Interest rates 3

The transcription is a conversation between two individuals discussing various topics. The first part focuses on a study from 2008 that showed the placebo effect of pain relief medication can be heightened by paying more for it. They discuss the ethics of advertising targeted pain relief and the complexity of pain perception. The second part briefly touches on inflation and its causes, highlighting the impact on purchasing power. Hello, Scott. Hello, David. How are you? I'm good, mate. How are you? Yeah, not too bad. It's a lovely sunny day. It is, isn't it? And we're stuck in a... A fucking boring chat to start off with. How British. Yeah, the weather's really nice actually. Yeah, I know. And now we're in an underground bunker recording a podcast that no one's going to listen to. I know. And it's very dark. We've got some natural light. It's not dark. We've got some natural light. Do we? The opposite of natural light. Define natural light. Well, yeah. From the sun, I guess. Yeah. So there's some bulbs above us. Okay. Anyway, welcome to today's podcast. Sponsored by Huel. We're not sponsored by anyone. We're not sponsored by anyone yet. Just a disclaimer, Huel, don't sue us. We know we're not responsible. We know we're not good enough. So today, David, we are speaking about interest rates, aren't we? But before we get into that, you've got a little fact for me. Yeah. So this isn't a really like any recent evidence or a recent newsworthy fact. Great. It was triggered by last week we started talking a lot about pain. And I think I find pain science really fucking interesting. You look like you don't, but that's fine. And I think I'm going to just try and crowbar it in little sprinkles. And weirdly, I can't remember what triggered me this week to start to think about this. Oh, it was I was listening to an audio book by David Mitchell. Who's that? The comedian? The peep show guy. Yeah. And yeah, I was listening to his audio book. It's really funny. And he kind of goes through just kind of rants about the world and stuff. And it was like a really nice example of how pain can be really complex. I can imagine his audio book being really funny by the way. It is very funny. It's literally just a man whinging. But I've been listening onto the tube and just cracking up. And so this is I said, it's nothing new. It was from like 2008. But it was about how and another reason I chose this fact, Scott, was that it merges our two industries. So it's about pain. Yeah. But it's also about money. Okay. So this study from 2008 showed that a placebo. Yeah. So you're aware of it. Okay. So nothing. So the effects of a placebo medication, pain relief medication can be heightened by paying more for it. So okay. Hang on. So when you go to the supermarket, right, you've got the shit Tesco own brand medications. And then you've got the Neurofen, the branded product. It's like buying that. Yeah. You say Neurofen or the Clarins. No, not Clarins. The Pyrrhoton one. Pyrrhoton. Right. Yeah. Fine. Yes. You get branded medications and then you get like Tesco's own. Yeah. Yeah. The BTEC medication. Yeah. They're the same thing. Yeah. Right. The active ingredients in them are the same thing. But yeah, in this study, I think they got like they got 80 people and they electrocuted their wrist or something. Yeah. I think they provided electric stimulation to a wrist, a painful stimulation. And then they gave them a placebo. So nothing with any active pain medication in it. But they told them that, yeah, this is a new drug that we're trialing. It's expensive. So they gave them either one that they said was reduced down to 10 cents or one that cost £2.50 or $2.50. Yeah. In the 10 cents group. So really interestingly, both tablets work in terms of people say my pain reduced because of the power of the placebo. But in the 10 cents group, 61% of them were like, yeah, my pain is better. Whereas in the $2.50 one, 81% said that they got better. So there was a heightened effect of the placebo by people thinking that it was a more expensive drug. That's mad, isn't it? Because it's essentially your brain can just do so much to you and you don't even realize. Yeah. And that's what I mean about what I said last week. And I got a bit lost of like, I don't know how to explain pain, posture and pain not being the same thing. But it's like pain is so complex to the nature of a placebo being more effective if you paid more for it. And that's where and actually coming back to why I heard it on David Mitchell's audio book, he was he was actually relating it to Neurofen. The company, I think, had a quite a big lawsuit back in 2016, 17 kind of time, where they had been in their advertising saying that, like this, this medication is for back pain, or they said they had different brands of targeted migraine pain relief. And there's no, that's not how pain relief works. I've always wondered that. I've always been like, oh, let's get to the back quickly and how they like, built this drug. So it knows exactly which part of the body to get. They got done by the advertising. What's that called? The people that regulate, regulate trustworthy adverts, basically. And they, they got done, I think, from an advert where it was like a woman with period pain. And they, like the imagery of the drug going to there and they were like, this isn't real. But equally, on that note, as well, I think 90% when when around that time, one of the newspapers said that 90% of people surveyed shop for pain relief that's targeted. Yeah. So go on Google and be like pain relief. Yes, I actually remember that in I can see it in my head. It's like a guy holding his back or all the women as well. And thinking, yeah, that is pretty impressive. They do impress it that they've managed to Yeah, as I say, like