Investment Themes

I believe that humankind is on the cusp of enormous change unrivalled since the industrial revolution which gave rise to the market economy, much of it necessitated by the unsustainability of the dominance of the market economy. Missteps in asset allocation over the next several decades have the potential to be especially punitive.

Human beings are enormously influenced by recency bias and especially the naive. One only needs to consider the Pavlovian response of property “investors” to interest rate reductions in Australia in recent years. The near future is likely to be so very different to the recent past that prudent investors need to carefully reconsider all that they “know”.

Below are a the Key Long Term Investment Themes that I am incorporating into my macro investment overlay. As I release each report in a blog post I will add these details below, and I will then periodically revisit this page to keep this information current and to incorporate my latest thoughts or add to the themes.

1. Emerging Asia ex-China 

2. Product and Food Miles

3. Defence and Military Spending

4. Autonomous Vehicles

5. Debt Monetisation

6. More Time for Personal Fulfillment

7. Education Revolution

1. Emerging Asia ex-China

In my early 2019 posts on China I was relatively early in recognising this as a historical reframing of the democratic West’s engagement with the emerging autocratic power. As the talking heads on television – selling flows in share/stock purchases – implored investors to position for an expedient solution to the trade spat, I remained sceptical and sold out of all of my Chinese stocks (that I accumulated end of 2018 at low prices) as well as emerging market funds.

As I explained in those posts, I had personally witnessed and experienced (in a very minor way) the actions of the Chinese Communist Party during a month-long workshop in China shortly before it joined the World Trade Organisation, and I long had concerns that it was not abiding by the implicit “arrangement” that it would open its economy and greater freedoms would flow to its people in return for the opportunity to develop its economy. 

Nonetheless, I have to admit that I had been lulled into thinking nothing would change by the almost 2 decades of increasing enmeshment of Chinese businesses in the global economy, even if I had little time for the elites arguing that rising out of poverty of its people was an achievement of global businesses. After all, the West is at the same time very quick to talk about liberty and freedom, and espouses an ethic that it is better to die on one’s feet than live on one’s knees.

And in reality President Trump and other Western leaders are not so much concerned for the freedoms of Chinese people, but of having domestic businesses handicapped when seeking to extract benefits from dealing in and with China and the loss of technological superiority. 

The one-sided arrangement which had developed was suggestive of an emerging power in a hurry to develop and assert its influence on the Global community.

While I would be relieved to see the end of the Trump era of erratic and dumbed-down crass diplomacy, if it should happen I will be alert to his successor continuing this critical adjustment. I am unsure whether anybody else would have had the “front” to do what President Trump did on engagement with China so abruptly, at the same time standing up to powerful US business interests, and it will undoubtedly be his biggest achievement in office. 

It was especially important for us Australians where our economy had become so beholden and vulnerable to China and the interests of the Chinese Communist Party, and thus were experiencing a dangerous political drift towards this authoritarian influence. 

The investments in Chinese companies that I made in late 2018 were mostly in technology and especially in automotive technologies due to their relative value compared with US companies. One of my investments was in BAIC which is one of their largest electric car manufacturers. After purchasing the shares, as I dug around its website I came to realise that BAIC is a major supplier to the Chinese military. This did not sit well with me because of its authoritarian system of Government (and how that is expressed within its own borders), because of its militarisation of disputed islands and seaways, and its increasingly conspicuous agenda to increase its international influence through infrastructure projects.

I decided decisively that I do not want my family’s capital to be used to strengthen an authoritarian regime’s influence in the world. 

Not surprisingly, given just how enmeshed Chinese companies had become in the global economy, this realignment is producing all sorts of adjustments many of which represent an opportunity to the alert investor. 

Firstly, however, I should say that I consider it to be an error to simplistically put this adjustment down to anti-globalisation. Certainly the politics in President Trump’s heartland, and throughout the xenophobic heartlands of the populists, suggests that these politicians are responding to this base. 

I see it the other way around, however. The politicians have created a background where they have a supporter base to implement the policies they want – lest the powerful business elites would be able to mount a successful campaign to protect their interests.

Obviously I agree with the need for the readjustment. However, it is disappointing that a genuine leader did not come to the fore and manage it more openly and inclusively as the side-effects of President Trump’s methods are unfortunate and dangerous, especially when it comes to social cohesion and climate change (see Themes 2 and 3 below).

So this is not evidence of anti-globalisation in my view. Rather it is a specific response to a very specific threat. 

No matter how much populists talk about bringing jobs back home, that is going to be a very long process and even when manufacturing is brought back onshore it will often accompany significant investment in automation and it will involve significantly fewer human work hours (see Themes 2 and 6).

The offshoring trend for labour is unlikely to reverse, in fact it may even ramp up. Let’s take the example of a manufacturer that has continued to produce in a developed country while the majority of its competition has offshored to China. They have resisted because they did not want to disrupt the way in which they do business even if they have been realising that they were fighting a losing battle with those producing in China at much lower cost, and the retailers were providing feedback that the struggling consumer was not in a position to pay a higher price for the locally-produced good even if superior in quality. 

Now with tariffs on Chinese products retailers are suggesting that those manufacturers operating in China should relocate to other low cost countries to prevent price inflation.
So those that have resisted offshoring are faced with a brief moment in time when the playing field is level once again, where everyone – including those who offshored to China – is in a scramble to identify suitable manufacturing skills in other cheap areas. I suspect a lot of those who have resisted will see this as a lower risk time to embrace the “inevitable”.

At the same time that developed country businesses are looking to re-engineer supply chains – or base countries for goods manufacture – China still wants to develop its own sphere of influence and continue the progress that it has made. It is likely to intensify those efforts.

While China has been active in Africa and South America, I suspect that they will now place greater emphasis on defence and will concentrate more intently on their immediate neighbourhood. Western Governments, encouraged by the US, will want to counter China’s moves by showing more interest in these regions than they have in the recent era. 

This was on show earlier this year at The Pacific Forum in Tuvalu in August where Australian Prime Minister Morrison together with senior US bureaucrats worked to counteract the Chinese agenda, which prompted the Samoan Prime Minister Tuilaepa Malielegaoi to say that the island nations would not line up with Australia and the United States against China, stating “their enemies are not our enemies” and then suggested if countries “against China” objected to Beijing’s support for the region “they should come in and provide the assistance that China is providing”.  

