s around divorcees and super. And also, if you’re overseas, not that many people can head overseas now, but for those that did head overseas the rules have changed a little bit. But for most clients, nothing too major, which is sort of good and bad. I suppose.”

Jim – “Just on some of them Nigel, just explain to me in plain English, what is the work test abolishment, what’s the implications of that?”

Nigel – “Previously if you are over 65 you couldn’t contribute to super anymore if you were no longer working and you had to meet a work test, which was basically you had to work 40 hours in a 30-day period. That’s about a week of work. So that made it a bit tricky and 65 today is not too old. So, a lot of lot of clients over 65 still would like to contribute. They still could be on the planet for another 30 or so years. So that was bit restrictive, and they just started to tinker with that to move it to age 67. But I think that’s a good announcement just to remove that work test completely you can contribute now to super, and you can top up your balance which is a good change.”

Jim – “The debt’s looking pretty big, you know, in terms of going forward for a long time, and it doesn’t look like it’ll be getting into a surplus for some time. Longer term, for your clients particularly, what’s your take on that?”

Nigel – “Yeah, well, as we all know, Jim, debt has to be repaid eventually, and when we’re running our personal balance sheet, we don’t want to have too much debt. Low interest rates are a false economy – if we can use that word. Interest rates will go up eventually at some stage. I’m no forecaster, but they will. And when they do, that causes pain. And that puts, if we’ve got a lot of debt personally, that puts you under pressure. So, our country will come under pressure with too much debt, it just will. We’ve got to repay that somehow. We either repay that with growth or we repay that with increased taxes. And so, at some stage, the tax reform will come through – it has to.”

Jim – “And we’re looking at, I think pretty good, 3-4% growth rates for GDP (nominal real rates) are we’ve also got, particularly for a lot of your clients as you’re on the peninsula, some extraordinary property prices going up with really unprecedented levels of low interest rates. So, if debt eventually has to be repaid, again, what’s your take on what’s happening from a property perspective, with the access to cheap money and ridiculous house price market we’ve got going on at the moment.”

Nigel – “Yeah, well we’ve seen all this before and I suppose Jim, eventually it comes off, something will trigger it. You know, you can’t keep running at these levels forever, it is a bit absurd at the moment. It’s hard to imagine every weekend where everyone’s finding the funding. And there’s a huge amount of, we are seeing with our younger clients, in their 40s and 50s, they are taking on a fair bit of debt. And while a million dollars is only $20,000 a year, that can jump to $40,000, $50,000 a year in a couple of years. I was only studying economics when we had the high interest rates of 17% – and I’m not saying it’ll happen again. But you know, even if it jumped to 3% or 4% or 5%, there will be a lot of people who struggle and that’s when we will see pain. You know, we haven’t really seen – the Australian economy has been so lucky – We haven’t really seen a real recession other than the GFC and COVID for almost 20 years.”

Jim – “And so your advice to people like that, the sort of wealth accumulators, looking for the extra space and realizing that, particularly white-collar workers, they can work from anywhere they’ve got more flexibility at work. What’s your advice with the current interest rates as they are now how are you advising?”

Nigel – “Well, you know, I’m a big fan of the Northern Beaches, I always tell people that I live on the Northern Beaches, but I think people have got to be careful when you hear people say the rates are going to stay low forever, The Reserve Bank even said it, you’ve just got to put that in perspective. And so, no one really knows, interest rates could go up. They already are going up and as soon as the Reserve Bank announced that, the 10-year bond yield went up almost the next day, so don’t take anything for granted. Factor in that things can change. If I was taking on a large new mortgage today because that’s what you have to do with property prices, then you’ve just got to factor in that interest rates could be 3%, 4% or 5% higher at some stage and be ready for that.”

Jim – “The Government’s putting a lot in infrastructure but also, in some ways is riding on the back of the iron ore train. It seems that that’s an unprecedented, well it is an unprecedented level, I think, $220 a ton at the moment for iron ore. Are we just lucky, Nigel, did you expect to see more real fundamental infrastructure change in the budget to prepare for those times that we won’t be as lucky riding on the back of an iron ore train?”

Nigel – “Yeah, like every federal government we’ve just been lucky, I think. We’ve got to start thinking much longer term and start to make some really big changes and 10–20-year plans rather than just these little tinkering’s and running off – ‘Oh the deficit’s not so bad because iron ore prices have skyrocketed’ – that’s luck. That’s not good management. No one really saw that coming. So, it is a shame that there’s this tinkering. It’s political they’ve got to win votes, but that does nothing that says, ‘Look, we’re willing to put our bodies on the line for this and make some big changes for the future of the country, even if politically it’s not favourable right now.’

Jim – “It looks like people are going to have to come to you for that sort of advice and get that long term leadership down the path when, inevitably, things won’t be as lucky as they are today.”

Nigel – “Yeah, well, I think for the next generation, you know, we’ve been lucky. Certainly, lucky with this resources surge – you know, the whole China thing, who knows where that lands? But there’s a big risk there and we can’t just run on that forever.”

Jim – “Nigel, that’s been great, thanks for your time.”

Nigel – “Thanks, Jim”.

Enquiries

Now is better than tommorrow. Take some action today and book some time to discuss your financial future.

The Super Secret

The Super secret uncovers the truth about how to invest succesfully. Nigel clearly and simply explains how to ensure ‘you’ as the investor can take control of your financial future.