Central bankers are usually easy targets. They live life in the world of academia and theoretical models. And they wonder why the economy doesn’t conform to these models. So it’s easy to have a crack at them when they speak.
But not today. Today I want to highlight some comments made by Reserve Bank Governor Phillip Lowe at the Australian National University yesterday. Because they were unusually sound for a central banker, and well worth considering if you’re wondering the best way to manage your investment portfolio in the years to come.
I want to highlight them because there continues to be so much ‘crash concern’ around right now. Seemingly everything is in a bubble, and crashes in a range of asset classes are imminent.
Yes, many stocks look expensive. But that’s a function of low interest rates around the world, which aren’t going to change anytime soon. If you’re waiting for stocks to get cheaper, you’re going to be waiting for some time.
Besides that, the global economy is reasonably healthy. Granted, it’s not firing on all cylinders. But that actually works in favour for stocks right now because there is little chance of ‘overheating’ and the need for sharp interest rate rises…which would hurt stock prices.
Lowe summed up the situation pretty well:
‘Over 2017, the global economy has improved. It is not just a story in one or two countries, but one that is broad based. After nearly a decade, the healing process after the financial crisis is well advanced, although there is still plenty of scar tissue.
‘So we are in a better position than we have been for some time. To be clear, we are not talking about a boom and there are still plenty of risks out there. But globally things are better.’
But it’s not all unicorns and lollipops, and Lowe recognises this:
‘At some point, the cyclical upswing will run its course. Beyond that, much depends upon demographics and technology. Here there are reasons for pessimism and for optimism.
‘Many developed economies, as well as China and Korea, face big demographic challenges. Populations are stagnant or declining. They are also ageing. Older societies want to save, rather than invest, especially so when there will be fewer people tomorrow than there are today. And older societies are likely to be more risk averse. So this is a major issue.
‘On technology, I am more optimistic.’
Here, Lowe is making the point that the sustainable sources of economic growth are productivity and population growth. If much of the world is ageing, that puts more pressure on technology to generate productivity, and therefore economic growth.
In a positive sign for the future, there is a lot going on in the world of technology right now. Applied properly, technology has the ability to create productivity growth and support economic growth beyond the current cyclical upswing that we are experiencing.
It’s been a long time coming too. Despite the feeling of ever present technology advancements, global productivity growth has been lacklustre. This is why the world still depends heavily on debt expansion to provide growth.
While I could be wrong on this, it feels like the technology advancements over the past decade or so are now finally getting to the point where it will translate into productivity improvements.
For example, battery storage technology is getting to the stage where electricity generation will be the next industry to face ‘disruption’. As the Financial Review reports today, Lyon Group, a private company, has made or announced nearly $2 billion worth of renewable energy and battery storage investments in Australia recently.
The paper quoted partner David Green as saying
‘“These things are happening despite governments, not because of them…the private demand for renewable energy can’t be denied.”
‘He said the weight of private capital coming to renewable energy had shifted the momentum in the sector, despite the political uncertainty over energy and climate policy in Canberra.’
It’s a good point. Political dysfunction in Canberra is not a new story. It’s been going on now for a decade or so. But the market is getting on with it. Advances will occur with or without government policy support.
It’s particularly tricky in Australia because we are a fossil fuel nation. There are many special interest groups that won’t like the move away from coal fired power generation. But it will happen regardless.
On this front Lowe made some good comments. He made the obvious point that economic growth in Australia won’t be as good in the next 25 years as we’ve had in the past quarter of a century. That is, we’ll have at least a recession or two — although of course he didn’t say this. Central bankers just don’t mention the ‘R’ word.
But he did say the government has the potential to be an impediment to Australia’s growth. This isn’t news to you and me, but coming from the head of the Reserve Bank, it’s good to hear.
‘As things currently stand, it looks likely that average growth in per capita incomes over the next quarter of a century will be lower than over the past quarter of a century. We should, though, be capable of stronger growth than we have seen over the past few years. But we can’t take this for granted. It is important that we have a sharp focus on the reforms that can make a real difference to our living standards. If we don’t do this, we will fall behind. The positive news is that there is no shortage of good ideas here. The not-so-positive news is that there is a shortage of good ideas that can successfully navigate the political process.’
Australia has to move away from relying on commodity exports to leverage into property speculation. That’s not a sustainable model. We need to work smarter, and politicians simply need to get out of the way.
Who knows whether that will happen? Right now it doesn’t look likely. But in the scheme of things, politicians are irrelevant. We will progress anyway. And so will markets.
Look, things are always uncertain. Uncertainty doesn’t halt progress. But worrying about what you can’t know — about a future that no one knows — and letting it impact your investment strategy, will cost you a lot of money in the years to come.
I’m no fan of central bankers. But in this case, I think Phillip Lowe is on the money. Things aren’t great, but they’re not dire either. If you stop living in the shadow of 2008, you’ll see this too.