There will be competition to win the hearts and minds of the leadership of other countries especially those in the Indo-Asia-Pacific. The Chinese will suggest that the West has not shown any interest in them and has developed a very perfunctory world based on Western dominance and exploitation of weaker nations, and will point to the far from altruistic motives in many of the post-WWII conflicts that the West has waged.

Already it is clear that China will use Anglosphere indifference to the climate change crisis as a point of differentiation which will appeal directly to Indo-Asia-Pacific nations.

The West will ask the leadership to think forward to what will be the world order with the hegemonic power an autocratic nation that has shown a willingness to mercilessly suppress its own peoples.

The leadership of these courted countries will mostly be guided by self-interest, so there will be a contest mostly in the form of direct and joint investment and other perks.

The West will most likely prove to be the most attractive suitor for it will be seen as the safer bet, but also because domestic politics may also prove easier since China is a fierce competitor to their own ambitions of producing low-cost goods for consumption by wealthy consumers.

All of this can be seen playing out especially in the two major multi-lateral trade pacts being negotiated at present, the Comprehensive Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP).  I would suggest that a simple examination of which countries feature in both of these pacts will provide a good pointer to who are the most attractive countries who will receive the most attention, and inducements, from the suitors.

These courted countries will gain advantage from being courted by both sides. In many ways that is exactly the game Australia has been playing – where we rely on the US for its implied security but do not wish to offend China due to our increasingly close economic ties – until this point where President Trump has forced Australia to more overtly express its allegiance. 

One only needs to briefly consider the released transcript of the telephone discussion between newly installed President Trump and then Australian Prime Minister Turnbull where the latter was clearly subservient and expressing in the strongest of terms his desire to prove Australia’s loyalty. The smaller but more critically strategic countries, on account of their proximity to China, will be able to prolong the courtship almost indefinitely and with little repercussions when they run the gauntlet on important issues such as potentially allowing the subversion of US trade policies by allowing Chinese companies to divert exports via them for a price.

Companies will also likely want to establish manufacturing bases in these proximate countries where the Chinese manufacturers have already done some of the early work and have invested in infrastructure and in skilling up locals to work in factories.

I have been searching for the correct investment vehicle to position for this progression. Unfortunately I have not been able to find an ETF that is for Emerging Asia ex-China as most emerging market funds have a high weighting to China, and Asian funds ex-China typically include developed markets and thus have high weightings to Japan.

This theme uploaded 2nd December 2019

2. Product and Food Miles

In this section I will concentrate heavily on my upbringing in rural Queensland because the trends are perhaps even more marked, and thus serve as an excellent example, but these same trends are just as relevant in urban centres.

When I grew up in the 70’s and 80’s in northern Queensland, every Saturday morning the main street of my small home town of Innisfail swelled with people getting about their business – doing their shopping (the grocery stores closed from midday Saturday until 9am Monday), sporting groups running fundraisers, and people generally milling around and catching up with friends. If it was raining, as it often does in Innisfail, then there were even more people because the farmers could not work in the paddocks.

The specialist shops were busy with people spending their money, sometimes a bit more if the sugar price was high. Unless they needed something very specific and not available in town, nobody would have ever dreamed of driving the 85 kms to Cairns where they did not know many people, and people wanted to support the local businesses who were run by and employed people who they have known all of their lives. 

There was obviously a strong social compact – the shop owners wanted to do the right thing by their customers, and they had a strong self-interest in doing so since everybody in town would soon know if an owner was not sticking to this social compact in all of its facets from the quality of goods or services that they provided to the way they treated their customers and staff.

Of course by the 70’s Innisfail businesses were offering goods that were produced outside of northern Queensland, unlike in my Great Grandparents’ and Grandparents’ time when, because of the remoteness and more difficult transportation, a higher proportion of goods sold would have been produced locally (including, to my recent surprise, pasta from a local factory to serve the very strong Italian population.) However, given that tight social compact in the town the shop owners needed to have a great deal of surety in what they sold because their livelihood – and more importantly, their pride and reputation – depended on it. There were several fruit and veg shops run by Asian grocers, whose families migrated during the gold rush in the 1800’s, and they often bought from local farmers when they had surplus melons, cucumbers, pumpkins and so on.

Innisfail has a strong history of multi-ethnicity and multiculturalism, and there are proud monuments demonstrating the involvement of non-British migrants in the town’s development including the canecutter statue on the banks of the Johnson River a gift from the Italian Community, the wonderful Chinese Temple on Ernest St, and the nearby Paranella Park built by an early Spanish migrant. However, many felt pressure to conform – to be “Australian” – and faced additional obstacles to succeeding while the White Australia Policy remained in place (see here).

Nowadays Edith St is usually very quiet over the weekend. Cairns suburbs now extend a further 20 km or so south to Gordonvale, and especially young Innisfail families think nothing of jumping in the car and travelling the distance to the large shopping centres even if the drive time has increased due to traffic. There they buy the same goods that all Australians buy throughout the country, and in many cases what people throughout the world purchase. They do not know the shop owner, and, as suggested by my own experience with my sofa that I outlined an earlier post, the shop owners know they are selling the same standard of goods – if not the same goods – as any other retailer and product failure is thus not a major concern but is incorporated into pricing. As a consequence, product failure is undoubtedly very high for many categories of goods.

There are no fruit and veg shops remaining in town, though some farmers will occasionally sell product on the side of the road. With the fruit and veg shops having closed many years ago, believe it or not, even though Innisfail is the centre of the largest banana growing region in the country, all bananas sold in supermarkets at a minimum travelled 3,500 kms (a return trip to the Brisbane markets though I am reliably informed that most go via Sydney) even though some would have been grown, processed and packed for sale as little as 5 kms from the supermarket! Now that is waste!

As I explained in that earlier post, I cannot see a future for humanity where so much resource from all over the globe is consumed in the production of cheap goods which are used briefly and then require additional resources to deal with their disposal. I also stated that I did not believe for a moment that the true cost to humanity was incorporated into their pricing for if it were we would not be witnessing such incredible waste, and that this would need to occur, and when it did it would result in higher quality manufactured goods potentially much closer to the point of sale and access to suitable repair skills at a relative cost which makes repairs economically viable.

