Illusions Of Comfort
Illusions Of Comfort
Uniform mediocrity… Or how Australia's 'Great Complacency' will come back to haunt it
Twenty years of almost unremitting growth has indeed reinforced the characterisation of Australia as 'the lucky country'. While the fortune of our location and natural endowment can be celebrated, it is easy to forget that prior to the 'great financial unravelling' (GFU), countries like Spain and Ireland too where enjoying a financial boom they hadn't witnessed for centuries.They came unstuck not from careless government deficit spending but partially from their governments inheriting problems from their bank which had overindulged in a credit binge. As they try to adjust via an internal recalibration of wages and prices (unable to devalue on their own as members of the European Monetary Union), the disruption and pain felt by many is very real and unsettling.
The two building blocks of Platinum Asset Management's investment philosophy relate to human behaviour. Firstly, there is a natural predilection to over-emphasise the recent event and secondly, there is a tendency to extrapolate the current situation into the future. We have been questioning for the last 18 months the prospect of China maintaining the high growth rates of the past given the skewing of that country's economy towards an unparallel level of investment. The market is now coming around to our view and is starting to understand the degree to which credit and central allocation have contributed to the astonishing growth record achieved by China.
It was with this in mind that we chose an economic assessment of the Australian economy for this year's report. Some shareholders may find it a little gruelling to process on account of it being somewhat academic and certainly belonging to the Austrian School of Economics. However, there is no escaping the central theme that Australia has been sitting on its laurels for a good while now with the reforms brought in largely by Mr Keating being a fading memory. Without a new bout of reforms that intensifies competition, frees resources and trims down bureaucratic meddling, the message is that we run the risk of severe withdrawal symptoms once our terms of trade deteriorate. To rely on this rare and huge benefit is simply careless. For reference, our current account was in deficit to the tune of 4% of GDP in the first quarter of 2012; a time when the terms of trade are at a multi-decade high, last seen alongside the Korean War.
For those less interested in the text, there are some valuable tables and charts that tell most of the story. Industries that have been left to their own devices like agriculture, have eclipsed the field in terms of productivity while others with strong monopoly positions, like the utilities, have a pitiful record of labour productivity. In terms of new legislation, our esteemed leaders in Canberra have excelled in adding to our burden, with the now disbanded Australian regulation taskforce estimating that one quarter of managers' time is devoted to compliance with the government's rules.
This analysis has interesting implications for you as an investor. Even if you believe that the phenomenon of strong growth in the emerging markets persists, you should perhaps think carefully about the likely supply response that elevated prices will bring to our principal exports. This will also bear heavily on the Australian dollar and may lead you to conclude that investing abroad carries relatively low risk from an Australian dollar appreciation perspective.
Illusions of Comfort by Justin Pyvis, Ausnomics
Commentary by Kerr Neilson