June 6, 2019 by Dymphna

Revealed: Are you going to benefit from the rate cut?

I saw this rate cut coming a long time ago. That’s why I’m ready.

So the RBA cut rates this week. Let’s have a look at who wins and who loses.

The first winner is… me!

I predicted this rate cut, well over a year ago.

And at the time I was pretty much the only economist in the country who thought rates would go lower. As I said: 

Over on sportsbet.com.au, you can bet whether the next interest rate move will be up or down.

Right now, the result that the next move is up is paying 1.2, while the odds that rates go down is paying 3.7.

That’s quite a spread, and it aligns with economist sentiment in the market. There seems to be a lot of confidence that the next rate move will be up.

I have no idea where they are getting this from.

… to me, the economists, the media, and the general public are way wide of the mark…

… again.

And whaddyaknow, I was right. …again.

Now, I wasn’t going to make a song and dance about it, but stuff it, I am going to have a bit of a sing and dance actually.

Because I cop it, let me tell you. Maybe it’s because I’m an outsider shaking up the wealth industry. Maybe it’s because they can still smell the cow-poo on my shoes. Maybe it’s because I’m a strong woman who doesn’t mind calling a spade a spade and a dickhead a dickhead.

But they all enjoy having a laugh at Dymphna. And when I was calling for rate cuts, when literally every shiny-suited economist in the country was expecting hikes, they rolled their eyes and laughed at me again.

So I’m going to make a bit of a song and dance about this one. But I’m doing it for your benefit. I want you to see that the finance and wealth industry is as prone to herd-think and collective-delusion as any industry out there.

And it’s one of the reasons why outsiders like us can always make money. If we keep our heads on straight…

Ok, song and dance is over. So let’s have a look at who wins and who loses from this rate cut.

I started to make a list but then I realised that there’s a simple way to explain it.

Active Capital wins. Passive Capital loses.

What do I mean by that?

Well, look at it from my perspective. I’m actively working my money. I’m out there making stuff happen. From my perspective, money just became 25 basis points cheaper. The profit margin on all of my deals just went up.

But then look at it from the perspective of a saver with money just sitting in the bank. The interest rate on saving deposits just went down. From their perspective, money just started earning 25 basis points less.

So if you are leveraging other people’s money into productive investments, your cost of business just went down. Your profits are up.

But if you are passively sticking your money in conservative options – saving deposits, bonds, whatever… if you’re just relying on the market to make your return, then the return you’re getting just went down.

Active capital wins. Passive capital losses.

So take a look at your personal balance sheet. How much active and passive capital do you have?

On balance, do you win, or lose?

And isn’t it time we all got a little more active?