In October the incoming President of The European Union, Ursula von der Leyen, proposed the introduction of a carbon border tax as a part of a new Green deal to address the climate issues that our Globe confronts. The proposed tax would seek to prevent businesses from arbitraging between locations which have different levels of climate-related measures and taxes, thus ensuring that EU-produced goods manufactured with higher climate-related standards, and costs, are on a level playing field with goods manufactured elsewhere when sold within the EU.

This is a move in the direction to which I highlighted in my post and I consider it to be just the start of a long but very necessary process.

I can also see a great deal of potential for innovation in conjunction with this stepped up regulation to ensure significantly better utilisation of natural resources and to extend the working life of products. For example, for repairing of goods to be common-place once again there is going to need to be access to parts. However, this may not necessarily mean that each manufacturer has to guarantee to supply parts which would necessitate significant logistical spend and costs. 

With rapid advancement in 3D printing technology, it will likely be possible to obtain many parts on demand as and when they are required. I can easily imagine the widespread proliferation of 3D printing businesses – some printing plastics, some basic alloys, some high stress structural alloys – where anybody can email a CAD of the required part which will be printed almost immediately. Many families would have basic 3D printers at home and in the example of the cheap trampolines that I mentioned in my earlier post, where the caps securing the safety net seem to always be the first part to fail, would most likely be able to print the plastic caps themselves as these fail and require replacement.

In this case it may well be regulated that product sold or imported must include access (open or licensed depending on the level of good) to digitised and printable parts.

While this regulation will greatly extend product life and reduce product turnover, and other measures will likely reduce resource waste such as regulation and punitive costs for waste processing and disposal, I expect that resource recycling will continue to grow in importance. Much of this is in train now and is driven by the collapse of the “compact” of the last three decades where the developed world increasingly adopted a throw-away model with cheap product originating mostly from China and in return China took back the waste from those developed countries for processing.

With the increasing trade tensions over recent years, China has increasingly refused recyclables on the basis of contaminants and other factors. This has created a problem for backed-up recyclables in the developed world. With trade tensions very likely to persist for many years (as discussed in Theme 1 above), and with China wanting to prove its environmental credentials (processing recyclables is a high polluting endeavour) as a point of difference with particularly the Anglophone countries, thus underlining their inclination to lead humanity in this area of critical concern, it is unlikely that the previous compact will soon be reinstated.

Waste processing and resource recycling is likely to be an area of very significant investment going forward. 

As a consequence of our links to our temperate colonial history, Australia’s fruit and vegetable markets were especially susceptible to centralisation. For many years it simply was not possible to buy seasonal fruit grown locally throughout much of Australia because what was desired were mostly temperate varieties which could only be grown in a small proportion of the human-inhabited regions of Australia.

When I lived in Montpellier in southern France, which is at the most northern reaches of the Mediterranean Sea, I was shocked to realise that I was equidistant from the equator with the middle of Tasmania!

Plant breeding programs have succeeded in extending the range in which those temperate species are commercially produced, e.g. by reducing the chill hours required for pomes to set commercially viable crops. European friends are always astonished to learn that in Queensland our strawberry season is in winter whereas in their natural range it is in summer when the daylength, at their latitude, is very long so that the soft fruit ripens and sweetens very quickly. Until I visited Finland in 1996 I disliked strawberries for the only ones that I knew had a 0.1 mm rim thickness of redness and were entirely white inside and were tasteless. And all Australians know the story of our store-bought tomatoes. 

One of the greatest joys of spending time in Europe for my family is the access to quality produce. When living in Europe, and now when visiting on holiday, it is entirely appreciated by us that, unless we are in the biggest cities, we will only be able to eat the produce that is in season at the time in the region that we are visiting. It might be disappointing to miss the cherry season. But we known that when we visit a market or a fruit truck that what is available is in season in that region and it will be the best you can possibly get, quite likely the best you have ever had!  

Obviously crops produced within their natural range of conditions are easier to farm. Thus productivity is greater and the produce is more natural with less human intervention in the form of chemicals, energy used and water consumed.

Undoubtedly breeding has improved the productivity and marketability, if not necessarily organoleptic characters, of temperate varieties produced in subtropical regions, but one has to wonder why so much effort has gone into it when there are other varieties which are more suitable for production in the region and in many cases are already present there plentifully to experienced observers.

By way of example, my Sri Lankan-born wife, on our first trips to Innisfail, pointed out that she knew the shady trees on the beach as “kortung” and that they contain a delicious nut reminiscent in taste of almonds, the passion fruit-like fruit that grows on vines which climb over our sugarcane crops and necessitates chemical spraying is edible, and the small fruit that grows on the thorny shrub which my father calls “devil’s fig” and grafts his eggplants onto is great in curries. The funniest incident was when driving to our fuel supplier of many years my wife screamed with excitement for me to stop so she could get out and pick some “jumbu” from the giant tree across the road. (These are the fruit red in colour and pear-like in shape commonly sold in markets and by the side of the road in Thailand in the fruit trays.) As she approached us munching on the biggest fruit of this type she has ever had, while Greg pumped our fuel he said, “you know we’ve looked at those big beautiful red fruit for years wondering whether we could eat them”.

The potential for alternate crops more suitable to being grown locally throughout Australia is enormous and the more multi-cultural and open-minded we become the greater the opportunity. Of course indigenous culture has much to add on this subject. 

I am not saying that apples should not be sold in northern Queensland and bananas should not be sold south of Coffes Harbour, and here I have to give a plug for the industry of my home town for I believe that while tree-ripened Cavendish bananas are better than commercially farmed bananas picked green and ripened artificially, the difference is quite marginal and it is no wonder that it is one of the most popular fruits throughout the world. 

I am simply saying that in a more environmentally aware (and health-conscious) society there will be far greater attraction to consuming locally produced food.

That opens up a great deal of potential for investment and prudent investors should be aware of this reality. And it would be a major departure from our centralised marketing and distribution system of food, and that has widespread consequences.

This theme uploaded 5th December 2019

3. Defence and Military Spending

The ordering of this investment theme after the environmental theme was intentional. While the first theme – geopolitics – plays a part, in my mind climate change will be the primary cause of defence-related spending going forward.

