The last few months have not been kind to investors. On top of substantial share market plunges – experienced on bourses world-wide (and covered in this newsletter), we have heard repeated predictions of chaos and catastrophe. As we write this newsletter, Australian papers are reporting the comments of Lord Mervyn King with ghoulish glee.
Lord King, the former Governor of the Bank of England, is releasing a new book ambitiously entitled The End of Alchemy: Money, Banking and the Future of the Global Economy. In launching it, he has alleged that regulators across the world have failed to reform banking. He therefore writes that:
“Without reform of the financial system, another crisis is certain, and the failure... to tackle the disequilibrium in the world economy makes it likely that it will come sooner rather than later.”
So another week, another prediction of disaster. Last week, we were of course regaled with the “Tale of Tepper”. Economist Jonathon Tepper and hedge fund manager, John Hempton, toured Western Sydney and concluded that there is an oversupply of apartments, that prices are high and that lending practices are shaky. Tepper therefore predicted a 50% drop in Australian house prices.
Predictions of disaster are newsworthy...
In fact, Tepper was participating in a hallowed tradition amongst economists and analysts – predicting the next disaster. He joined the likes of Harry Dent (who in 2014 called a 27% drop in house prices in Sydney and Melbourne over the “next several years”), Lindsay David (who in 2014 predicted a “bloodbath” in the housing market in the future), Jeremy Granthan (who in 2010 called a 40% overvaluation in Australian housing) and – perhaps most famously – Steven Keen. In 2008, Steven Keen predicted a 40% house price correction during the GFC and – after a friendly bet with economist Rory Robertson - had to walk to from Canberra to Mt Kosciuszko wearing a t-shirt proclaiming “I was hopelessly wrong on house prices. Ask me how”.
The bottom line is that bad news sells. The media continues to look for content and – for some reason – headlines reading “all is lost” seem to attract more attention than “ups and downs continue as usual”. That is perhaps why economists have famously predicted seven of the last three recessions. As AMP Chief Economist, Shane Oliver, gently put it, there “... have been numerous calls of a looming crash in Australian property over the last decade or so, but they have proved to be well off the mark.”
... but the reality is much more positive
Now we’ve discussed our views of the Australian property market in previous editions of Investor Insights and in our quarterly Investor Call briefings. We will return to the subject in future editions, but for now suffice it to say that we do not see a house price collapse as a probable outcome in the near future. In this edition of Investor Insights we are examining some of the very real reasons for optimism about the future in general. Notwithstanding the doomsayers, we continue to believe that Australia faces a very bright future indeed.
We’ll start by quoting – at length – the ever-interesting Warren Buffett. We make no apologies for quoting Buffett frequently in these pages. His success and longevity as an investor and as an investment communicator is peerless. Last week, he released his annual letter to shareholders. In it, he made some very pointed statements about the doomsayers in his own country, the USA. With few changes, the following can be read as equally true when applied to Australia.
It’s an election year, and candidates can’t stop speaking about our country’s problems (which, of course, only they can solve). As a result of this negative drumbeat, many Americans now believe that their children will not live as well as they themselves do.
That view is dead wrong: The babies being born in America today are the luckiest crop in history.
American GDP per capita is now about $56,000. As I mentioned last year that – in real terms – is a staggering six times the amount in 1930, the year I was born, a leap far beyond the wildest dreams of my parents or their contemporaries. U.S. citizens are not intrinsically more intelligent today, nor do they work harder than did Americans in 1930. Rather, they work far more efficiently and thereby produce far more. This all-powerful trend is certain to continue: America’s economic magic remains alive and well.
Some commentators bemoan our current 2% per year growth in real GDP – and, yes, we would all like to see a higher rate. But let’s do some simple math using the much-lamented 2% figure. That rate, we will see, delivers astounding gains.
America’s population is growing about .8% per year (.5% from births minus deaths and .3% from net migration). Thus 2% of overall growth produces about 1.2% of per capita growth. That may not sound impressive. But in a single generation of, say, 25 years, that rate of growth leads to a gain of 34.4% in real GDP per capita. (Compounding’s effects produce the excess over the percentage that would result by simply multiplying 25 x 1.2%).
In turn, that 34.4% gain will produce a staggering $19,000 increase in real GDP per capita for the next generation. Were that to be distributed equally, the gain would be $76,000 annually for a family of four. Today’s politicians need not shed tears for tomorrow’s children.
