The Secret Broker: Rising inflation? Thank you, thank you very much…
The Secret Broker
The Secret Broker
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After 35 years of stockbroking for some of the biggest houses and investors in Australia and the UK, the Secret Broker is regaling Stockhead readers with his colourful war stories — from the trading floor to the dealer’s desk.
I was rummaging around the local op shop and I found an image of Elvis, in black and white, going back to him in 1958.
“My God, he was a good looking man,” proclaimed Mrs B as she watched me hang him above the bar in the pool room.
(It’s actually a snooker room but I now realise not many people would know or want to learn how to play snooker, so pool room is a lot easier and quicker to explain.)
As we stood back and admired his image I made the remark that if I put another one next to him taken in his last year of living, I could point out to all my guests what inflation actually looks like.
Normally, the only way you would see inflation is in your wallet, as you required more and more notes just to buy the same thing.
We haven’t seen it over here yet but I have witnessed it in other countries.
You feel wealthy, as you have a large wedge of notes, stuffed into your bulging wallet. Loads of money!
This is until you actually buy a staple product, like a beer, and the barman takes the fistful of notes and returns one very small coin back in change.
This time around (and inflation always comes around at some point), we have moved towards a cashless society, so what you have in your wallet will not have it bursting at the seams.
I think one of the miscalculations on how inflation had started to creep up on us all is because the so-called experts around the world forgot to think about how things have changed in modern society.
Australia is one of the biggest users of tap and pay and because of COVID, the take-up, along with the virus, grew rampantly. ATM cash withdrawals fell by 20% in 2021, as an example.
My local coffee shops adds a 1.5% surcharge when I tap and pay, so I am already paying a higher price.
With rates down at 0.01% (remember when?) that is a fair whack above the base amount.
Worse still is that the coffee shop is just passing on the fee. So I am paying more for the same product, whilst the coffee shop gets nothing extra.
Then, because of the ease of just tapping with a plastic card, the adding on of small increases almost goes unnoticed.
This price gouging has been going on since the introduction of electronic road toll tags.
The good old days of stopping at a toll booth and paying two dollars in coins are long gone. Now, seeing funny-ending till fees on your bank statement is the norm.
In 1981, the UK government was one of the first AAA rated players to issue bonds that were linked to inflation.
They paid a fixed semi-annual coupon, with the then current inflation rate added on top, plus they also added the inflation rate to the maturity payout.
We loved this novel issue and stuffed as many portfolios as we could find with them. They were issued at par (£100) and for trading purposes they were priced ‘clean’, though on settlement the price became ‘dirty’ as the coupon plus the inflation rate was added on.
As inflation started to grow in the UK, all of our investors had both their income and capital bulletproofed against the damages that it can do to your savings.
Going back over the history of these inflation protected bonds brought back some very fond memories for me.
They were good times, as we were able to switch clients out of their boring bonds and into these new shiny bonds, thus earning bonus commission rates.
The Christmas 1981 bonus was celebrated with a trip to the warm sunny Caribbean, away from the cold and windy UK winter.
Those terms ‘clean’ and ‘dirty’ were the actual official words used in the terms and conditions which are still used today. This is one of the things I miss about the UK.
Unconventional words in official documentation. Love it!
Currently, the longest rated AAA rated UK bond, indexed to inflation, matures in 2073 and pays a semi-annual coupon of 0.125%.
If you paid par for them and then held them to maturity, your redemption payment on a £100,000 investment would be £491,926.20 with annual inflation running at 3%.
If inflation is 7.75% (as predicted here in Aus), then at maturity that £100,000 would equate to a cheque for £4,813,224.49.
Just like with the fatter and fatter Elvis, there is nothing like seeing physical inflation over time just when you tap your card.
However, there is a bright side to the above.
Imagine if you could borrow £100,000 till 2073. Your loan value would be ravished by inflation but you would net out with £4,713,224.49.
If you could do £1m, you would get £47,132,244.90.
If you bought a small flat in London for £1m a few years ago and it is now worth £3m and you tapped your equity and put £1m into the 2073 bond, then you will enjoy the fruits of inflation twice.
Once with your flat going up in value and once with your bond maturing for over 47m quid.
Now, if I was younger me, I would be whisking Mrs B off her feet and heading to London to buy the flat and the bond whilst excitingly singing in her ear:
‘It’s one for the money, two for the show, three to get ready now go, cat, go.’
I’m now heading back to the op shop to find an Elvis outfit so I can prove to the world that my personal inflation rate has been kept very low.
If you want to see my personal inflation rate in action, I’ll meet you in Parkes!
Feel free to contact him with your best stock tips and ideas.