Some of this defence spending will be humanitarian in recognising the need for multi-national responses to increased climate catastrophes.

Unfortunately, much of it will occur through national security – i.e. insecurity – relating to increased pressures on national borders and sovereignties brought about from the severe impacts of climate change.

Any reader of my essay “Xenophobia Must be Challenged for an Effective Response to Climate Change Inclusive of Global Population Growth” would have read between the lines that, unless humanity is prepared to remember the lessons of history and become united to overcome this serious challenge to our way of life on Earth, then all of our futures are bleak.

While I am optimistic in humanity, current events suggest that divisive populism has the upper hand at present so defence budgets are going to be increased for this reason alone in the immediate to medium-term future. 

Certainly human history is splattered with the blood of hordes manipulated by megalomaniacs that wanted to transform the world to their vision. But a far more serious threat to humanity is desperation, a loss of faith in global order, and a loss of hope in the future.

If a young student in Sweden feels so desperate and at risk of being disempowered by the mostly grey-bearded Caucasian world order, then just imagine how angry and desperate millions throughout the developing world will become once the reality of climate change becomes undeniable. 

On the divided humanity course, those more fortunate ones who through the fortune of birth or earlier immigration live on an island of relative prosperity will seek to protect and defend that relative prosperity. That desire will only increase the more people become displaced from their homes due to climate change. Perhaps it is reasonable to assume that the openness of a sovereign’s border – through legal and illegal means – will be inversely proportional to the amount of resources spent on defence. 

On the other hand, sovereignties worst affected by climate change, when faced with serious weakening or total loss, may consider that there is little to be lost in using whatever means it has left at its disposal to attempt to use force to acquire more resources to give themselves a chance at survival by increasing defence spending.

The relative-fortunates are also likely to face more turbulence within those islands of relative prosperity, whether at home or when travelling to other islands, originating from the increasingly desperate “unfortunates” which will require increased defence spending within national borders.

I cannot escape the conclusion that a divided humanity ensures a truly awful future for all of us, and even anti-immigration proponents will find difficulty in arguing that we have a genuine quality of life when we feel far less safe than we have for the last 70 years and our relative prosperity is maintained at the point of a gun and is relative to a widespread misery that has not been experienced in centuries, perhaps millenia.
United or divided, humanity will demand very significant defence-related spending for many decades. 

Whether you wish to invest in this theme, that is a question for you.

This theme uploaded 5th December 2019

4. Autonomous Vehicles

In my posts on autonomous vehicles I have concentrated on the growing epidemic of distracted drivers being the primary reason for why I believe this to be an area of immense opportunity. Yes we are in a world awash with cash for venture capital and technology innovation – albeit perhaps a little less enthusiastic since WeWork blew up – with much of this being directed to electric vehicles and driverless systems.

While I cannot see these funds originating from central bank largesse drying up anytime soon (see Theme 5), even if we were to have some type of market dislocation or paradigm shift which caused a real awakening of risk-aversion particularly with respect to investing in genuinely high-level technological innovation (as apposed to developing an App for an old industry and ploughing in $Billions to make it a “tech Unicorn” – intentional lower case t), I am certain that the enthusiasm for the vehicles and road systems of the future will be little dented.

There is simply too much to play for and too much to be lost by incumbents.

I know nothing about the science behind the technology being developed and frankly I do not need to any more than the majority of people needed to understand the science behind Man’s conquest to walk on the moon. Where there is a human will – driven by pride and the commercial imperative to hit the jackpot – a way will be innovated.

The first question that I asked myself was whether the gain to the population from being freed from the need for one person in the vehicle to focus entirely on driving, though more typically “adequately” and today often not even, would be perceived as significant enough to overcome the negatives. 

I recognised those negatives as being twofold: 1) the patent complete relinquishing of human control of the vehicle; and 2) the reduced attachment to the vehicle once nobody in the vehicle is in continuous control and “manages” the cockpit.

Obviously on the first point humans have been relinquishing control of wheeled machines once they were powered by engines and fitted with steering because we are trusting that human-designed, manufactured and maintained systems will function properly. And modern cars with significant computerisation have already taken this to a very high level. Nonetheless, the final step of letting go of the wheel, literally, with the inherent understanding that once it occurs we are on a one-way route to one day having no opportunity to manually override (not least because no passenger would have ever had experience of driving like few contemporary carpenters have had the experience of driving a nail into a roof truss with a hammer in hand!), will be significant for some.

On the second point I have long understood the status labelling that is involved with one’s mode of transport. After all, it is generally the most expensive mobile possession that most of us possess, so the ability to stamp oneself as a person of means with said conveyance is powerfully attractive to many.

I have to admit that I engage in it myself. I like to set everyone’s expectations low in the hope that I might over deliver!

I suspect that there is something rather powerful in the tactility and control over the vehicle that will be lost when nobody actually drives the vehicle. And I feel certain that Uber’s vision of fleets of autonomous vehicles as the main method of conveyance for the majority will come to pass. But one of our most important symbols of status and power – and if you’ve stared down a SUV-driving parent after school pickup late for post-school activities asserting their right to speed down the middle of a narrow car-lined street, you know what I mean – will not be given up lightly.

So what will be the positive to counteract these negatives? Well really, have you been on any city roads lately, and if you were, if you did not have your head down and eyes on your phone while at traffic lights, did you notice how many others do? I mean I’ve seen many texting while actually moving!

First and foremost is safety. 

Some months ago I was speaking with a parcel delivery subcontractor who was telling me the things he had seen in recent times. The worst example was a young woman (presumably on a Provisional License since the car had P plates) on her phone running straight through a red light and not even braking before colliding with cars in the intersection. I have now personally witnessed almost the exact same thing – at 10.30 am on a week day (at the Old Cleveland Rd intersection at Westfield Carindale, for those familiar with Brisbane) someone driving a 1T tradesman utility ran straight through a light that had been red for at least 10 seconds and into 2 right-turning lanes and 3 lanes going straight. The distracted driver slammed on the brakes at around the point that they entered the intersection, and fortunately there was little traffic heading straight, so as the vehicle slid to eventually be 90 degrees to its original direction it sped off with the traffic flow without hitting any cars and without coming to a stop!

