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Fed Rate Watch, NSW $100 Billion Budget & Beware the Deepfake

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Rate Watch – Tracking the Fed Dot Plot

The U.S. Federal Reserve on Wednesday released a new set of eagerly anticipated economic projections. There were two main questions markets were seeking answers to. Firstly will U.S. central bankers signal they now expect to start raising interest rates in 2023, instead of 2024? And how high do they expect inflation to rise this year and next?

The Federal Reserve uses a dot plot to signal its expectations of future interest rate changes. In a Fed dot plot, each member of the FOMC is represented by a single dot, but each dot is anonymous.

The result was that the Federal Reserve considerably raised its expectations for inflation this year and brought forward the time frame on when it will next raise interest rates, indicating possibly two rate rises as soon as 2023. However, in contrast to this, the central bank gave no indication as to when it will begin cutting back on its aggressive bond-buying program. The only morsel offered on this front was an acknowledgement by Fed Chairman Jerome Powell that officials had discussed the issue at the meeting. To quote him exactly he stated, “You can think of this meeting that we had as the ‘talking about talking about’ meeting”, in suitably obtuse central banker language.

Stocks sold off following the release only to retrace their steps later in the week as focus turned to the next wave of US stimulus, the bipartisan infrastructure plan still likely to be in the trillions of dollars.

 

Major Changes to Income Protection Insurance

An often underappreciated yet critical aspect of people’s financial lives is protecting against risk. It’s something Stanford Brown thinks deeply about and it underpins all our work with clients.

And after life itself, there’s no more important asset to protect than your ability to earn an income.

After absorbing billions of dollars of losses in recent years, from 1 October 2021 insurers are being required by their regulator, APRA, to make changes to income protection policies to ensure the industry remains sustainable.

To learn more and see how you can take advantage of opportunities before 1 October, watch the 3 minute interview between our Chairman, David Brown and our Senior Insurance Adviser, Matthew Prain.  Knowing your options before they change in October could reduce your premiums and ensure significant ongoing policy inclusions.

 

NSW $100 Billion Budget

This week NSW delivered its first $100 billion budget with spending by the NSW government projected to hit that threshold for the first time in the coming financial year.

Even though the recovery in NSW is exceeding expectations, Treasurer Dominic Perrottet set out that he is not putting the brakes on spending just yet.  Instead, he set out an agenda for NSW that is designed to seize on the coronavirus pandemic and introduce long-term reform.

As a result, the budget will be in deficit to the tune of $8.6 billion in 2021-22 – an even greater shortfall than the last two financial years as both of those deficits have transpired to be less than had been expected. In the coming financial year, the government will devote another $6 billion toward stimulus including payroll tax relief, rebates, and incentives to visit the CBD. Mr Perrottet said this will “make sure the NSW economy continues to grow”.

Overall expenditure by the NSW government surged by 8.2% this financial year and will jump by another 7.3% next financial year. Although things will change in 2022-23 when spending is forecast to contract by 3.6% as stimulus measures are withdrawn. With the budget bottom line projected (for what it is worth) to be back in the black by 2024-25.

 

Where to invest with inflation?

Our Chief Investment Officer Ashley Owen contributed a wonderful article to the leading independent investment publication, Firstlinks.

In the article, Ashley discusses a comprehensive study of the impact of inflation on returns from different assets over the past 120 years. In it, he notes that the high returns in recent years are due to low inflation and falling rates, but this ‘sweet spot’ is ending.

In the study, all asset classes as a group generated significantly higher returns when inflation was low and/or falling, but significantly lower returns when inflation was high and/or rising. From there the article sets out several major implications for long-term investors including the identification of one asset class that performed best in all all-inflation conditions.

 

Woolworths Endeavour split

This week saw the listing on the Australian Stock Exchange of retail drinks and hotels business Endeavour Group (code EDV) following its demerger from Woolworths. The demerger comes after Woolworths’ shareholders voted in favour of the split last week.

