Bears, Eternal Bulls and Distortions

As I put the headphones on for the commute to work, something Ross Gittins said resonated. I’ve often heard the likes of Warren Buffet preaching similar things about never betting against the power of ‘the people’. Time and time again, our societies have faced adversity; in war, in drought, in cyclones, in economic crises and in technological revolutions. The naysayers herald in the doom and gloom but we are resilient. As my mother always said, “where there’s a will, there’s a way.” To Elon Musk and your tech boom that’s going to leave everyone jobless I say, jog on. There may be a period of structural adjustment which involves higher than trend unemployment but we will find a way. We will adapt and we will resume the march forward. We will do this in spite of continued irresponsible government intervention and distorted markets.

At a recent breakfast meeting we discussed how frustrated business is with government over promising and under delivering. Business wants to invest but it can’t get a clear signal from the government. The political tennis match on policy is hindering the economy by creating risks for the business sector. EnergyAustralia, AGL, and other major energy providers in Australia want to invest big in green energy but there’s so much political risk that the costs can’t be fully justified yet. The energy crises unfolding has reached such heights that Elon Musk has committed to building a giant battery for South Australia in 100 days or it’s free. A bold proposition from a man who fails to hit deadlines but strangely the South Australian government has now been ostracised by its federal peers.


There is no coincidence that the relationships of interest rates, inflation and foreign exchange have broken down. Economic theory would suggest that if American interest rates go up then inflation will go down and the domestic currency will appreciate. Well that isn’t exactly happening. As an Australian, I am skeptical of the domestic economists and media calling for interest rate rises by the RBA. We have low inflation, we have an Aussie dollar with a high valuation (which makes no sense in itself) and we have a housing market that is beginning a down turn. Raising rates would only further reduce inflation, it would increase the Aussie dollar which is bad for the competitiveness of the mining industry and tertiary education (two major exports), and apply further pressure on households that are at an over 190% household debt ratio.

The US has a problem of labour force participation and social well being. Although the unemployment rate appears to be kicking goals, the numbers of discourage workers and incarcerated paint a different picture. Janet Yellen made some very accurate statements about getting people off drugs and into the labour force. The government is once again failing the people, the markets and the future. As many know, problems with addiction require professional attention and happen to people across the socio-economic landscape. Addiction is devastating to the person, to friends, to families and to communities. It is evident that when we have national addiction issues we need to have a national response. We need to help people help themselves and bring them back to their loved ones, back to the community and back to the economy.


I spent this morning examining and discussing GDP per capita. A reasonably good measure for standards of living. It doesn’t account for wealth distribution but it does paint a picture.

The trend in Australia is concerning but leaves room for optimism. Although there is a spike and slide, the hope is that we will realign to the trend. If we map back to trend then there is hope for a better international response. Nations can share experiences, knowledge and forge trade agreements to lift each other up.

If we continue sliding then there’s a whole world of hurt. Unstable politics are threatening to continue the slide. There are simply too many distortions in the Australian economy. Credit markets and household debt, negative gearing, vacant properties, subsidies for mines, disasters like NBN Co., and more. The giant spike in GDP per capita that we all saw was due in part from a boom in natural resources. A boom that we failed to cash in on, and are now facing the dreaded “resource curse”.

This graph is quite representative of the rise of populism, protectionism, and the public discontent that comes from falling standards of living/increased pressures on the household.

In Australia, this worrying pattern is symptomatic of policy distortions such as negative gearing creating a misallocation of resources. Building and construction boomed, but it was mostly fuelled by credit expansion and tax breaks. Bring it forward to today and we have an estimated 1 million vacant homes or put another way, 10% of the housing stock is sitting idle.

The credit expansion and mining boom were facilitated in the most part by collapsing interest rates. Debt became cheaper and cheaper, and for a population that hasn’t seen a recession in 25 yrs, who could resist.


Negative real wage growth means household spending is falling. Workers aren’t willing to push the envelope and ask for more money, so they then have less to spend. I am in this situation myself. I recently signed a new contract and I considered asking for more but I didn’t want to jeopardise the chance of having a job. I knew there was a lot of competition and I valued the idea of just being employed.

The global economy is undergoing some structural changes but it will win out. China is finding it’s feet and America is waking up from it’s slumber. The UK, France and Germany are pushing forward. I am optimistic about the long run. I am bullish on the global economy. Although tighter monetary policy is happening, it’s about time.

Back at home, I believe winter is coming. Australia has had a decade of political ping pong and the game doesn’t look finished. My concerns here in the sunburnt country are the following:

  1. Falling GDP per capita
  2. Astronomically high household debt
  3. A lack of business investment
  4. Low labour force participation and high underemployment.
  5. Negative real wage growth
  6. Overheated housing market
  7. Flattening mining industry

All this supported by an unstable political environment. There’s a lethal mix in the economy but what will be the straw that breaks the camels back?

No idea!

What I do believe is that our politicians need to cut the BS. They need to step up to the plate, and be consistent.


People are incredible and you can bet on the human spirit to triumph eventually. The uncertainty is in how long will we be down for. The Australian government has done great things. Superannuation has been a tool for preserving wealth. Superannuation is a great example of small government intervention to facilitate market solutions. Although the money in superannuation is diverted because of government. The way that money is used is purely market driven. Whether it is in a self managed super fund or in an industry super fund, you call the shots and instead of going into the coffers of treasury and overpaid MP’s, the money goes back into the economy as investments.

There are no problems with a little government intervention. There are essential services and basic needs to be met, as well as freedoms to protect. There are problems with the government intervening to create distortions in housing and prevent people from affording a home for their family. At the end of the day, I’m a short term bear and a long term bull. Like Buffet I respect that the animal spirits have a role to play, the government has a role to play, the markets have a role to play and we, the people, are the directors. We are in control of our futures and in the long run you can always bet on the will of the people.

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