It was an amazing example of just how distracted contemporary drivers are and I have stressed to my family the absolute importance of not assuming anything when on or even near roads. Better still, assume that everyone is distracted until you are certain otherwise. One has to wonder just how many accidents have already been caused by device distraction and pedestrians must be especially at risk in this new era. 

The first time I became aware of this issue was Warren Buffett speaking at CNBC in 2016. Having access to the records of some of the largest insurers in the world, Buffett commented on the increase in the number of single passenger car accidents. He suggested that the increase in distraction of drivers due to their use of mobile devices outweighed the safety improvements to the vehicles.

My sense is that society is beginning to wake up to the sheer level of risk to which we are all being exposed. But many are conflicted because they know that they are guilty themselves. And here I want to be clear that this phenomenon is most certainly not restricted to the young. In my experience middle-aged Australians are equally guilty of being distracted by devices while in control of a vehicle. But the consequences of this extreme level of distraction will become increasingly understood within society (and by insurers) and will demand a regulatory and enforcement response.

Cameras at lights are being trialled to detect device distraction and have proven effective with many drivers found to be offending. Even though there are privacy concerns with cameras being directed into the interior of vehicles, we can assume that the severity of the problem will ensure that these measures are expanded. 

There likely will be other measures. If the outside of vehicle anti-distraction technology is resisted on privacy grounds, then I expect that it will be mandated within vehicles and probably will be in any case. A great deal of innovation has already gone into fatigue detection in the mining and transport industries and this is currently being adapted for distraction detection and may become a common regulatory response.

The point is that this is almost certainly the most serious challenge ever to road-users’ safety. Consequently the regulatory and enforcement response will be aggressive and punitive. Drivers will be confronted with a clear choice – either drive without the distraction of their device or do not be in control of a vehicle. In this highly connected world, many – perhaps the young first – will elect the latter.

Tesla’s arguments on the inevitability of hiccups – some resulting in innocent deaths – being an unavoidable consequence of rapid development of autonomous technology and adoption is entirely accurate. I understand wholeheartedly the heartbreak of the family and wish it were some way avoidable. But the truth is that no matter the level of advertising about the stupidity of driving under the influence of alcohol and other drugs, of speeding, and now driving while using a device, human nature is such that the lessons are never learned, by either the young or the old, and for as long as humans are in control of vehicles innocent people will be killed by the selfish and reckless actions of others. 

Unlike broad groups of humans, machines will learn from accidents! And the quicker we reach a state where machines fully control the roads the safer we will all be. Few people can appreciate the genuine improvement in safety that will be achieved once human fallibility and error is removed from the equation. 

Of course I am not immune to error while driving like any other. No matter how much I tell myself that if I am late getting in the car to leave than I am late, there is nothing I can do about it, but I look forward to the reduced stress of feeling like I need to make every post a winner on my drive in the hope of making up maybe even a whole minute! If I am behind schedule getting into the autonomous vehicle than I will be late at my destination and that is now beyond my control.

As I said above in Theme 1, I was enthusiastic about investing in Chinese companies active in the autonomous vehicle space for a number of reasons: 1) they offered better value than US counterparts that had been the subject of extreme optimism from the flood of investment capital seeking (a chance of?) a return; 2)  their autocratic nature of Government would create an environment where the inevitable hiccups in the development of the technology would ensure that innovators would be less impeded by societal concerns; and 3) their often less ordered road systems would mean that the incidence of irregular/unpredictable/atypical driver or pedestrian behaviour would provide an environment for more rapid “learning” by the artificial intelligence systems. 

The understandable concern by Western Governments at unfair collaborative practices by Chinese companies and other security concerns, and the consequent increased restrictions on that collaboration, will slow Chinese progress but they will certainly remain formidable competition in this space.

It is challenging to ponder how our transport systems and urban centres will change as this technology transforms the way humans live their lives.

Perhaps the “pragmatic” and flamboyant Italians who treat road rules as recommendations more than rigid rules will provide some pointers, with the Mayor of Rome famously admitting on television that even he treated a red traffic light as a mere suggestion. And peak traffic in many high-congestion areas invokes many drivers to create extra lanes of traffic in the busiest direction which the Italians speed down with their hands continuously pressing their car horns to alert the oncoming traffic.

I expect that the road system of the not too distant future will be very different from our current systems. There will be little need for public transport as computer optimised traffic flows will negate their need and a ubiquitous, cheap, privately-operated fleet of pods will collect and deliver passengers at their chosen point with varying price points dictated by the level of “sharedness” and comfort chosen by the passenger.

Computer-optimised roads will negate the need for traffic lights and traffic flow will be continuous with immediate negotiation of individual vehicle requirements. Perhaps it will be easiest to imagine arthropod (ants or crabs on mudflats) organisation where industrious colonies are in continuous movement, and realise for one second that organisation is based on simple negotiation of individuals in response to immediate stimuli. Besides instantaneous negotiation – for example slowing down 10% to allow a single vehicle coming into a traffic flow from a side street (the reason traffic rules require such a vehicle to give way is because humans can not assume that everyone in the flow of traffic will recognise their desire to enter the traffic flow and then act accordingly) – the autonomous traffic flows will have the advantage of “knowing” what lies ahead in the near future if conditions remain consistent or develop in line with forecasts based on prior events. For example, that when travelling a further 2 minutes at the current speed there will be a flow of traffic from another major arterial road merging.

Of course the traffic will come to a complete stop for pedestrians. However, there will be no need for lights in most if not all cases which, after all, are not all that convenient for pedestrian crossing in any case. Perhaps there will buttons or switches along the side of the road at regular intervals of every 5 or 10 metres which the pedestrian will step on with a foot bringing the traffic to an immediate safe stop. 

Safety for bicycle riders will improve markedly with driver unpredictability and indifference eliminated.

I suspect that few will feel much attraction to owning their own vehicle and it will be less stressful with the logistics and costs (and their unpredictability) eliminated. Housing affordability pressures may be eased by eliminating the need for space to house one or more vehicles.

I am certain that the ways in which this major adjustment to the way we organise our urban centres and indeed our societies would blow all of our minds if we caught a glimpse forward. It is enormously exciting and it will be accompanied by enormous creative destruction entailing many massive challenges for current businesses and enormous opportunity for new ones.

This theme uploaded 19th December 2019.