program this, this paracetamol essentially to go to these specific places. So I wanted to ask you a question. Yeah, I'm around this stuff. Yeah. If the placebo effect is heightened by the higher the higher, obviously you are. You're the cheapest bloke I know. If, if people aren't aware of this fact, for example, now you're aware of it, the placebo effect wouldn't work with a higher price point. Is it unethical for companies to say back pain, pain relief, if it actually does mean their back pain reduces more? That is a good question. Thank you. Is it unethical? I guess it's not going to work on everyone is it like it's the 20% of people where the placebo doesn't work, where you've just given them a sugar pill, and they paid for a sugar pill thinking they've got something else. So from that point of view, you, you've sold a product, and you've supplied something completely different. But for the 80% of people it does work for, who cares if it's working for them? I can't answer that question. I know. I haven't got an answer. Yeah, I haven't got an opinion. I think we've got to be transparent with advertising. Yeah, I think it's important to be transparent. Yeah, and I like to give people the facts, but there's loads of questions in and around this in medicine of actually like, if it works, do we care why it works? Yeah, if somebody cracking your back makes you think that your back is far better, there's no evidence to actually say that that changes anything in the back and makes you far better. Yeah, yeah. But if people pay you and you do it and their back pain gets better because they believe it. If drinking mushroom coffee makes you think that you're more intelligent. Is that a bad thing? I don't know. Anyway, that's a thought to ponder. Yeah, yeah, no, that's a Thursday afternoon. It is an interesting one. And I, yeah, I can't. I can't. Yeah, we'll get into another topic for another time actually to see those. Thank you. And now on with the rest of the show. Scott, you've just described yourself off air as the Yoda of finance. And I would like to obtain some of your wisdom. So the first finance podcast of this series, what do we series? Series. Series. We're going to talk a little bit about interest rates, but I'm going to, I'm going to take you away from that right now. Everything seems shit these days in terms of cost of living. And I hear about inflation rising all the time. Why is this happening, Scott? Why? Please tell me why. Way back when, I can't remember it now, it's the global pandemic and we're all stuck at home except for you, obviously, and loads of other great people. But we're all stuck at home and we couldn't go out. We couldn't go spend on money, do any of this fun stuff. And, and what happened was everyone was just basically not consuming anything. And at the same time, because everyone was at home and not working, major global supply chains were all disrupted. So you've got this balance where demand is growing because everyone's saving money essentially, not spending it on going to work, going out, all this kind of stuff. And then on the other side, you've got supply chains that are all disrupted and stuff that we usually get without even thinking about, weren't able to come through. And then to just put it, to make everything even worse, you had Russia invading Ukraine. Ukraine are a big exporter of different commodities. So that's where your food price inflation comes into it. So there's lots of little things that really just compounded the issue that we had. And then as soon as we came out of the pandemic, there was this massive increase in demand. And obviously the demand supply balance was just ruined. So there's too much demand, not enough supply. And what happens? Prices increase. Okay. I think I get that. So the culmination of different external factors, I guess, in society will be huge landmark moments in history probably. But why is that a bad thing? So inflation actually isn't bad in itself. We target, most countries target a 2% inflation rate because you actually want prices to steadily grow because it encourages growth. And it's good for, when I say growth, and that means prices as well as wages, as well as economic growth. So it is good. But what you don't want is when inflation gets out of control. And when it branches way past that 2% target, like we've seen at the moment, what happens is consumers and everyone else loses their purchasing power. So what that means is that if yesterday I could buy bread for £1, tomorrow I can buy bread for £2, you can kind of like, it means I can't buy as much, right? So what it actually ends up doing is decreasing demand overall, and then decreasing growth. And what that actually means is that if you get inflation spiraling out of control, something called hyperinflation, people will tend to hold their money for like, literally a day and they want to get rid of it because the next day their money's going to be worth less. So it just ends up in this spiral. It can just really completely damage all economies. Okay, so you've started explaining inflation, chatting about inflation. But what does this mean in terms of, can we control it? How do we control it? Yeah, no, we can control it. And when I say we, it's central banks. Central Bank is a bank that is autonomous from government. So it's independent. We have one, which is called the Bank of England. US has one called the Fed and etc, etc. And what the central bank can do, they have two main weapons at their disposal. So they can control money supply in the economy, and they can control interest rates. So interest rates will be something that you've obviously heard of, just because everything's getting, everything just keeps going up and up. I don't have any interest in them. Terrible joke. But it's, they use them