2017 Quarterly Economic & Investment update

Looking back on 2016

2016 was a year of shocks and recoveries. Brexit, Trump, Italian banks and a Chinese stock bubble bursting saw plenty of volatility in investment markets. In all cases markets recovered and the lesson is a positive one. Long term investment trends trump short term volatility. For those who can hold their emotions in check, 2016 market shocks will be little more than forgotten blips in the gradual and compounding accumulation of investment wealth.

Economic stats for 2016

· Australian inflation remained low at 1.3%

· RBA cash rate finished up at an all-time low of 1.50%

· The Australian Economy grew at a rate of 1.8%, significantly lower than predictions this time last year.

· Average house price in Australia at the end of the year was AUD$623,000

· Unemployment finished at 5.6%

· European Central Bank, Bank of Japan and Bank of England continued to inject USD$130b of printed money (via quantitative easing) each month.

Social stats for 2016

· Nationalism and indeed fascism is on the rise as indicated by the following 2016 events;

o Brexit

o Trump

o Austria barely avoids electing ex-nazi sympathiser as president

o Marine Le Penn’s ‘National Front’ holds 28% of votes in France

o Sweden’s right wind party, founded by nazi-sympathisers has grown from 2.9% of the national vote to 19.9%

· Inequality is rising, creating social discord.

· Women are segregated in India on planes for their safety. More here

· Evidence based thinking makes for boring journalism.

Investment and industry trend predictions in 2017

The technology revolution continues and each year that passes sees a doubling of its impact on society and the economy. We discuss some of the expected trends that will emerge as serious economic disrupters in 2017.

Health Care

Health care is evolving from traditional medicine treating ailments and their symptoms. Medical advancement in the future will occur more and more at a cellular level altering the body itself to deal with the problem.

By 2020 it is very likely humans will be seen medically as complex strings of code. Medicine has become an information technology industry and its evolution will become exponential. Technology capabilities, not traditional medical practices, will define this industry into the future. Two exciting examples of this are:

Stem Cell Revolution

· Stem cells are undifferentiated cells that can transform into specialised cells.

· Technology has now overcome the ethical issues of gathering stem cells as they are now easily engineered.

· The stem cell market is expected to reach $170billion by 2020

· Transplants may become redundant if stem cells enable humans to regrow their own organs. More here

The following stem cell advancements took place in 2016

· In Osaka Japan stem cells have been used to regrow Human Eyes.

· Stem Cells have been injected into a damaged cervical spine of a recently paralysed 21-year-old man. Dramatic improvement in sensation and movement of both arms was exhibited within months

· Stem cells were successful in assisting stroke victims regain motor function

· Stem cells extracted from young people and injected into older people have shown to slow, stop and even reverse aging.

Further detailed summary on stem cell potential here

Immune Engineering

· T-Cell engineering manipulates cells within a patient’s white blood cells to code the immune system to target previously unrecognised ailments like some cancers.

· This ideological approach to treatment means the focus is on understanding the cellular structure of everything and then reprogramming cells with genetic manipulation and gene alteration to essentially ‘clean the code’

· Successful cases of immune engineering are becoming more common.

More detailed information here

Driving & Transport

The long-term future of transport is communal, driverless and electric vehicles that enable cheap door to door transport for all. Vehicle ownership will become redundant for practical purposes and the freed-up driving time will provide a significant productivity boost.

Significantly reduced numbers of cars, due to higher utilisation rates, will improve congestion, reduce waste, incentivise faster car life turnover and improve safety. All these factors incentivise the long-term trend towards decentralising how we live.

Emerging trends from 2016;

· Driverless Uber cars already roam the streets More here

· Apple, Google, Uber and Tesla are already in a technology arms race to be the provider of this extremely lucrative driverless car technology ecosystem.

Inequality and Populous politics

The latest technology and innovation boom has created a tremendous amount of wealth. All individuals, on balance, are significantly better off than they were ten years-ago. Globalisation, which reduced barriers to accessing human capital, allowed much of the wealth gains to flow to educated workers in both the developed and developing world. Reduced barriers to human capital also gave low-skilled workers in the developing world a strong cost advantage over low-skilled workers in the developed world.

