In fact today I want to discuss why Australia will have another economic boom, and that must be good for our property markets.
Three strikes for Brown after the bust
I’ve always felt a little sorry for UK Labour politician and former Prime Minister Gordon Brown. He appeared to be a fundamentally decent person but is seemingly always remembered for all the wrong reasons.
Firstly, he got blamed for his faulty crystal ball when, as Chancellor of the Exchequer, he sold off 60% or 295 tonnes of Britain’s gold reserves between 1999 and 2002 in order to diversify Britain’s portfolio.
He was arguably right in his logic, for governments should be diversified in their investment holdings. Unfortunately there then followed a decade-long tremendous bull market in gold.
It’s a bit unfair really.
For one thing the value sold at US$3.5 billion, while not trifling, pales into insignificance when compared to, say, the £9 billion cost of playing host to the London Olympics.
Admittedly the gold could have been worth nearly US$20 billion today, but recall my post of two days ago on opportunity cost – the funds would still have been invested, just not such a large percentage in gold.
Secondly, Tony Blair reputedly reneged on the secretive ‘Granita Pact’ of 1994 to hand over leadership of the Labour party to Brown until as late as 2007, by which time the tide of opinion had started turned against New Labour’s media-obsessed machine.
Granita was an unremarkable London restaurant where Blair and Brown met to hammer out the alleged deal. I used to audit the restaurant back in my accountancy training days, but it subsequently closed. It’s now been re-opened as “Desperados”, which might be a metaphor for something. Not sure what.
Perhaps most damagingly, Brown is remembered for his sound-bite, nay mantra: “No more boom and bust!”
Britain had supposedly gone a little money mad in a boom under Maggie Thatcher through the 1980s but felt the pain when the bust finally came on Black Monday in October 1987. Gordon Brown instead advocated sustainable growth.
Unfortunately for Brown, through little fault of his own, he came to preside over one of the greatest busts in living memory when the sub-prime crisis finally blew up and Britain tumbled into recession.
They stopped saying “no more boom and bust” after that, and it seems widely accepted that market cycles are here to stay.
While markets move in cycles, developed countries tend to have a long-term average growth rate of somewhere around 2.5-3%. Australia is currently tracking at growth of a touch over 3% which is solid enough, but is likely to have a tricky 2013 and the next year might send us to the low end of that range or below.
Developing countries, such as Brazil and China can demonstrate blistering rates of growth – it has been said that China could sustain growth at 8% per annum for the next two decades, which would be wonderful news for Australia as a resources exporting country.
Markets do tend to move in cycles, however, sometimes demonstrating very strong growth and at other times falling into negative growth or recession.
The 2011 Census showed that even after adjusting for inflation, median personal income in Australia was 7.5% higher than it was in 2006 and median household income was 4.3% higher. In absolute terms, of course, incomes increased far more sharply.
This growth in our spending power stands in stark contrast to Europe and North America where incomes have fallen over the same time period.
However, the Census did show that income is being distributed with greater inequality both between cities (resources-rich Western Australia saw incomes rising faster than elsewhere, for example) and even between the suburbs within the cities.
4 reasons why markets do cycle
There are a fair number of reasons in particular why markets move in cycles.
1. Firstly, markets move in cycles simply due to human nature.
We tend to believe that when things are good they will always be good, and when times are bad that they will always be bad. Markets are ultimately driven by human traits and, rather than being rational, we tend to be emotional. Thus markets therefore tend to overshoot on the upside and on the downside.
2. Secondly, people have very short memories.
I have talked before about how after a bear market or a crash investors tend to move away from the asset class which has corrected, when instead this is the time they should be looking to buy. This herd mentality is exacerbated by the fact that over time a new generation of investors replaces an older one.
We might hear tales about the desperate Great Depression of the 1930s but, we weren’t there to experience it so the stories don’t seem to hold much relevance to us.
England’s former rugby captain Will Carling said that when getting set to play versus Scotland he used to drum into his team-mates that England must never again be humiliated as they were in the 1990 Five Nations Grand Slam defeat. Gradually though, he began to realise that few other players had ever even lost a game to Scotland and a defeat from years ago held little or no relevance to most of them as players.
As time passes, new generations come to prominence and make many of the same mistakes as their forefathers.
3. Thirdly, politicians are inclined to let booming economies run.
After all, they may well not be around for the bust so there can be a tendency towards exuberance which later manifests itself in a bust when the boom runs out of steam.
4. And fourthly, there will always be unforeseen or Black Swan events which trigger recessions.
While some anticipated the sub-prime issue, few could have anticipated the sheer scale of the domino effect as one financial institution after another ran into insolvency.
Australia’s next boom
Over recent times, Australia has fared comparatively well in global terms.
While some other economies have been crucified through the financial crisis, Australia has managed to avert recession for two full decades now.
The timing and extent of market cycles are inherently unpredictable. There are some who fear that the peak of the capital investment in our mining boom will see growth fall into negative territory.
This may or may not eventuate, but the longer-term future for Australia is bright as demand from China continues to soar.
Over the last decade average Australian household incomes according to the ABS increased by a fraction over 40%.
The implication is fairly clear in that whether or not we see a significant downturn in investment markets, over the longer term quality assets will eventually return to growth.
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