5. Debt Monetisation

Growing up in a farming household afraid of bank foreclosure following collapse of global soft commodity prices provided me with an opportunity to be appropriately sceptical about debt and markets. I also think that the number of generations separating oneself from ancestors who experienced the Great Depression might also be a factor, although the lessons that my Grandparents learned, while passed onto my father before me, perhaps did not sink in enough to counteract his own dreamy aspirations.

As the housing bubble inflated I knew that I did not want to borrow to my family’s limit, which the banks, eager to dole out money, said was probably around double what I thought was prudent. As the housing bubble continued to inflate on irrational exuberance and easy credit, I have to admit to briefly checking my thoughts periodically. But it always seemed imprudent.

I always understood that what was at question was security – in where we lived and in our financial situation – and I knew that if we borrowed more than we could comfortably pay back with interest to the bank then any emotional benefits in living in a secure home that we would eventually own would be outweighed by the emotional costs of the stress that we would experience if afraid that we might not eventually own that home because of financial difficulties. 

As interest rates rose to 8+% around 2008 and stories of overleveraged Australians emerged in the media, for example on television on “4 Corners” and “60 Minutes”, I was saddened and empathetic, but not surprised. I was especially concerned for the lower income Australians who, through no ill-informed decision to buy a home they could not afford, were being pressured into homelessness by surging unaffordability in rental accommodation.

I have to admit to being surprised by just how long this bubble has gone on, but if one looks objectively in hindsight, I think it is clear that the collapse of the US housing bubble underlined to economic bureaucrats and politicians just what a dangerous imbalance had developed in our economy and society.

As I said in my submission to the Royal Commission, over the last decade and half it has often felt that economic management in Australia has in effect become housing bubble management. That has only been further emphasised by developments over the last 2 or 3 years.

As I said in my post on the Australian economy a year ago, while the RBA was trying to sooth concerns about the impact of falling house prices on the already sluggish economy, their narrative was that there was unlikely to be a negative wealth effect as there had been little positive wealth effect observed in the preceding years of strong house price increases. I suggested that the RBA was being mindful of its perceived function in selling confidence, and in reality the lack of positive wealth effect from such strongly rising house prices was in fact concerning because it suggested that any positive effects were being more than counteracted by the negative consequences from the sheer size of the stock of household debt. In other words, the law of diminishing returns had reached its natural conclusion.

Now that the RBA has managed to turnaround house price movements, by reducing interest rates 3 times from June to October 2019, and with APRA loosening their macroprudential standards again, the RBA has even felt that is safe enough to admit just how important housing has become to this economy.

In the November 2019 Statement on Monetary Policy the RBA said ” Recent developments have shown that dynamics in the housing market can have more pervasive effects than we had expected. The decline in housing prices and turnover weighed on household spending decisions …”

Of course they can admit that now because house prices are moving in the “right” direction, so what they are really doing again is trying to sell confidence – i.e. that all will be right in the economy now that house prices are rising again.

However, the RBA concern for the economy has been expressed in additional ways aimed at further easing financial conditions including giving forward guidance and stepped up open mouth operations (in an attempt to provide surety and confidence) such as discussion of an Australian form of Quantitative Easing (QE).

At this stage it appears to be doing little to improve confidence – and many suggest that they are at risk of scaring the horses – with the only affect being to reignite the rampant animal spirits surrounding the largest housing markets. I would suggest that this is the reason why pre-Christmas 2019 the RBA is talking down the likelihood of QE in Australia.

I expect this spin-based narrative to be dropped by the RBA early in 2020 with a move to reduce rates to the 25 basis point terminal rate that they have set prior to QE beginning end of 2020 or early 2021. It is to be hoped that they learned from their very significant mistakes of eschewing macroprudential policy and thus allowing the bubble to inflate to the point where the heads of the Council of Financial Regulators panicked as they scrambled to cool the bubble with hastened introduction of macroprudential policies.

I will save updates of my views on the Australian economy for regular posts. What I want to highlight here is that over the recent period that Australian house prices fell, especially in Sydney and Melbourne which have been the most bubbly markets in recent years and which represent almost 50% of the value of Australia’s housing stock, Australian household debt ratios did not fall, i.e. improve (see Graph below).

Graph of Australian Housing Prices and Household Debt. Note the sharp fall in house prices (relative to incomes reflective of falls in nominal terms) in recent years. Note also that over the same period the household debt ratio did not fall. Source: RBA Chart Pack November 2019.

Put another way, with essentially flat credit ratios Australian house prices fell quite sharply. Just imagine what prices would do, in the absence of strong gains in household income (which even the RBA seems to have capitulated on anticipating), if household credit ratios actually fell meaning that Australian household began the long process of deleveraging!

This sums up the predicament that Australia has gotten itself into. Leveraging up of an economy is essentially a once in a lifetime phenomenon, and the problem is that the market price of assets which the debt pumped up is ephemeral and continually dependent on a flow of transactions holding up the market price while the stock of debt can only be adjusted down by the hard work of actual repayments or by default and writing off which would threaten the viability of our banking system if widespread.

Here’s the thing; we are not alone! This is a global problem even if the composition of the debt differs from country to country. In some countries it is the corporates that have gorged on debt, especially QE-induced cheap debt, and in other countries it is the Governments that have leveraged up. 

The simple reality is that the world is awash in debt which can not be repaid. I realise that detractors will say that I have not backed up these assertions with data, which as an ex-scientist is my impulse, but I want to keep the text less technical and in any case a very quick internet search will reveal thousands of articles on the subject. This is a well known problem!

Central Bankers certainly appreciate the problem and if you ask me, I think the good ones privately are very, very concerned even if they can not show even the slightest hint of concern to the public they serve. 

If one sits down and begins to think about all of the changes in global economies and financial structures since the GFC, it truly is astounding. What I find interesting is that the people that were attacked by the “talking heads” for being “doomsayers” were all too conservative – nobody that I am aware of that warned of the emerging problems in say 2005 or 2006 were sufficiently bearish to foresee what has occurred. That in itself is food for thought for where we have come to over the 10+ years since the commencement of the GFC and what might lie ahead.