Indeed, most of today’s children are doing well. All families in my upper middle-class neighbourhood regularly enjoy a living standard better than that achieved by John D. Rockefeller Sr. at the time of my birth. His unparalleled fortune couldn’t buy what we now take for granted, whether the field is – to name just a few – transportation, entertainment, communication or medical services. Rockefeller certainly had power and fame; he could not, however, live as well as my neighbors now do.
Though the pie to be shared by the next generation will be far larger than today’s, how it will be divided will remain fiercely contentious. Just as is now the case, there will be struggles for the increased output of goods and services between those people in their productive years and retirees, between the healthy and the infirm, between the inheritors and the Horatio Algers, between investors and workers and, in particular, between those with talents that are valued highly by the marketplace and the equally decent hard-working Americans who lack the skills the market prizes. Clashes of that sort have forever been with us – and will forever continue. Congress will be the battlefield; money and votes will be the weapons. Lobbying will remain a growth industry.
The good news, however, is that even members of the “losing” sides will almost certainly enjoy – as they should – far more goods and services in the future than they have in the past. The quality of their increased bounty will also dramatically improve. Nothing rivals the market system in producing what people want – nor, even more so, in delivering what people don’t yet know they want. My parents, when young, could not envision a television set, nor did I, in my 50s, think I needed a personal computer. Both products, once people saw what they could do, quickly revolutionized their lives. I now spend ten hours a week playing bridge online. And, as I write this letter, “search” is invaluable to me. (I’m not ready for Tinder, however.)
For 240 years it’s been a terrible mistake to bet against America, and now is no time to start. America’s golden goose of commerce and innovation will continue to lay more and larger eggs. America’s social security promises will be honored and perhaps made more generous. And, yes, America’s kids will live far better than their parents did.
Meanwhile, in Australia...
Now we all know, that Australia has a very different economy to that of the USA. However, we have our own set of distinct reasons why we, as an economy and as a nation, have significant grounds for optimism about our own future. For example:
- Geographically, we are located in the most populous region in the world – Asia. What is more, that region is almost certain to be the global engine of growth for at least the next century. We have dynamic trading partners like China, Japan and South Korea with the enormous populations of the ASEAN region also clamouring to join the world’s middle class.
- Economically, we are well placed to deliver to this region goods and services that it badly needs. This includes raw materials, like iron ore, gold and energy. But it also includes clean food, sophisticated and well regulated financial and professional services and a host of high value services like health care.
- Demographically, like the USA and unlike many other nations, Australia continues to experience solid population growth. Although somewhat slower than in the late 2000s, this growth continues to come both from natural growth (births) and migration.
It should go without saying (but won’t) that this does not mean that we will not face our challenges. These include the following:
- Demographically, our population – like that of the rest of the world – is aging, and we will need to ensure that we have appropriate measures in place to take care of our elderly. Fortunately, the work of successive governments has put us well ahead of most of the rest of the world in this respect and industry participants, including La Trobe Financial, continue to deliver aged care innovations that lead the world.
- Economically, household indebtedness is high and needs to be managed.
- Socially, we need to find the right balance between economic dynamism and important social cohesion goals.
Economic success is not guaranteed. Markets being what they are, there will be corrections and – from time to time – the doomsayers will be right. But behind the ups and downs of normal market activity, the fundamental picture for the Australian economy and Australian investors is overwhelmingly positive.
And that is something for which we should all be grateful.
STOP PRESS: Australia Ratings reaffirms “Strong” rating for La Trobe Financial
For a number of years, independent ratings house Australia Ratings has conducted an operational capability review of the responsible entity of the La Trobe Australian Credit Fund (Fund), La Trobe Financial Asset Management Limited (LFAM). This review focusses on the critical embedded processes and procedures adopted by LFAM to execute the Fund’s investment mandates and – crucially - deliver the expected income to investors.
In Australia Ratings’ words:
“LFAM’s ‘Strong’ operational capability assessment indicates continued demonstration of a strong capacity to perform its obligations and role as Responsible Entity for the La Trobe Australian Credit Fund. LFAM is supported by very strong capabilities and qualities."
Some of the key points from the Australia Ratings review include:
- LFAM’s ‘Very Strong’ governance structure provides a clear, supportive framework through which LFAM can operate effectively.
- Consistent and clear processes, regular monitoring and reporting, and periodic review for improvement all contribute to Australia Ratings’ Very Strong ranking on its approach in managing its risks and complying with its legal and operational requirements.
- Australia Ratings considers the custodial arrangements implemented by LFAM to be Very Strong, reflecting the comprehensive safe keeping, audit and oversight of this activity.
You can read a copy of the updated Australia Ratings report by clicking here.