As a result, the notable missing beneficiary in the technological wealth creation boom are low-skilled developed world worker. They are not worse off than they were five or ten years ago, but, their fellow high-skilled countryman have become much better off over the same time-frame.

This is highlighted by:

· The world’s 8 richest billionaires’ having wealth equal to the bottom 50% of the world’s population

· The worlds’ 10 biggest corporations having revenues greater than the poorest 180 countries.

There has always being significant inequality between nations, this hasn’t changed dramatically. It is the inequality within nations that has undergone dramatic change, and this creates a heightened sense of inequality and relative injustice.

A paper by Maferima Touré-Tillery and Ayelet Fishbach (2016) discussed the relationship between Perceived Distance on the Expected Impact and Likelihood of Charitable Action. The paper demonstrates that there is an inverse relationship between empathy and distance of human contact. I.e. we care less about somebody the further they are from us. This inverse relationship likely applies to other emotions, such as the sense of injustice associated with inequality. It is the inter-country inequality that has driven discontent and led to the nationalistic and fascist sentiments we see arising in the developed world

One positive outcome from inequality is that some of the recent beneficiaries of wealth are utilising their resources for humanities greater good. The following are significant examples:

· Elon Musk (TESLA) — making us a multi-planetary species

· Bill and Melinda Gates (Microsoft) — Utilitarian philanthropy

· Mark Zuckerberg and Priscilla Chang (Facebook) — Curing all disease | Read more

· Warren Buffet (Berkshire Hathaway) — Giving pledges which creates contagious philanthropy

The above trend of highly resourced individuals tackling difficult problems is a significant contrast to more nationalistic governments which lack the political currency to tackle global problems.

Our long-term prediction

Decentralisation

The home of tomorrow will not be penalised for distance.

3D printing will evolve to essentially replace convenience shopping. Need a new shirt, download the code for the shirt design you like and send it to your 3D printer.

A fleet of driverless couriers will take away the inconvenience of having to do your own shop. Further in the future, continued advancements in protein recreation will see your 3D printer take care of food production as well. Vertical agriculture will also drive this trend

Need energy? You’ll be off grid with cheap solar production and efficient battery storage

Need to travel? Just do it in virtual reality.

Need entertainment? Plug into hyper-realistic gaming and augmented reality.

Need sex? OK I am not going there! However, if you feel the need to go somewhere to talk and interact with a human, augmented reality will be so vivid that the need to leave home may be redundant. Still want the real thing? No problem, ubiquitous driverless cars take you anywhere, cheaply and with little impact on your entertainment or work productivity.

It is challenging to think of many advantages of urban living in the future and decentralisation of living may become a practical reality.

Asset Class Views

Fixed interest — Fixed Interest took a hit on the news of a Trump presidency. Trump has promised to build great walls, great highways, great schools and so spend money to make America great again.

Increased spending expectations created inflationary expectations. Higher inflation sees greater probability of US Fed monetary policy tightening. Nearly overnight an unexpected Trump presidency saw the US and even the domestic yield curve rise sharply, negatively impacting capital values on fixed interest portfolios. With continued uncertainty in this space, and yields at record lows, careful selection of fixed interest opportunities is required. Syndicated loans and floating rate inflation linked bonds are favoured.

International Equity — International equity, particularly in the US, is very expensive. Markets warmed to further spending under Trump, but with a world a-wash with low interest rates and cheap money, markets are stretched to eye-watering valuations. Passive exposures are not suitable in stimulus driven economies like Japan, the US, the UK, and to a lesser extent the EU. Active management, code for picking good companies in good industries, is required.

Domestic Equity — The Aussie share market has followed the US market higher. Be cautious with passive exposures and continue to be selective.

Cash — Cash provides a good store of capital whilst waiting for things to cool off elsewhere. Should the UK, Japan or ECB announce a wind back in stimulus, markets will trend lower.

Property — There is a lot written elsewhere on property so I will leave you with a less reasoned conundrum.

Sanity would lead most to believe that Australian residential property is at the top its cycle on any normal valuation, income ratio, affordability or credit worthiness metric. However, should there be more insane people than there are sane, the sane people become the insane and miss out on further growth.

Trump’s election victory makes us question consensus sanity.

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