Glenn Freeman: In the U.S. the $34 billion worth of tariffs that the U.S. is imposing on Chinese goods is coming to effect. We're not seeing a lot of explanation out there about what it actually means for Australian markets and for Australian – essentially for Australian investors as well. What's your take there?

Peter Warnes: Yeah, well, Glenn, it is serious. I mean don't forget, the interest rate movements in bond yields, that's serious enough. But overline that we have this problem again, something we haven't seen for long, long while. The world has benefitted significantly from globalisation. Trade has been free – has freed up and the movement of goods and services around the globe has created significant economic growth and significant wealth for the world.

Now, we have some interruption there. The U.S. and China, you know, in a face-off. Now whether that escalates or not, who knows. You've got two fairly arrogant and aggressive, you know, personalities there. Neither looks like they want to back down. So we are quite – I am not saying at flashpoint, I don't want to get too kind of over – you know get too excited and sensational. But the things is that from Australia's point of view, if we look at where China's economy is now, we all know it's got over highly leveraged. But strange enough, the import and export, which are big, they are in trillions of U.S. dollars, the net exports don't contribute all that much. In fact, 9% to GDP.

The two big elements of GDP growth are consumption and fixed asset investment – investment in capital creation, right. So, consumption is about 55%; investment is 32% or 33%; and then you've the net exports. Now – and that's as the China's economies evolved from, you know, rice patties if you like, people have moved to the city, migration and what have you, so infrastructure has done that and so, initially going back 10 or 15 years ago or more, investment was a big creator and big driver of GDP growth. Then consumption has taken over, as it's become more westernized and more developed economy.

Now, import-export industries, they employ a lot of people. Disturb that and the impact on consumption, which is the main – China's consumption, which is the main driver of the economy, because fixed asset investment is coming off, because you could argue that the majority of China's investment in fixed assets and infrastructure is gone. It's too plenty to do but the majority of it's gone. So, consumption is becoming more and more important. Disturb the consumption pattern, in other words people haven't got a job or what have you, then you get the backlash in Australia, but there will be less demand for our exports, but this is specifically our resources. So, that’s where we will get washed up in.

We are in a good position, don’t forget, being so close to and in the same time zone as Asia and East Asia, that's our big trading partners. Tourism is going to be very good for us and what have you, but disturb the consumption patterns and that’s where we could see some problems…

Freeman: And none of these other places are arguably going to be big enough to take – to make up for any shortfall in that bigger picture?

Warnes: Well no, because, I mean, number one and number two, exports, iron ore at $63 billion, $64 billion and coal at $55 billion. If you get 10% or 15% off those, they make big hole in our terms of trade and the currency will come under some pressure as well. So, Australia is a bystander, but it will get hit with the backwash.

Freeman: You've alluded to it a little bit, but in terms of – so you're talking about bond yields, but what is – does all of this mean for bond yields and for interest rates?

Warnes: Well, I mean, in Australia, the central bank here hasn't got the problem, it hasn't got the assets on its balance sheet, there doesn’t need, but it also has got the cash rate at an all-time low. But it has got a different situation unlike in the U.S.

In the U.S., the corporates are highly leveraged and they are buying a lot of their stock back with debt, which is very dangerous. But the households aren't as – very leveraged at all. Our situation is, we've got a household sector that's very leveraged, very sensitive to increases in interest rates. Despite the fact that we've got an economy that's growing in someway 2.75% to 3%, inflation doesn’t seem to be a problem, but we have got wages growth below par. We've got expenses in the household increasing at 2 and 3 times wages growth and inflation, household incomes are under pressure.

The central banks here who might be doing anything, I don’t think, for at least a year, but out-of-cycle interest rate hikes are highly likely, and I'd say, before the end of the year, you'll see banks move on the variable mortgage rate. That’s not going to be good news for consumption here or household.

Our bond yields, like our 10-year yield is below the U.S. That's happened in 1998 and in 2000. Both of those situations the currency was below 60 against the U.S. Now, yes, it's been a big China influence since. So, it's not really strictly comparable, but that interest rate differential is not positive for the AWS cross. I think that the A dollar could come a bit lower, probably 70, it might even have a 6 in front of it at some stage. But I don’t see it going north.

Freeman: And just finally, so, where does that leave us; do you increase cash, do you buy gold. What's – I know we don't want to get into too many specifics here, but…?

Warnes: No. Well, I mean, in December when we last did a forecast video, I said that I thought the U.S. and Australia markets would finish 2018 below their exit of 2017. That looked a bit silly back end of January with the markets on the tier. Things have normalized a little bit now. I don't see any reason to change that forecast because we have – this second half of the year could get quite volatile and a little bit nasty. And so, I think that you should be raising some cash. The most consensus out there sees the ASX 200 at 6500, 6600 by the end of the year. That from where it is now is 5%, so 5% upside against a possible downside that could be anywhere between 15% and 30%. Now, on that scenario, I think you have to say that you should be taking money off the table. Getting your portfolios in good shape. Make sure you’re holding quality assets and build some cash.

Freeman: Thank you. We look forward to reading all the details on that and really getting down to some of the more micro level as well later on, both in this existing report and in the one to come once the earnings season hits.

Warnes: Yeah.

Freeman: Thanks, Peter.

Warnes: Pleasure, Glenn.