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.

Here’s something 99% of all the retail market players are not talking about, as they either do not want to know (as it will stop the party), or do not understand.

The elephant standing in the corner of the trading room floor, which everyone is ignoring, is called… inflation.

If you’re into bonds, rather than having your cash tied up in a Cash Management Account, you will have already started to feel the cold chilly wind of change blowing up your kilt.

Bonds are being sold down, and it’s because market players become increasingly worried about inflation.

The central banks have a lot to answer for, as interest rates have been (artificially) kept at historically low rates by them and I suspect they are going to be too slow to adjust rates upwards, with inflation, as it will cause short term political indigestion for our leaders.

Short term political election cycles almost mean that, as soon as politicians are voted in, they are straight back on the campaign trail and they don’t want their electorates suffering under higher mortgage rates.

With all the financial watchdogs shouting about how much they worry about Bitcoin going through US$50,000 and how everyone should be careful but, as for housing? Just switch banks and get a better mortgage rate and thank us with your votes.

Yet it is their meddling in interest rates which has caused investors to chase these non-yielding assets and go for capital gains, as it is the only way that they can make up for lost interest.

According to the financial rating site Morningstar, at a share price of $83.60, Commonwealth Bank of Australia (CBA) is yielding 2.97% (100% franked). Yet at the branch they very generously offer you 0.4% interest (paid on maturity) for 12 months.

The average dividend yield for CBA over the past five years is 5.61%, which would more than cover off the current Australian inflation rate of 0.9%, so it either has to improve its dividend payout rate or the shares have to almost halve to get back to that average five-year yield.

The very fact that if you buy CBA shares today and get a greater dividend yield than having your cash on deposit with them, very well sums up to me the current situation we all find ourselves in.
 

The cheek!

I have been worrying about inflation for some time now but it recently came to a head for me, when I went to the local bottle shop. I was going out for a Chinese meal and like to have a long neck of Cooper’s stout when eating oriental food, which to my horror had gone up from $6.99 to $7.99 in one hit.

That is a rise of over 14% in one go. The bottleshop guy told me it was because of an increase in excise duty being slapped on by the government. Going through the stats, the last quarter showed that the price of food over the year had increased by 2.3% and alcohol and tobacco had risen 9.3%.

You can call me a realist, as I, like everyone else, have seen the price of meat rise by over 10% this year and now alcohol by even more.

Old giveaway cuts like beef cheek and lamb shanks have started to appear on the supermarket shelves as an alternative meal budget buster.

I can still remember the butcher giving me lamb shanks for the dog for free. Now Woolworths sell them, pre-cooked, for $17 a kilo and beef cheek for $18 a kilo.

Let’s hope they keep to the front end, but there’s a good chance we’ll soon be comparing the prices on things that dangle down at the other end. No doubt promoted on MasterChef as Paleo Pete’s cure for COVID.

So alcohol and food are going up in price faster than inflation and Australian government bond yields for 10 years are at 1.36%, with the 15 year bonds at 1.69% compared to the yield on two-year bonds, which is 0.11%.

The CEO of Heinz recently stated this in an article:

“We have inflation, we are seeing inflation, we are concerned about inflation.”

Which means my beloved tomato sauce will be going up in price soon.

Don’t be alarmed too much though, as this is what a federal policy maker’s reply was, in the same article:

“In the near term I don’t see we are going to have an inflation problem.”

Er, that’s not what the bond yields are telling us. And with higher commodity prices worldwide, producers can only absorb so much, before putting up their prices (or in the case of Cadbury’s, making everything smaller in size and hoping no one will notice).

The ironic thing in all of this is that if you owe money – like a mortgage or say, a government who has racked up billions of dollars of debt to see them through COVID – is that inflation, ultimately, is their friend.

Now, don’t tell this to the elephant, but the price of peanuts last year rose by 29%. I don’t want to be in the room when he finds out.

And neither should you.

The Secret Broker can be found on Twitter here @SecretBrokerAU or on email at thesecretbroker@stockhead.com.au.

Feel free to contact him with your best stock tips and ideas.