as a way of controlling inflation. So back in March 2022, when inflation really started getting going, we had our first rate hike, is what you'd call it. And that's where the base rate, so that's the rate that the central banks lend to other banks. So we never see, we never deal with the central bank. The central bank is something that only other banks deal with. We deal with retail banks, obviously. But whatever the central bank does gets passed on to the consumer. So the central bank increased their base rate from pretty much zero to, I think, half a percent being the first one. And it's been a steady, steady increase up until now. And the idea behind it is that if you increase interest rates, it means that borrowing becomes more expensive. So if you were paying 1% before, and now you're paying 5%, you're either going to borrow less, or you're going to have to come up with more money to pay that extra interest rate back. And as a result, it reduces overall demand. And obviously, as I mentioned, demand was a real big factor in causing the inflation. So if demand starts to decrease, it means that supply has a chance to catch up, and then hopefully prices start to come down. It's also beneficial for savers, because it means that if you were getting 1% on your money in your savings account, you're now getting 5%. So it encourages saving, again, taking money out of the economy and reducing demand. Because if you're not spending it, you're saving it, and it just means that you're not going to be buying more stuff. So the general idea is to lower demand in the economy, reduce growth for a little bit, which is obviously not ideal, but it is something that is necessary. And it does have external consequences, i.e. potential recessions and all this kind of stuff, but it's a necessary evil to get inflation back under control. So what I want to know, and I'm not pointing any fingers, but I was told to invest in some shares. Now, I did that. And then, you know, I'm not going to blame you exclusively for the economy collapsing, but I want a scalp. So when I... Okay, I'm joking. You advised me and said, you know, don't invest what you can't afford to lose and all of those things. But my portfolio, at the moment, is in a minus. Okay. I'm sorry to hear that. You don't look sorry. I'm smiling. But it seems to be getting less minusy. It seems to be going in a positive direction. Should I hold my chips? Is that because of the interest rate environment? Yeah, you're bang on there, actually, Dave. So if you think about what... Let's take Amazon as an example, okay? So if the interest rate has gone up and demand has come down, okay, less people are going to be buying Amazon shit, okay? That means that Amazon's profits are going down. As a result, their share price is also going to go down. And that's kind of what's happened across the board. So if you're trying to, which the central banks are trying to do, limit demand, it's going to have a negative outlook for company earnings. If you have bad earnings, it means that share prices go down. So that's why your portfolio is fucked. But the good thing is the stock market usually sees this earlier than what the economy actually does. So it's what you call a leading indicator. So the stock market has crashed. However, the economy is still slowly going down. But what we'll tend to see is that, potentially, the stock market will go up before the economy starts to come back. Like a predictive... Kind of, yeah. If you start seeing an improvement in your portfolio, you could start to get an idea of, ooh, maybe the economy is getting slightly better. So what you're trying to tell me is everything's going to be okay? Well, I mean, I'm no optimist. I'm no optimist. Yeah, I'd like to think so. All his financial stuff, he keeps his finances under his bed, his cash. Okay, look, I'm essentially a narcissist and would like to know, this is all interesting and I know it's complex and I know it's hard to talk about, but is there any kind of simple advice for what... If people are fortunate enough to have spare cash knocking about at the moment, should they keep it under the mattress? Should they get it out? What should I do? Great question. Love it, Dave. Thanks. So if you've got some spare cash, the first thing you want to do is you want to divide it up into three different risk pots, is what I'd call them. So the part of that money that you know that you're not going to need in the next 12 months, the part of the money that you think that you won't need within one to five years, and then the five year plus money, okay? Okay. Because that's really important because what you don't want to do is say you've got 500 quid and you're like, all right, I want to do something with it, but I know I'm going to need it in three months' time, okay? If you really bad advice for me to say, go and invest in the stock market, it looks really low at the moment, even though it might be a really good entry point, no one actually knows what the stock market... It's a bit like throwing it all on red, right? Yeah, exactly. It's impossible to predict. No one knows if it's going up or down. It would be silly. So that would be my first bit of advice is the 12, 1, 5 is what I call it. It was 12, 5, 1 earlier, wasn't it? It's a very different football formation. It's very expensive. Yeah, a lot of people at the back. So sorry, why 12, 5? I've not heard 12, 5 or 1. You said three pots. Yeah, so 12 months. So your first pot will be 12 months or less. Your second pot will be one to five, and then your third pot will be five years plus. Got you, got you. So it is 12, 1, 5. 