At points throughout this year around one-third of the stock of global Government debt had a negative yield which meant that “investors” paid Governments for the right to lend them money. The European Central Bank is about to kick up its money printing endeavours of QE again, as have the US having performed a sharp pirouette from a year ago when it was tightening financial conditions raising interest rates and reducing its holdings of Government debt.

Money printing, the more colloquial term for QE, has been on the outs with economists ever since it was used in post WWI Germany and led to hyperinflation which was a factor in the emergence of the Nazis. Until recently it remained the last desperate refuge of despots trying to hold onto power.

There have been advocates of money printing in developed economies under certain conditions but these have largely been seen as unorthodox – i.e. not mainstream – economists who frequently espouse something called “Modern Monetary Theory” and who, until very recently, were considered by the economics community as being “nutters” to put it mildly.

(Anyone familiar with the work of Steve Keen will have sympathy for the original MMT advocates because the economics profession has a propensity to attack and castigate non-orthodox thinkers.)

MMT is now being openly discussed and is being openly encouraged by some very big names in the field.

You might wonder why.

It seems to me that the Central Bankers are fresh out of ideas and are now willing to cling to whatever idea presents itself, preferably with a shroud of some type of reviewed intellectual body of research.

When bond yields progressed downwards towards zero, a few realised that negative yields – a condition never before contemplated and thus previously absent from economics textbooks – was theoretically possible and so it was, akin to the world proving to be round. 

I doubt that the growing crowd of MMT converts have any idea how it will turn out. They just understand the importance of seeming to the people to understand what they are doing and what they will do next lest the panic would quickly lead to a collapse of the global economic system.

Central Bankers are certainly applying the McLuhan maxim: “I may be wrong, but I’m never in doubt!”

In the mean time they all hope that a genius future Nobel Laureate steps forward with the solutions, but of course humans are notorious for not recognising brilliance in time or at least in their life time. Perhaps MMT will prove the brilliant solution and the Nobel Laureate is already known.

Regardless of what is the impact of MMT, it seems certain that our experimentation with economic policy continues apace. I can not recall the last time I heard reference to the Central Bankers having the important job of removing the alcohol-laced punch bowl just as the party is getting into full swing. The echoes of the 1930’s are too scary for the Central Bankers. And it seems to me, as I pointed out in a recent position paper for my SMSF, that the most significant and enduring consequence of the GFC has been the breakdown in the (perceived?) separation of monetary policy decision-making between Government and Central Bankers which clearly peaked under Paul Volcker at the Federal Reserve.

The response to the GFC to this point has served to make the wealthy even more wealthy. The inequality within nations has led to political backlashes which has given rise to populism. 

Consequently, the next phase is highly likely to appease the lower 99% of the population, which has less wealth than the top 1% in some countries including the US, and one idea which is rapidly gaining acceptance is the idea of a Universal Basic Income (UBI) which is the giving of cash from the Government directly to all individuals in the country.

I realise that this seems odd in the extreme, but we need to recognise that our views are based on our lifetime experiences and what we have learned through other media. The past Chairman of the Federal Reserve, Ben Bernanke, in large part was given the job because he was an academic expert on the Great Depression and his papers recommended the use of something that he called “helicopter money” as a response if the world ever confronted similar conditions, and this is essentially the idea of dropping free money on the people. UBI fits that description, so it is not as if it is totally without academic support.

A couple of years ago I read a landmark book by Rutger Bregman entitled “Utopia for Realists” which deals primarily with the idea of introducing a UBI. The book blew my mind and I recommend it to all readers.

The most memorable thing about the book for me was that the US almost introduced a UBI in the late 60’s under President Nixon. Legislation was drafted and debated by Government, but it failed because it did not go far enough for the Democrats, and politics being what it is, the idea fell out of political favour and it was put in the “tainted” and “too hard” basket.

Just imagine for a moment – the country in which I consider has the harshest of capitalist edge, with a minimal social and health safety network, which us Anglophone countries especially seem to want to emulate – having spent the last 50 years with a system where the Government gives money to all in society to provide a basic standard of living.

It is difficult to imagine what might be our frame of reference if we had experienced that during our lives!

The book also details all of the ways in which hard-edged right-winged capitalists have fought and argued against the idea going back centuries.

Sadly, I believe for many to feel superior in their wealth they need to feel superior in all aspects of life, and the worst thing would be for people with much less wealth to appear more contented and satisfied with their lives. What really makes the wealthy feel proud is to see everyone else playing the same game that they have risen to the top of – it just would not be the same if everyone else was playing a different game and were too satisfied in their own lives to notice the successes of the elites! 

That would not be good for their ego at all. No aspiration or envy – oh no!

What will be the consequence of free money on economies? Well there are a broad range of views. Some consider hyperinflation to be likely, but many prepared for that a decade ago and have found themselves poorly positioned for what transpired. In fact inflation remains stubbornly low and most Central Bankers sight targeting of a higher inflation rate as justification for further QE.

Obviously there have been factors which have prevented the QE efforts from translating into high levels of inflation, outside of asset prices of course, and these revolve around low rates of wages growth in spite of historically low levels of unemployment (this will be discussed below in Theme 6).

Central Bankers are increasingly being vocal that politicians need to cease shirking their responsibilities and play a more substantive role in managing the economy. I think it is certain that increasingly the money created via QE will also find its way into infrastructure spends which relate to the majority of the earlier listed themes.

I am particularly interested and optimistic about the social change that this era of debt monetisation will bring, and in Theme 6 I will discuss what I consider to be the greatest impact and the most significant change to societies in over a century.

This theme uploaded 5th December 2019

6. More Time for Personal Fulfillment

Many people entering retirement do so with anxiety over what they will do to occupy their time and mind. After a long career involving strict scheduling and consuming much of our prime active time and energy, a definitive end to this routine can seem overwhelming.

It’s something that I understand well. It was the ruminating thought that pushed me over the edge after I had abruptly retired from my career as a research scientist at the age of 34. (See my earlier post with additional reference to sport stars struggling with the same issues.) For the previous 13 years I had been investing so much of my emotional energy and time – either physically doing tasks for my research career or thinking about it – that there seemed like a massive hole was left in my life when I clicked the send button on the email announcing my retirement.

