DAVID BASSANESE | Chief Economist at Betashares

Economic news or fear porn? Sometimes it's difficult to tell the difference. News media love our eyeballs and bad news is what grabs our attention. Bad news plays on our fear, uncertainty and doubt. Even when times are good, the media loves bad news. In this episode I asked David Bassanese to give us a quick education in basic economic concepts. It may provide some protection against those big words and numbers that can affect our investing.

David Bassanese is Chief Economist with BetaShares, an independent Australian manager of exchange traded products (ETPs), with over $A23 billion in funds under management. Ex-Federal Treasury escapee and spent time sipping espressos at the Paris-based OECD. Also worked at Macquarie/Bankers Trust in senior market economist/strategist roles. Once wrote a column at the Australian Financial Review and co-founded Paris based Australian theme bar - Cafe Oz!

He's the author of Australia’s most comprehensive book on exchange traded funds The Australian ETF Guide: cheap and easy investment strategies using exchange traded funds.(ETFs).

TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE

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EPISODE TRANSCRIPT

Chloe (1s):
Shares for Beginners.

David (4s):
Sometimes negative headlines are information. You know, we, we do go through periods where the economy is turning down and there's gonna be a period of poor returns in equity markets, period of rising unemployment. So sometimes bad news is bad news, but often even in periods of good economic times, it's the bad news or the threatening news that that's gonna tend to dominate. So you need to have a bit of a filter

Phil (26s):
G'day and welcome back to Shares for Beginners. I'm Phil Muscatello. The economy takes up oodles of hours in the media. The mere mention of some economic terms can send shivers down the spines of investors. Today I'm welcoming a living, breathing real live economists to talk about some of the terms that we should be aware of and hopefully to be inoculated against economic fear porn. Hello, David.

David (49s):
Hello, Phil. Good to be with you.

Phil (51s):
David Bassanese is the chief economist with ETF provider Betashares. He's an ex federal treasury escapee and spent time sipping espressos at the Paris based OECD. So these are terms that we hear a lot about what's what is the federal treasury and what is the OECD?

David (1m 8s):
Well, the federal treasury, it's a government department of the federal government, and it's really responsible of economic policy, like deciding, you know, where best to spend government money monitoring the economy, judging how, how strong the economy's going with. Does it need any extra support from the government? So that's really the, the, the treasury now and the OECD is similar sort of economic think tank, but it's a, has a more international focus. So it's yeah, as you it's Paris based and it's really a club of rich countries. So although, you know, developed countries around the world contribute money to the OECD and, and that budget then funds many economists who work there and, and work on collective problems like working on, you know, what's the best way to spend money in the healthcare sector.

David (1m 54s):
What's the best way to regulate the financial sector. So it's a, a collective effort in, in coming up with, you know, good policy that could be applied across many countries.

Phil (2m 4s):
Look, I just wanna start off with talking about the economy as it's portrayed by the media. Do you think that the term fear porn is valid in this case? There's a lot of times where journalists seem to have these glaring headlines about economic news and they seem to be designed to create fear. Is that your impression of the way things work?

David (2m 25s):
Look, that is the nature of the media. Unfortunately. I mean, I, again, I spent a decade working at the Financial Review and I had a column in the market section, and I often joke that, you know, many of my columns were about downplaying. You know, what you're reading on the front page of the paper. So the front page is, you know, a very alarmist look, but you know, when you think about it, it comes big down to the human psychology, right? We're more, we pay more attention to things that are likely to threaten us than things that are likely to, you know, benefit us, you know, it's that sort of fear and flight wanna get too deep about it. But basically one of the terms in the media is if it bleeds, it leads, you know, it's a bad news sells, more than good news.

David (3m 6s):
And so it's often, you know, alarmist bad news or threatening news is what works its way to the front page. So, and in, in the area of like economics as, as a result, you know, you will see, you know, I guess a skew toward the more threatening aspects of the economic outlook. Yeah. So it all comes back down, unfortunately to the fight for eyeballs, the fight for attention. And it tends to skew the way in which, you know, economic and financial news is reported.

Phil (3m 33s):
Do you think it has an effect on investor psychology as well, especially for newer investors who aren't used to, to this?