12, 1, 5. So for the first pot, your 12 months, I would say don't invest it in anything risky right now. That is your cash money. Cash money. Cash money. I apologize for that noise. But the great thing is that, as we just spoke about, being a saver right now is actually really good. So if you have cash, you're going to be getting potentially between 3.5%, 4% on that cash. So it's not like you're getting nothing, whereas maybe five years ago, you'd actually be getting like half a percent maximum. So being a cash person right now is actually fine. And there are some really good places to put it. I'd say, depending on, and this is, again, really important, everyone always defaults to putting into like a cash ISA. That's not necessarily the best place to put it because cash ISAs will tend to give you a slightly lower interest rate than just a normal savings account. It does depend on whether or not, it depends on how much you're going to put in it. So if you're a basic rate taxpayer, you've got a thousand pound tax-free interest allowance every year. If you're a higher rate, you've got 500. If you're an additional rate, you've got zero. So if you think that you're going to make, let's say you're a higher rate taxpayer, let's say you think you're going to make more than 500 pounds in interest in that year, you're better off putting it into a cash ISA because you'll pay your income tax rate on that interest and it's just not worth it. It really dilutes the amount you're going to get. But if you think you're going to make 400 pounds in interest, looking at a different option and putting it into a savings account, which isn't wrapped in a cash ISA, is actually not a bad idea because it could be the difference between half a percent or 1%. I don't think it's actually as big as 1%. I think it could be more like three quarters to 50 basis points. So it's not loads, but it's worth thinking about. For your one to five year, I'd recommend going short. I wouldn't go risky because, again, you could be really unlucky. If on average the stock market is up three out of four years, you've got a good chance of making money, and that is what the data shows. It tends to be on average, and we all know what averages are like, a six or a nine or what. But you could be really unlucky and your day one investment could be in that one bad year, which means that you'll be down on your money. So you want to be looking to invest in a small amount of risk. But to be honest, I would actually be looking at more of your fixed term accounts these days rather than actually taking any proper investment risk. Again, similar, just use Google. You can type in a three year fixed savings account. It means that you put your money in, but you can't touch it for three years, but what you get is a better interest rate. I think some of them on the market, you're looking at about five, five and a half percent, which is not too bad. I do caveat both of those with that all the time inflation is above that rate, your real return is lower. You're getting a negative real return. Does that make sense? If inflation is at five percent and you've locked in a four percent return, you're actually getting a negative one real yield is what you'd call it. And then for your five years plus stuff, that's where you start taking your risk with it because probability wise you're going to make more money if you're going to not touch it and you've got that long term time horizon. If I was giving you advice right now, you're a young, strapping young boy. You've got a long time horizon. Worst case scenario, you lose all your money. You've got time to recuperate it. It's not the end of the world. I'd actually advise you to take as much risk as possible because that also means you've got the most chance at making above inflation returns and also making a really good return in the stock market. Again, using another average, even though I hate it, if you whacked in a S&P 500, which is the US index, which basically tracks all the top 500 companies in the US, you're looking at an average return of 8-9% a year. Again, that doesn't happen. Sometimes it's 15%. Sometimes it's 2%. Sometimes it's negative. Okay. So I get it. In terms of, from an advice point of view, you've got cash money spare. In the shorter term investments in the year, you're looking virtually no risk at all. Medium term, a little bit more risk. Long term is where you would start to be balls on the table. I'm going to ask you a question about if this is it. The part of this podcast is providing professional advice to people and not just going off trends and fads. Do you listen to your own advice with this investment? Oh, great question. Because I know with video stuff that I'm a lot better as a video than I am a patient, right? So do you listen to this rule yourself? Yeah, no. Totally, actually. Because when I was younger, I made the mistake of not doing that and I bought some spiffy Chinese tech stocks and all this kind of stuff. I wonder why you're trying to stand me up. Lost a bit of money. But the good thing is I didn't put a lot of money in, so it's not the end of the world. So now I'm a lot more conservative with it because I just have to be because otherwise you do end up losing money. It's really easy to lose money in the stock market, I think, is where people do forget. When it goes up for so long, you forget that it does also go down and that's what's happened. People have felt that in the last year. I guess on the five-year, when I say it falls out, you can, again, use another rule. I call it the 110 rule. I mean, I don't call it that. I think other people call it as well. You're not coining the term. Yeah. So if you're looking to take a lot of risk and your time horizon is more than five years, you can use what's called the 110 rule and that is a really good rule of thumb where you basically start on 110 minus your age. So for you, it would be 84. Yes. Yes? No. No, 82. How old are you? Don't ask such a