Look on the Bright Side of Life
In this Christmas edition of Investment Enews, we pause to take a break from the grinding negativity of the commentariat to reflect with gratitude on how far the world has come.
People are, by nature, a pessimistic bunch. And, since the ground-breaking work of psychologists Amos Tversky and Daniel Kahneman in 1979, we can prove it. In that year, Tversky and Kahneman showed that “losses loom larger than gains”. In fact, their work indicates that the pain of losing is psychologically about twice as powerful as the pleasure of gaining. Maybe (think those of us with young children) that says something about the relative importance of the carrot and the stick.
In any case, the implications of this tendency towards the negative can frequently be seen in investment. People hold losing investments too long and sell winning investments too quickly. We would rather experience the slow, unseen losses accruing from lazy cash holdings than produce a better net return but taking on additional risk. But the effects can be seen in other spheres of life as well. “If it bleeds, it leads”, goes the old newspaper adage. Nothing sells like a disaster and our media loves a bit of gloom.
Take the perennial obsession with house price movements. It was just eighteen months ago that everyone in Australia agreed that house prices in Sydney and Melbourne had grown too quickly. We were all of one mind. “A correction was needed”.
Well, we got what we wanted. House prices in Sydney are down about 10% and in Melbourne about 5%. So far, so good. This cooling has been against a backdrop of low levels of arrears and defaults, low unemployment and relatively healthy economic growth. But to read the daily commentary, you would think that we were experiencing what Ireland went through during the global financial crisis. That was a somewhat different experience, with house prices declining by 40%, 15% default rates and unemployment around 13%. To state the bleeding obvious, I know which one I’d choose.
It’s unfortunate to observe that this pessimistic bias pervades our news cycle and our thinking. Disasters and tragedies tend to happen quickly, in photogenic snapshots. Progress, by contrast, tends to be steady and incremental and pass almost without notice. When, for example, was the last time a reporter did a live cross to report on a country that had been peaceful and democratic for a generation?
To that end, it’s useful to take a moment to pause and reflect on how far our species has come over the years. Earlier this year, Canadian-American cognitive scientist, Steven Pinker, released the best-selling Enlightenment Now: the Case for Reason, Science, Humanism and Progress. In that book, he tackled, head-one, the myth that life was getting worse (or its slightly more nuanced counterpart, the myth that life was only getting better for the privileged few).
Pinker argued that life has been getting progressively better for most people over the last few hundred years. Our biggest fears are often overstated – an American is 3,000 times more likely to die in an accident than a terrorist attack, for instance. What’s more, progress in recent history – across the world – has been nothing short of staggering. Life expectancies have been increasing dramatically, GDP has been surging, more and more people are getting access to education and we get better, year on year, at controlling the environmental impact of our economic growth.
Importantly, these benefits have not just accrued to the privileged few, or the ‘one-percent’, but have been broadly distributed across the world. World Bank data shows that the proportion of the world living on less than US$1.90/day declined from around 30% in 2000, to a projected 9.6% in 2015 (see graph below). One does not have to be Pollyanna to see this as a sign of progress.
Yes, of course, the critics will tell us that we face significant risks of all kinds. Our economy is fragile, wages growth is slow and indebtedness is high across the world. All of that is admitted. We face social problems too. There are geopolitical tensions, ideological divides and political stalemates. We have the vulnerable who continue to need more, and more effective help so that they can take advantage of all that the world has to offer. We must battle with our tendencies towards simplistic responses to complex questions. But the life expectancy for an Australian male in 1900 was just 49.5 years. It would be ungrateful in the extreme not to remember that we have come a long way in a very short time. As, La Trobe Financial Senior Executive Steve Lawrence reminded us all recently, amidst all the noise and struggles that we face day to day, it’s important that we remember to look on the bright side of life.
On the Distribution of Wealth
Towards the end of each year, organisations like Knight Frank and Credit Suisse publish their reports on the distribution of global wealth. Whilst the lifestyles of the rich and famous can appeal to our vulgar curiosity, a careful study of the data can also reveal much about the progress and evolution of the world economy. What’s more, it serves as yet another reminder as to how Australia remains the lucky country.
For example, did you know that global wealth grew by $14.0 trillion to $317 trillion in the year to mid-2018? This is outpacing population growth and global mean wealth is now a record $63,100 per adult. Interestingly, women account for an estimated 40% of global wealth, with female wealth share growing considerably throughout the 20th century and, to a lesser extent, into the 21st century. There are clear signs that more self-made women are succeeding in business, although some categories of women, such as single mothers and divorcees, are still disadvantaged.
The United State continues to be the epicentre of the world’s wealthy and ultra-wealthy, adding 878,000 new millionaires. Depending on the data source and measure, either China or Japan are in second place. Japan still holds the mantle for second highest population worth US$50m+ and mean wealth per adult in China (US$47,810) is not surprisingly significantly lower than Japan (US$227,240).
Australia continues to outperform, with 1,260 people fitting the US$50m+ definition, but our relatively small population size means that we feature well down the rankings on a global scale. Notably, despite a hit from sagging commodity prices, Australia’s wealth per adult is US$411,060, the second highest in the world after Switzerland. In terms of median wealth, Australia has edged above Switzerland into first place. Compared to the rest of the world, Australia has high average worth combined with relatively low wealth inequality. Only 6% of Australians have net worth below US$10,000 (US: 28%; UK: 18%).
Seasons greetings from La Trobe Financial
On that positive note, we would like to extend our warmest wishes to all of our readers and investors for the Christmas and New Year period. We hope that this time is one of happiness and refreshment for you and your loved ones and wish you a safe and prosperous New Year.
La Trobe Financial Services Pty Ltd ACN 006 479 527 Australian Credit Licence 392385.
La Trobe Financial Asset Management Limited ACN 007 332 363 Australian Financial Services Licence 222213 Australian Credit Licence 222213 is the issuer and manager of the La Trobe Australian Credit Fund ARSN 088 178 321. It is important for you to consider the Product Disclosure Statement for the Credit Fund in deciding whether to invest, or to continue to invest, in the Credit Fund. You can read the PDS on our website www.latrobefinancial.com, or ask for a copy by phoning us on 13 80 10.
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