David (3m 39s):
Oh, for sure. I mean, that's, you know, why we see so much volatility in the stock market? I mean, if you invest in the share market and you look at a long term chart, you know, over the long run shares go up, but, and in fact, the blips that you see on a, on a year to year basis here and there from a wider, you know, 10, 20 year perspective look like, you know, very small blips along the way, but living through those blips can be quite disconcerting. I remember I, I invested some money for my mother in shares a few years ago, and she became fixated on watching, you know, the, the financial news and, and just couldn't take the volatility. So, but that's just a small example, but it, yeah, so it can affect.

David (4m 20s):
And as, as a result, you know, equities generally speaking in a, in an economic downturn, you know, there's excessive selling, you know, stocks get very cheap when things turn bad. And similarly in the good times when greed overcomes fear, you know, can stocks can tend to get very expensive. So we do go from cycles of, you know, over exuberance to excessive pessimism.

Phil (4m 41s):
Do you find as an economist that people expect you to have some kind of crystal ball?

David (4m 46s):
Yeah. I mean, it's, it is part of the job. I mean, we economists do, I guess, tend to fall back on explaining what's going on, like, which is kind of easier, right? You can explain, oh, this is happened. And this is why, but look, if you could forecast the economy and forecast financial markets, well, I mean, you could stand to make a lot of money, right. And businesses would make good decisions. Investors in the market would, would obviously make a lot more money. So there is that incentive for, you know, economists, I guess, were hired to try to predict the future, try to anticipate where interest rates and the economy were going simply because if you could, you could make a lot of money, but it is a very hard thing to do.

David (5m 27s):
But, you know, I guess it's part of our job. Particularly someone like myself that does work in financial markets, you know, you're expected to have a view on, on interest rates in the share market, even if you know that it's highly conditional on a, on a lot of moving parts and, and things, you know, can change pretty quickly.

Phil (5m 46s):
I like that they're highly conditional on a lot of moving parts. I mean, there's, there's no other way that you can describe the economy.

David (5m 52s):
Well, there's, there's a scientific word for like a chaotic system, right? So forecasting a chaotic system is, you know, very, you know, almost impossible, but look, you know, good economists can get things better than I don't wanna downplay. You know, that forecasting is completely useless. I mean, at the moment, for example, I have a particular view about where the share market is likely to go where the currency's likely to go, but I'm also very watchful of the things that could change that would, you know, change my views. But, you know, it's often useful to have at least a map as in terms of where you think things are going, but then be very watchful in terms of what could upset that view.

Phil (6m 28s):
I'm actually tempted to ask you now what the, what your view is on the direction of the she market. I'm sure listeners are gonna go well, what is it? What is it? What is it? But I don't really wanna go down that path. No worries. I really don't. I just want to talk about what I'm hoping to do today is to explain some economic terms and some economic institutions, so that listeners have a better understanding of what they are. So I wanted to start off with a central bank. What is a central bank?

David (6m 56s):
Yeah, well, a bank is, I guess it's the guardian of the financial system, really the monetary system. So a central bank bank these days is really basically the fir the main thing it can control effectively is the level of interest rates in the economy. And it can do that through tightening the ability of bank to lend without getting into the technical ways in which it does, it can effectively set short-term interest rates in the market, which then obviously affect the cost of borrowing and lending, which in turn affects the, you know, the strength of the economy. And so they vary interest rates over time to keep the economy on an even keel. So if the economy's getting overly hot, inflation's breaking out, then they can raise interest rates, which slows credit demand tends to slow the economy and, and brings, you know, those pressures back down again.

David (7m 45s):
Similarly, if we get a big negative shock, as we saw during COVID where, you know, demand was very weak, they can lower interest rates and, and try to encourage spending and credit. So at heart, they're sort of like, you know, they regulate the speed at which the economy grows to keep inflation in check and keep employment, as, you know, as, as unemployment, as low as possible without, without inflation getting outta hand. And they do that through varying the level of interest rates essentially.

Phil (8m 14s):
And our central bank is known as the Reserve Bank and in the us it's the Federal Reserve, is that right?

David (8m 20s):
That's right. And Europe has its own central bank covering a whole bunch of countries. Yeah. And they all have their funny AC, you know, so the European central bank, so the ECB, and then in New Zealand, they've got the reserve bank of New Zealand. So that's called the RB NZ. And then in the, in England, they've got the bank of England and it's the BOE. So everyone's got their sort of, you know, shorthand abbreviations. But so every, every country basically has a central bank that do essentially what the reserve bank tries to do here in Australia.

Phil (8m 52s):
And so it's just adjusting interest rates. So when times are bad and the economy's falling, they wanna reduce interest rates because that has an effect on trying to stimulate the economy and then vice versa. Is that how it works basically?