personal question. I'm older and wiser than you ever will be. Around 82. Approximately. Approximately. And that's the portion that you allocate to equity and then the other part of that is where you put it into slightly lower risk stuff just to balance out the journey that you're going to be on because otherwise, yeah, it could be a bit of a ride. But it's different for everyone. If you feel more risk-taking, you can just go 100% or leverage it. Go 110. Why not? Borrow some. No, don't. We're not meant to be borrowing right now. Exactly. Well done. Well done. Thank you. I'm learning. So yeah, that's my general advice with if you've got a bit of cash. I can't give anything too specific. Of course not. Okay. And you wouldn't advise the old cash under the duvet? In a time of turbulence, can it be safer to just go, I'll hold on to this? Who has cash anymore? No. That would be my question. No, no. This is it. So holding it in a current account. Okay. So current accounts. I would advise strongly if you have any money in a current account, get it out of your current account. Move it into a savings account. These days, everything, your current account will have a savings account attached to it because your current account will be giving you near enough 0% interest. And even just your day-to-day spending, if you want to be super specific, every single day, put in your current account what you're going to spend. No more. You don't have to go to that extreme, but definitely don't have any more than you need substantially in there. If you've got your rainy day put in your current account, move it right now because you're losing out. It's the opportunity cost of not getting a decent interest rate on it. That would be my advice. And if you want to take it a step further, which I tend to do, and I wouldn't recommend this for everyone, but with my current account at the moment, I've actually got an interest-free overdraft. I didn't realise you owned a bank account. Yeah, I know. I know. Because when we go to bars and stuff, I thought you didn't have a bank account. So I've taken it a step further. I'm going to completely ignore that. I can see you properly shaking. And because I've got an interest-free overdraft, I actually use that. So I'm using the bank's money, which means that all my money has always got an interest in it. I think the most important part about that, though, is that it's interest-free and I'm never actually going to breach their interest because then you start getting sharded. But, yeah, a little tip you could do. A question, and it's probably all in the small print of the T&Cs, but I don't want to read them, do I? If you lock into a, let me phrase this better, how quickly can a bank or an account change their interest rate? Because I know I had an ISA that was, I can't remember at the time, 3%. And then the next I checked, they'd changed it. I think they'd sent an email, but it was like, oh, it's now 0.5%. Can they do that tomorrow? Yeah, 100%. So it's usually linked to whatever the base rate is. So if the Bank of England tomorrow decides to cut interest rates in half, that's going to be reflected in what you're going to get paid. So that is the only thing. That's why, though, getting a fixed rate in that one to five year band, which I mentioned, the fixed rate savings account, you're fixing that rate. So they can't just change that. I mean, it's worth double checking the small print. But, yeah, from what I understand, they can't just flip that off. So it's probably a decent time to actually fix in this rate because interest rates aren't really going to get much higher from here. That's a forecast. Claims. Yeah. I mean, inflation is stickier than they thought, but it's unlikely that interest rates will continue going up. But, I mean, I say this now and they'll probably still go. Who knows? Scott. We have a closing tradition on this podcast. I've written a question down. No. Before we finish, thank you. I think that's clarified a few things. I think it's confused the fuck out of me in other ways, but we've got other things to explore and play around with on other weeks and we can't sit here all evening. I think that was being very useful. The takeaways I've taken home are regarding the 1215 rule. Yeah. Something like that. That was quite helpful. Interest rates are very high at the moment. Yep. If you are somebody saving money, it's a really good time to fix that interest rate in and lock your money into an account with a high interest rate and make the most of it. Is that correct? Yep. If you're trying to borrow money, you're going to find that really quite tough right now. So, maybe not the best time to start a business or a bank's approving people taking money. Yeah. Relating it more to buying a house, I think, is probably relevant for everyone. It's become really hard for first-time buyers especially, as I guess everyone will feel. The issue is banks will give it based on affordability. If interest rates go up, your affordability comes down, so it means that you can't borrow as much to buy a house. In effect, a couple of years ago, if you could buy a £400,000 house, you can probably only afford £350,000 now. Got you. And it's just going to be as expensive. So, yeah, it's tough. Okay. And that will get you a one-square-metre flat in London. Well, thank you, Scott. Next week, we will pick up on something physio-y. Yep. Again, physio-y. See if one of the listeners puts in a question. If the listener puts in a question. We need a sign-out, Scott, from you as a financial advisory precaution. Yoda. As a financial advisory Yoda. Yes, everything I said today is my own opinions, and if you do need some more help... You're making a very strong icon, though, aren't you? Remember, always seek professional help. Thank you, and goodbye.