Well, it’s the last blog of the year for Blue Wealth before we head off on our holiday break. I always have mixed feelings about Christmas and the New Year – for most of us the end of another year is a reminder that we just went around the sun again and of the inexorable passage of time. It also gives us a chance to reflect on what happened during the year. And what a year it’s been. We’re now living through the most extreme government intervention in financial markets in history.
Before we go on holiday let’s review some of the big picture things shaping the world around us and hopefully figure out how to best position our portfolio in order to take advantage of the coming changes.
The continuation of covid was expected and has played havoc in the main street economy but as with all crises over the past 40 years, the predictable response by the RBA has been to drop interest rates to stimulate the economy. Each time this has caused a spike in financial markets – and the struggling retail and hospitality industry is juxtaposed against the all-time highs in both the stock and property markets. The economy has a lot of moving parts though, and the attempted management of it always throws up a few unintended consequences to keep us on our toes.
We have seen multiple supply chain shocks through the pandemic which raises questions about some of the shortcomings of globalization and just-in-time inventory management. Beginning from the difficulty in sourcing PPE for front line staff at the beginning of the pandemic, to the current difficulties in sourcing steel and timber for construction. To the narrowly averted Adblue shortage in the transport industry.
Of course, it is impossible to understand what is happening in Australia without looking at the world around us. Incredibly 40% of all US dollars ever in the history of America were printed in the last 12 months and in October the House of Representatives passed legislation to raise the debt ceiling again to avoid default in December. Then in April the Federal reserve discontinued weekly updating of the M1 and M2 money supply series with Chairman Powell explicitly stating that money supply is unrelated to inflation…! You can’t make this stuff up.
Of course, the inflation figures came out in April at a disturbingly high 4.2% (well above their 2% target) when we were told that inflation was “transitory”. They have been anything but transitory with the figures creeping up ever since most recently coming in at 6.8% and the highest level in 40 years. Whether that has been to the increase in money supply, a supply-side shock due to the shipping crisis or a combination of both has been a matter of debate amongst money managers and capital allocators.
In many ways, Australia is a microcosm of the other major industrialised economies and we have ventured down the path of money printing as well. Globally the central banks and governments have added $15 trillion USD in ‘stimulus’ packages in order to soften the blow of COVID-19. This equates to around 17% of global GDP. Given that global debt in 2019 already stood at $250 trillion it doesn’t take a genius to guess that all of it is borrowed. Borrowed money is effectively future demand and consumption brought forward to the present.
There have been many times in history that this has played out from Weimar Germany, Nixon taking the USD off the gold peg in 1971, the Black Monday sharemarket crash of 1987, the GFC in 2008. Each time it caused a boom in property prices as generational wealth was transferred from creditors to those that held hard assets like property and precious metals.
I don’t expect this time will be much different.
I hope you all enjoy yourselves during your Christmas and New Year break and we’ll see you all in 2022!
Senior research analyst