David (9m 5s):
Yeah. It's like think about interest rates as a dial almost where you, if you need to, you know, encourage growth in the economy, cuz it's weak, you can lower the dial, lower interest rates and, and vice versa so they can dial interest rates up or down. Now they can do a few other things as well. I mean, what we've seen recently just a few years ago, they actually introduced what's called macroprudential controls where the RBA along with APRA the, the regulator of the banks, rather than they wanted a slow credit demand, they thought the housing sector, particularly in Sydney was getting too hot. So rather than raise interest rates, which would've affected everybody, they basically told the banks to reduce their lending to investors and in fact, and increase the interest rate on mortgages for investors.

David (9m 51s):
So that was a very targeted policy. So actually a relatively new innovation in, in the way, you know, central banks operate. So that's another tool. So they, yeah, they change interest rates, but in these days they can also direct banks to, you know, either increase or decrease their lending to certain areas or particularly decrease their lending in certain areas. If they think it's, it's getting outta hand

Phil (10m 13s):
A little while ago, you just mentioned monetary policy. So what is we, we hear the terms, fiscal policy and monetary policy. What, what's your overview of those terms?

David (10m 23s):
Monetary policy is the policy of deciding, you know, should interest rates go up or down in terms of, you know, helping the economy or, you know, regulating or, or telling banks, you know, whether they should be lending as much to certain sectors. So that's monetary essentially deciding what's level of interest rates and, and credit conditions are best given that where the economy is at the moment. Fiscal policy is, is run by the federal government and that's really deciding government spending and taxation. So how much, any given year the government's got a whole bunch of different spending commitments, you're paying pensions, paying unemployment benefits, giving money to the states. And then they try to finance that through taxation, you know, their personal tax company tax.

David (11m 7s):
And so fiscal policy is deciding a, you know, where, where to be spending that money and B what the net balance between spending and taxation should be. So for example, if you're spending a lot of money, if you decide the economy needs some stimulus, for example, through fiscal policy, you might decide to, you know, ramp up, spending, give more money to states, to fund infrastructure projects. For example, that's a, a fiscal stimulus, and then you might decide later, well, cuz that's increased the budget deficit, we've got increase taxes. Otherwise it might have too much stimulus imposed in the economy. So that's really the way fiscal policy works. It's deciding the level of government spending and where government should spend that money.

David (11m 50s):
And also the level of taxation and, and how that tax revenue should be, should be raised.

Phil (11m 54s):
So presumably they can interact with each other, these kind of policy settings sometimes, obviously, hopefully in tandem, but otherwise maybe at odds with each other. How do you see that?

David (12m 5s):
Yeah, look again, they run by two separate groups. So the federal government effectively runs fiscal policy and the reserve bank, which is independent of the government, which is very important. It, it basically the RBA can decide what it wants to do with no pressure from the government effectively, well effectively, no pressure from the government. So there's no reason they necessarily have to run together. Ideally it would be nice if they did. And obviously government officials like treasury officials where I used to work and, and the treasurer would meet with reserve bank officials, RBA, governor Phil low, quite regularly. So they'd compare notes on the economy and often they would work together. So during the COVID crisis, for example, in 2020, you had monetary policy eased quite a lot.

David (12m 50s):
So interest rates were cut aggressively and the government did a big fiscal stimulus package. So both arms of policy were working to, to stimulate the economy. Sometimes they can work in opposite directions. So governments for various reasons may decide they want to spend a lot of money at a time where the economy is running already too hot. And so that, that would then put pressure on the reserve bank to, to raise interest rates, to sort of slow the economy. So you've got two arms of policy moving and opposite directions. So that's how it works. Ideally, they kind of work together but often, but there's no reason they necessarily would because they are run by two separate groups.

Phil (13m 35s):
I think you're kind of hinting there that what these policy settings are aimed to deal with in a way is inflation. How does treasury and the, and the central bank look at inflation?

David (13m 46s):
So inflation is like a, the rate of increase in prices on a, on a ongoing basis. So you for every year infl prices are going up by 5%. You'd say that inflation is running at 5%. Now a little bit of inflation is okay. So something like around about 2% or the RBAs target is two and a half percent. So a little bit of inflation in the economy is, is, is good at sort of like oil for the machine if you like, but if it gets too high and particularly if it gets high in volatile, that creates a lot of uncertainty for businesses. It's hard to plan. You know, when you don't know, you know, what the level of prices are gonna be over the next next year or so. So it tends to hurt business investment and also hurts consumers because you know, their real incomes, your after inflation, their incomes can, can fluctuate.

