Inflation in the US is seemingly out of control

The US inflation rate has been rising for some time as their economy rebounds leading to increasing consumer demand but a shortage of many goods and services due to supply chain issues and a lack of workers in many areas. Job openings are at record highs versus unemployed. Not surprisingly, wages are rising, oil prices are up and housing costs and rent have increased substantially and that’s fuelling inflation.

 

 

 

 

 

 

What is not clear yet is whether this is a temporary (transitory) spike that will dissipate as supply chain pressures ease up and more people are attracted to enter the workforce or whether the increase is more structural. The implications are significant.

The share market is vulnerable if inflation causes significant interest rate rises

The US market is expecting the US Central Bank (the Fed) to raise interest rates 3 times in 2022, which is leading to speculation that official Australian interest rates may also rise in 2002, though the RBA Governor has reiterated that he doesn’t expect that to occur. If the US Fed raises rates 3 or more times to counteract an increasingly persistent rise in inflation, this will very likely be a negative for house prices and the stock market. As we are at record high, a correction of more than 10% would not be surprising.

My view is that inflation is a concern, but I expect inflation to moderate in 2022 as supply chain issues become less significant and consumer spending moderates. If this is the case, the share market may be more volatile but unlikely to suffer a major correction, though the risk is more to the downside than the upside, so a degree of caution is warranted.

Australia’s inflation situation is not as problematic as that in the US and hence our interest rates are less likely to rise significantly. However, our share market is heavily influenced by the US so if that market corrects, expect us to follow.

Increased scope for older people to contribute to Superannuation

Federal Treasury has told the SMSF Association that the non-concessional contributions (NCC) three-year bring-forward provisions will apply for individuals aged between 67 and 74 (subject to legislation being passed by Parliament).

Treasury has confirmed that the amendments, which are currently before parliament, simply move the current cut-off age for the bring-forward rule from needing to be under age 67 to needing to be under age 75 from 1 July 2022.

Provided this legislation passes, persons aged between 67 and 72 will be able to contribute $330,000 at one time provided they haven’t already triggered the bring-forward rule and provided that their Total Super Balance (TSB) is not large and precludes them from making such a sizeable contribution (for most people, provided their TSB does not exceed $1.49m).

A phasing-out method is expected to be introduced which will see people aged 72 and under able to bring forward three years of NCCs, people aged 72 and up to when they turn 74 allowed to bring forward two years of NCCs, and those aged 74 but under age 75 able to bring forward one year of NCCs.

Electric Vehicles (EVs) are a big deal

Putting Australian politics aside, there is no doubt that EVs are a big deal and in a decade or thereabouts most new vehicles sold worldwide will be EVs. That will also be true in Australia, particularly given we don’t manufacture vehicles anymore and all major vehicle manufacturers who supply Australia are investing very heavily in EVs.

Everyone knows of Tesla, but most people may not have heard of US EV (truck) manufacturer, Rivian. It is a company that has manufactured less than 200 vehicles and has no revenue but after listing in the US market last week at US$78 per share, Rivian is now valued at around $130 billion with the shares at US$146, down from a recent peak of $179. That’s as much or more than nearly all traditional car companies, such as Daimler (Mercedes) and Volkswagen which produces 10 million vehicles a year with €250 billion in revenue. Toyota is valued at twice what Rivian is but Ford, a shareholder in Rivian, as is Amazon, makes over 4 million vehicles a year and is valued at only about half of Rivian.

For a comparison with Australian businesses, Rivian’s market capitalisation is a bit larger than our largest company, CBA. As remarkable as Rivian’s share market valuation is, it pales by comparison with Tesla which is now valued at approximately US $1 Trillion (US$1,000 Billion).

To give a sense of what investors think of the future of EVs and Rivian in particular, at its recent peak it was valued at more than almost 90% of all S&P 500 companies, including stocks like Goldman Sachs Group Inc., Boeing Co., Citigroup Inc., Starbucks Corp. and Caterpillar Inc. That valuation seems like a stretch to me, but it helps to confirm that EVs are a big deal.

What is the Family Tax Benefit and who can receive it?

The Family Tax Benefit (FTB) is a two-part payment from the Federal Government to assist with the cost of raising children. All FTB payments received are not included in taxable income.

FTB Part A

The FTB Part A is paid per child. You may be eligible for the FTB Part A if you care for a dependant child who is either:

  • 0 to 15 years of age
  • 16 to 19 years of age and meets the study requirements, which require them to be undertaking full-time secondary study and not receiving a benefit like Youth Allowance.

You must also meet the following criteria yourself:

  • Qualify under the income test
  • Meet the residence rules
  • Care for the child at least 35% of the time

The maximum rate for the FTB Part A depends on the age of the children and your family’s taxable income. You may receive the maximum rate for each child per fortnight if your family’s adjusted taxable income is $56,137 or less. The maximum income at which a family can receive any FTB Part A depends on how many children you have, with a maximum income of $105,327 for families with one child and as much as $187,513 for a family with six children, depending on the ages of the children.

The maximum rates per fortnight for 2021/22 are:

  • $191.24 for a child 0 to 12 years
  • $248.78 for a child 13 to 15 years or a child 16 to 19 years, who meets the study requirements
  • $61.46 for a child 0 to 19 years in an approved care organisation

If you receive the FTB Part A, you may also be eligible to receive the FTB Part A supplement. This is a yearly payment, made after the end of the financial year, after Centrelink has checked that you have received the correct FTB amounts.

The FTB Part A supplement is a payment of $788.40 for each eligible child for 2021/22.

FTB Part B

The FTB Part B is a separate entitlement to the FTB Part A. To receive the FTB Part B, you need to be either a single parent or non-parent carer, a grandparent carer, or part of a couple with one main income.

You will also not be eligible for the FTB Part B if your annual adjusted taxable income is more than $100,900.

If your income is $100,900 or less, you will be eligible to receive the maximum rate of the FTB Part B. The maximum rate depends on the age of your youngest child.

The maximum rate per family each fortnight is:

  • $162.54 when the youngest child is 0 to 5 years of age
  • $113.54 when the youngest child is 5 to 18 years of age

 

Pfizer’s COVID Pill is effective & likely to be deployed globally

Results from a clinical trial of Pfizer’s new antiviral COVID-19 treatment, Paxlovid, indicate a high level of protection against severe illness and death. Paxlovid, has an 89% efficacy rate at preventing hospitalisation among high-risk COVID-19 patients, according to details published by Pfizer.

500,000 courses of the oral antiviral have already been ordered by the Federal government. It could be prescribed by general practice in Australia if it is approved, as seems likely. Pfizer says that subject to authorisation, Paxlovid ‘could be prescribed as an at-home treatment to help reduce illness severity, hospitalisations, and deaths, as well as reduce the probability of infection following exposure, among adults’.

There are encouraging signs that Paxlovid will become available worldwide, including in poorer countries. American new website Axios reports that “US drug manufacturer Pfizer will allow its experimental COVID treatment pill to be produced and sold in 95 developing nations that are home to more than half of the world’s population. The deal is part of a UN-backed, for-profit consortium. Pfizer says that as long as COVID remains a WHO-designated public health emergency, it won’t charge royalties for the pill.

“While the treatment is still good news, inequality in access to COVID vaccines and treatments persists, with numerous issues outstanding — from pharma patent issues, to global production supply deals, to local drug production capacity. Still, having cheaper access to effective treatment is a big deal for the countries on Pfizer’s list, most of which have very low vaccination rates and weak healthcare capacity”.

This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.

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