Christopher Joye says this asset class is in trouble

The world’s most important central bank is at risk of making some crucial mistakes in its interest rate policy from here, said Chris Joye, Coolabah Capital Investments’ CIO, and portfolio manager during his latest interview.

The outspoken investor spoke with Livewire’s James Marlay last week, just a day ahead of the latest inflation figures handed down in the US last Wednesday. Official figures showed consumer price inflation lifted to 3.5% (on a year-over-year basis) in March, up from 3.2% in February, and most importantly, above the consensus estimates of 3.4%.

Joye noted that each of the last three inflation prints surprised on the upside. This was led primarily by persistent services inflation that has reaccelerated to 6.7% - up from 3% before COVID. He explained this figure needs to return below that level before the Fed can get anywhere near its target of 2%.

“It’s arguably precipitating a wage-price spiral because it’s keeping overall inflation high. Inflation has been artificially dragged down by goods deflation, but that's a temporary effect. So really, there's no basis for the Fed to cut right now,” Joye said.

He said the US Federal Reserve “desperately wants to cut because of the upcoming November US Presidential election. They don’t want to be seen as politically interfering with that process.”

Joye also believes persistent inflation pressure would be reinforced if the Fed does cut rates in June.

“The mistake they’ll make is over-investing themselves in one of these intellectual paradigms that central banks are fond of fabricating,” Joye said.

“Whenever they make these long-term forecasts, they blow up in their faces. My concern is we’re going to get a re-acceleration in inflation.”

Revisiting his big predictions

Joye was also reminded of his bold prediction from Livewire Live last year when he anticipated a near-record level of corporate defaults in Australia – higher than during the 1991 recession and the GFC.

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During the latest interview, Joye noted that here in Australia, insolvencies are at their worst in almost a decade. He said we’re tracking close to his expectations, especially among businesses that based their business models on “perpetually cheap money, who believed Phil Lowe [when he said] rates would stay low for years…they really can't survive in a high cost of capital environment.”

Which assets are most exposed?

For investors, Joye is most negative on private credit funds, especially those focused on real estate. He noted that private credit as an asset class didn’t exist in Australia during the GFC, meaning companies in this space have never been through a default cycle.

“Private credit is completely illiquid. There are very good managers, but most are, I think, not going to survive this cycle,” Joye said.

While noting private credit has a role to play in portfolios, he suggests now might not be the ideal time: “I'd be sitting on the sidelines and looking at an opportunity to re-enter the sector on new assets at some point over the next 12 to 24 months.”

“Right now, the US has high inflation, low unemployment, and trend plus growth. If I'm wrong, and inflation isn't persistently problematic and it zooms back down at 2%, you're going to have all three criteria satisfied. You can have 2% inflation, low unemployment, and trend plus growth,” he says.

Pockets of opportunity in Australian housing

Joye also revisited his prediction that Australian house prices would plunge by between 15% and 25%, which stretches as far back as May 2022. 

“That was the second biggest fall in 40 years of data. Inflation-adjusted, house prices did fall 15%. But we were surprised by the fact that they didn't fall a bit further. And we were surprised that we got the rebound we did,” he said.

He pointed to Australia’s “world-beating population growth” as one reason for this, alongside the net wealth of those coming to our shores.

"The composition of the population growth was probably more well-heeled than we had anticipated. A lot of people coming to Australia, bringing a lot of money,” he said.

But Joye still sees pockets of opportunity in Australian residential property investment, including in Queensland where he likes Noosa and the broader Sunshine Coast.

He also believes parts of Perth remain appealing, alongside the “wealthier, older suburbs of Sydney such as Bellevue Hill.”

Has the RBA lost credibility?

Quizzed about his views on the RBA, Joye retains his view that the Reserve Bank of Australia is losing credibility. One reason for this is the discrepancy in our cash rate, which is usually 1.5% above the US but is currently around 100 points below.

He also pointed to the macroeconomic models the RBA itself uses as a guide to where the cash rate should sit. “Those models also imply the RBA should be at [a cash rate of] 5% or higher.”

What’s the global economic outlook?

Returning to the issue of inflation in the world’s largest economy, Joye gives an equal 50-50 chance the Fed will begin cutting rates in June but said he’s preparing for two possible outcomes.

On one hand, if the central bank doesn’t cut – or indeed hikes rates again – markets will become stuck with a higher cost of capital. Joye noted this has already played out in the US in the following ways:

• Corporate defaults in 2024 at their highest level since the GFC
• Incidents of bankruptcy at their highest since 2010.

“Right now, the US has high inflation, low unemployment, and trend-plus growth. If I’m wrong and inflation is persistently problematic…there’s not much scope at all for the Fed to cut rates,” Joye says.

“Immaculate disinflation”

On the other hand, the “immaculate disinflation” scenario supports the case for a higher-for-longer outlook for interest rates. This would see central banks run a neutral rate model where they assert that 2% is the ideal rate to assert their influence while holding the economic cycle steady.

Will the Fed cut?

Joye believes the US central bank is still deciding whether to back what the data is saying or the market narrative.

“Right now, I think the data is pulling them towards pragmatic reality, which is, ‘hey, there may not be a case of cutting here and…neutral may be higher than we thought it was’” he said.

The risk of another Trump presidency

Joye weighed in on the upcoming US election, with a strong chance former US President Donald Trump will claim the role again. He said Trump’s policies on immigration and higher tariffs on China trade would be detrimental to inflation.

“He's campaigning on the basis of slashing immigration and de facto shutting borders to many folks, which is going to put a lot of upward pressure on wage growth,” he said.

That said, Joye sees the potential volatility Trump would bring to global markets as an opportunity.

The embattled presidential nominee has endured two of the half-dozen civil and criminal trials he’s facing – something that Joye and his team have been modelling in their research.

“It's difficult to know because some of those betting markets have been wrong and the survey data you get these days is often unreliable. But we’re doing a lot of diligence to understand the probability distribution around the trial,” Joye said.

More from The Rules of Investing

Listen to the full recording of Chris Joye’s latest The Rules of Investing interview by clicking the link at the top. 

You can also download the interview using the following links:

• Spotify
• YouTube