David (14m 33s):
So history, you know, shows us that high and volatile inflation hurts economic growth. And so governments and central banks do aim to keep inflation low and stable. That's the ideal. You want a little bit of inflation, but not too much.

Phil (14m 50s):
And of course, if the brakes go on too hard, then the economy can go into a recession. And maybe we should talk about that in the context at the moment, there seems to be in the us a debate about whether they're in a recession or not. And the difference between a technical recession and one that might be a bit more nuanced.

David (15m 7s):
Yeah. So in the US I mean, generally speaking around the world, a technical recession is when economic growth as, as measured, you know, GDP growth is negative for two quarters in a row. So generally around the world, we measure the, the level of output in the economy. It's gross domestic product GDP, and we measure it on a quarterly basis. And so when you get two negative numbers in a row, it it's seen as a technical recession. Now in the us, it's a little bit different. They have a, a group it's quite unusual for the United States. There's actually a group of economists that are part of a, a group called the national bureau of economic research. And are they actually pour over the economic statistics and decide amongst themselves whether they think the economy's gone into recession or not.

David (15m 53s):
And so it's not just about GDP, it's about the, the breadth of, of the weakness and things like consumer spending, industrial production, employment growth. And if they feel that there's enough breadth of weakness and it's been going on for a long enough time, then they say, you know what? We think the economy's gone into recession. And then they proclaim when they think the economy's come out of recession. Now, the only issue with that group is they don't tend to tell us that until six months up to a year after the fact. So it's really just from an historical perspective, but that's the way it works in the United States. So when, when we talk about recessions in the us, and there's a, you know, a whole history of the periods in which it's been in and out of recession, it comes back to this group, the N B E R, which had been around for a while that have basically proclaimed when they think the economy has gone in and, and come out of recession,

Phil (16m 45s):
What is the CPI? And why do we hear so much about it?

David (16m 48s):
Yeah. So the CPI is the consumer price index. It's basically a measure of the prices of a whole bunch of goods and services across the economy. So it's a way of keeping track of inflation general level of prices in the economy. So the bureau of statistics, again, it's similar in countries all around the world. So our bureau of statistics actually goes out and measures the prices of a whole bunch of things. You know, the price of bread, the price of milk, the price of rents for homes, the price of holidays, a whole collection of goods and services, and it sums it up into an index. And then every quarter we get a, an estimate of what the CPIs done that in that quarter. So you it's gone up 1%.

David (17m 29s):
It means on average, across all of the goods and services that have been monitored by the bureau, statistics prices have gone up by about 1%. Now the weights on those goods and services are broadly in line with our household budgets. So again, there's a lot of debate of what the weights on different things should be, but they, again, they survey households and work out. You know, what, what percent of a household budget typically is spent on bread is spent on overseas holidays and, and those weights are what are then used to calculate the overall CPI.

Phil (17m 59s):
And presumably that's what inflation is based on this number.

David (18m 3s):
Yeah. So again, when we talk about inflation, you know, picking up, we mean that the CPI, you know, the rate of increase in the CPI has accelerated, like it started to, you know, pick up. So we talk about like annual inflation is up, let's say it's at 6%. It means that the average price of the basket and goods and services that the, the ABS monitor has gone up 6% over the past 12 months

Phil (18m 29s):
And what's GDP.

David (18m 30s):
So GDP is gross domestic product, and that's a measure of economic activity in the economy. So effectively, again, there's a lot of assumptions and work that goes into calculating, but it's effectively trying to calculate the amount of goods and services that are produced in the economy in, in a given quarter, a given three month period. So when you hear the economic growth was, you know, 2% in the last quarter, it means that GDP, the, the, the estimate of the goods and services produced in the economy grew by 2% over, over that period.

Phil (19m 4s):
So in your opinion, what are important economic concepts for investors to understand?

David (19m 10s):
Yeah, I mean, where do we begin? So there's a lot of things to think about. I mean, the, the pace of interest rates obviously are a big driver of so much in financial markets. They affect the level of economic growth, which in turn affects the level of corporate earnings, which in turn affects the share market. The other effect is the level of interest rates affects the, the valuation of the share market. So if interest rates are very high, if you can get a good return by putting your money in the bank or buying bonds, then to compete, the shares have to sell at, at a cheaper level. And so higher interest rates tend to put downward pressure on equity valuation. So interest rates are very good. I mean, just the general sense of is the economy, you know, growing well, or is it slowing down?