The separation was an easy sell as it involved giving shareholders the same stake they already owned in Endeavour, which owns bottle shop chains Dan Murphy’s, BWS, more than 300 licensed venues, and 12,000 poker machines.

The pandemic led to long closure periods for Endeavour’s pub network, a segment that accounted for 12 per cent of Woolworths’ revenue in FY20 but 23 per cent of earnings.

There have been a variety of strategic and operational reasons for the demerger including stronger brand clarity for Woolworths and Endeavour, and simplified businesses to increase the strategic focus of Woolworths and Endeavour executive teams.

Most significant though is an opportunity for shareholders to choose their level of investment in Woolworths and Endeavour. With environmental, social, and corporate governance becoming the mainstream for fund managers and professional investors the pollution of alcohol and gaming revenue precluded many from investing in the Woolworths business, until now.

 

Beware the Deepfake

Think of deepfake as the 21st century’s answer to Photoshopping. They use a form of artificial intelligence called deep learning to make images of fake events, hence the name deepfake. Want to change the words in a politician’s mouth, star in your favourite movie, or dance like a professional? Then it’s time to make a deepfake.

Used by everyone from academic and industrial researchers to amateur enthusiasts, visual effects studios and potentially even Governments. Deepfakes are Artificial Intelligence-generated videos that can make people appear to do and say things they never did.

The sophistication of the technology has evolved to such an extent that a recent innocuous Tok-tok, seemingly showing Tom Cruise teeing off at the golf course, was soon setting off alarm bells in U.S. national security and intelligence circles.

The reason for the alarm – A series of clips depicting one of the most recognised faces in the world, created by one guy at home with a computer, had fooled virtually every piece of publicly available deepfake-detection technology.

This naturally sparks fears of how the technology could be misused and abused. Social media has already been exploited to manipulate the narrative around countless news events. Now throw in the prospect of deepfake news and the potential for audience manipulation is monumental.

Not for the first time, the speed of evolution in technology is leaving intelligence communities and government administrations scrambling to keep up. Beware the deepfake.

 

Global Vaccine Update – Australia’s Delta Reality

Unfortunately, Sydney has once again slipped back into COVID high alert with the spread of the much-feared Delta variant across the Eastern Suburbs and beyond.

Regrettably, outbreaks of this nature are inevitable and further increase focus on the lack-lustre vaccine rollout across Australia. For those of you interested in keeping track of the global vaccine roll-out, we again share the Financial Times rolling tracker.

 

Olympic Shoe Wars

With less than a month to go until the Tokyo 2020 Olympic Games, controversy still dominates the build-up given the public health backdrop both locally in Japan, and globally. That being said, the 2020 European football championships are currently taking place across the continent, and despite the natural health concerns, the attention quickly switched from the off-field health debate to the on-field action and it’s not unrealistic to expect the same will happen in July once the flame is lit.

The marathon remains one of the pinnacle events at any Olympic games and this time it represents something of an arms race between shoe manufacturers as they push the boundaries of science and the rule book. Essentially, they have carbon-fibre plates sandwiched between an energy-returning ultra-lightweight midsole. All this research and investment is intended to help athletes run their best races, and while world record times, particularly in the marathon, have come down with the advent of higher-tech shoes, sneakers aren’t everything.

Case-in-point: Abebe Bikila and his barefoot Olympic triumph. Bikila was a last-minute addition to the Ethiopian marathon squad at the 1960 Summer Olympic Games in Rome. According to a documentary on the Olympics YouTube channel, a few days before he was set to leave for the big games, his shoes fell apart. Despite a long search, he could not find a pair comfortable enough for him to race 26.2 miles in. Instead of settling for a mediocre pair of kicks, he ran arguably the most important run of his life barefoot—and won. In doing so, he became the first Black African to win an Olympic Gold medal. This all goes to show that while technology can help an athlete succeed, it doesn’t always make or break a race. We share a link to a short 4-minute video on this story.