A few months earlier I had a brief insight into this when I realised just how wired I was and how much it was occupying my mind with it starting to spin like car tyres on gravel struggling to gain traction. I was driving in the car with my wife and we were talking as I drove, but all along my mind was whirling thinking of what on Earth I could do to get myself funding to continue my career. (So no, I realise driver distraction is not new, but the distraction with an interactive device I discussed in Theme 4 is clearly at an entirely new level.)

In the intervening 15 years I have had to train myself to balance my thinking, settling my anxiety that I do not always need to be doing something, not even thinking of what and how I might do in the future. In my upcoming post on my own solution to the Human-Time Paradox I will discuss this in far greater detail.

Suffice to say that, as a stay at home Dad, I have had an extended period to adapt to a life routine split between periods of strict schedule (school drop off and pick up times, kids extracurricular activities, and so on) with prolonged periods of time which is my own to fill as I see fit with non-urgent tasks. It has essentially been a long transition to retirement.

It is this concern over what will one do with the extra personal time and emotional energy (or thoughts) that results in anxiety from the notion of working fewer hours or perhaps not at all.

Yannis Varoufakis touches on a number of underlying factors in his brilliant book “Talking to My Daughter: A Brief History of Capitalism” which are germane. Varoufakis explains how our personal development occurs through internal conflicts, and in this case our conflict revolves around the question “I want more personal time, but should I want more personal time”. The other conflict lies in what seems to be especially prevalent in the Anglosphere where many feel the need to be continuously productive, if for no other reason than everyone else seems to be productive and reaping rewards from it. So the conflicting question becomes “if everyone else believes that they need to gather more acorns to get through the winter, can I really be secure that I have gathered enough?”

The sad irony is that the increasing level of anxiety in society, much of it associated with a constant need to feel and be seen to be productive, so much so as to appear to be spinning on a hamster wheel, is actually causing many people to be much less effective so that, like the hamster on the hamster wheel, the energy expended does not produce forward progress and the process becomes the ends not the means. Again that will be the topic of a later post.

These factors combine to create a great deal of scepticism to the viewpoint that we humans could spend less of our time in carrying out tasks for which we earn an income and more time on personal activities.

But here is the thing. I think that there is a lot of validity to the idea that many people in paid jobs spend most of their time doing non-productive tasks and which they consider add very little value to their employer let alone to society. That is why David Graeber’s book “Bullshit Jobs: A Theory” gained so much attention. Just like jokes with a strong element of infrequently discussed and barely perceptible truth are always the funniest, ideas of this type do not gain traction if they do not hit on an elemental truth that often hints at a deep anxiety within society. (I always loved the quote on a Bloomberg advertisement, “Artists are just people that notice things”.) 

If very many people in their heart of hearts consider that they are largely being unproductive at work then the only real value in it is providing income, providing some social interaction, and in occupying time.

Then one has to wonder whether there are not better ways to achieve these goals in society in a way which produces less anxiety for people.

In “Utopia for Realists”, discussed in Theme 5, Bregman suggests that the introduction of a Universal Basic Income (UBI) might be accompanied by the introduction of a 15 hr work week. If it is in fact true that many employed people carry out very many pointless tasks, then there is absolutely no reason why this can not occur. Obviously there will be functions which require more than 15 hrs per working week, but in these cases the functions can be covered by job sharing arrangements between two or more people.

There will always be people who want to want to carry out more hours of paid employment in a week than 15, for any number of reasons from personal fulfillment to the desire to earn significantly more income than others. I am unsure how Government regulation might deal with this – it might be possible to have more than one paid job but income from extra paid employment might be treated punitively to actively discourage people from taking on extra paid employment. Importantly there would still be significant difference in the income received from the paid employment so people will be rewarded for having studied and/or for working harder and smarter. 

The point of the UBI would be to ensure that, for all people, the income earned from 15 hrs of paid employment together with the UBI would provide for an entirely satisfying life.

I actually think that many Australian employers may currently be intentionally over-employing as a means to maintain their social license to operate and as a payoff for the low cost of capital (flowing from QE and various Government backstops). Automation and off-shoring has probably progressed far enough already that large employers could significantly reduce headcounts. But about the only thing going for the global economy right now, and holding back significantly more political unrest and polarisation, is the relatively low unemployment rates.

Even so, anxiety about automation and off-shoring, combined with a nagging anxiety that they are not actually adding value for their organisation, is making employees very reluctant to negotiate strongly for wage rises.

Consequently I feel that it is inevitable that Bregman’s vision of a significantly reduced working week combined with a UBI will come to pass during the next decade, in developed countries. I firmly believe that this will be an extremely positive development for individuals and society.

I do not expect that we will jump straight to a 15 hr work week or even that we will necessarily settle at that. I expect that before very long there will be a discussion about reducing the work week down to perhaps 35 hrs, as was being discussed in France when I was living there in 2001, and this will be introduced at the same times as a modest UBI. Over the next decade or two this will grow into a trend of decreasing work hours and increasing UBI until some sort of steady-ish state is reached. Perhaps it will be 20 hrs of paid employment per week, instead of 15 hrs, but this is just detail. 

I expect that there are higher-level thinkers within Government and Business that understand that this is going to be a very, very significant change in our societies, and, given how much work has gone into training people in western societies to be productive consumers, they are working to ease the people towards this future with as little personal disruption as possible. After all that would not be good for the business of Government or for the Business elites.

Of course some will try to resist and suggest the sky will fall. But increasing automation makes resisting the progression a futile exercise, and as increasingly more people experience the change in a positive way it will gain full acceptance in society.

What will people do with that extra personal time? Bregman’s thorough research of the topic shows that there have been small scale “experiments” with a UBI. These studies point to people generally using the extra time on self fulfillment projects like learning new skills, for hobbies as well as to upskill for higher level employment opportunities, and in giving back to society in the form of charity work.

The changes that the reduction in hours spent in paid employment, the introduction of  a UBI, and the increased availability of time for personal fulfillment, will bring on will create lots of challenges for incumbents. Perhaps a more societally focused humanity will result in less consumerism, but as discussed in Theme 2, it is in any case an unsustainable model.

As usual, however, the greatest change to our society in a century will produce many opportunities to the astute observer. One such example follows in Theme 7.

This theme uploaded 19th December 2019.

7. Education Revolution

This theme will be uploaded soon

© Copyright Brett Edgerton 2019

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