David (19m 54s):
Is there a risk of a recession? The other thing is I think just having a sense that different investments can trade either very expensively or very cheap levels and, and, and markets tend to move in cycles. And we tend to swing from, you know, periods of greed, where things are very expensive. And, and unfortunately, a lot of retail investors tend to buy at, at precisely the wrong moments where everyone's very excited about the share market, for example, and it's been going up for a number of years, everyone starts to notice and they all jump in, but they tend to be jumping in right at the time when the market is, you know, pretty hot and pretty expensive. And similarly, when the, the market turns down and there's a lot of, you know, negativity out there and the economy could be in recession, shares have been going down for a while.

David (20m 39s):
Nobody wants to touch the share market. And that's actually often when it's a good time to buy, because shares are then cheap. But so that, that's just, just, just a few things, you know, having a sense for how the economy is moving, what interest rates are doing, having a sense that markets do move in cycles and your likely returns from any investment depend on importantly, you know, what, what price you're paying for. If you buy assets at a very expensive level, then you'll likely return over the next few years is, is gonna be poor and vice versa.

Phil (21m 9s):
This is a question without notice. Yep. What does an economist do at an ETF provider?

David (21m 15s):
Well, again, we provide at the first level just basic economic information. Like it's a service to our clients. I retail investors in, in our funds, also financial planners. So big part of our business is promoting the use of the ETFs with financial planners who in turn, you know, would then use them in their recommendations with clients. So firstly, it's a service to provide information on what's going on in the economy. Secondly, to the extent you want to be, you know, active, the thing about ETFs, you, you can be as simpler, as complicated as you want. If you just want a, a simple ETF that tracks the share market, you can just buy that set and forget, and you don't have to look at the markets again, but if you wanna like play the markets a little bit, decide, I want to have some European exposure.

David (22m 2s):
I like emerging markets. I like technology. I like resources. Then, you know what I also, what economists like myself do is, is just give information in terms of, you know, what's likely to be doing well. In our opinion. You know, obviously as we were saying before, these are just opinions and, and forecasts in a way, but give a sense for, you know, over the next six months to year or so, these areas of the markets may well do better than other areas. So that that's a sort of information that I aim to provide.

Phil (22m 32s):
And is there any words of comfort that you can give investors about fear porn and the, those lurid economic headlines that we, we see? Oh,

David (22m 42s):
End of the day. I mean, you know, share markets over time, trend up. I mean, cuz the economy is trending up. So over time being invested in the market, you're going to do well. I mean, you've gotta basically have an investment, you know, balance of investments. So shares are great over the long term, but they can be volatile. Now if they're too volatile and you know, they give you, you know, keep you up at night, then you can have a more blended portfolio. But having, for example, bonds, which we also offer through an ETF, bonds are a different type of investment, but they're generally less volatile. And so again, you see that in superannuation people, but generally diversified portfolio you'll have a blend of equities and cash and bonds so that the overall volatility of your portfolio is in line with your risk tolerance.

David (23m 30s):
So it's not too volatile that it's gonna upset you, but it it'll still offer you a long run return. Sometimes negative headlines are information. You know, we, we do go through periods where the economy is turning down and there's gonna be a period of poor returns and equity markets period of rising unemployment. So sometimes bad news is bad news, but often even in periods of good economic times, it's the bad news or the threatening news that it's gonna tend to dominate. So you need to have a bit of a filter.

Phil (23m 60s):
David Bassanese thank you very much for joining me today.

David (24m 3s):
Lovely to be with you.

Phil (24m 5s):
If you found this podcast helpful, please tell a friend, especially if it's someone who needs to start thinking about investing for their future, you'll be helping them and helping me to keep this show on the road

Chloe (24m 16s):
Shares for beginners is for information and educational purposes, only it isn't financial advice and you shouldn't buy yourself any investments based on what you've heard here. Any opinion or commentary is the view of the speaker only not shares for beginners. This podcast doesn't replace professional advice regarding your personal financial needs circumstances or current situation.

Phil (24m 35s):
And thank you for listening to my podcast.
 

Shares for Beginners is for information and educational purposes only. It isn’t financial advice, and you shouldn’t buy or sell any investments based on what you’ve heard here. Any opinion or commentary is the view of the speaker only not Shares for Beginners. This podcast doesn’t replace professional advice regarding your personal financial needs, circumstances or current situation