OMG!!! WHAT TO DO WITH ALL OUR HOMELESS MONEY??? / by Patrick McComish

OK, back to the world of today.

The resounding message from last week’s Update was that despite all the doom and gloom the Global and Australian economies grew a staggering amount in the 11 years to 2012.

And in the midst of this environment of fear there was data released by the RBA in February this year that showed the Australian economy was still growing at an annualised rate of 2.5%.  Not bad for an economy coming off 22 years of consistent growth and a once in a century mining investment boom.

By the way, calling the mining boom a “once in a century event” isn’t my call; those are the words of our own RBA Governor, Glenn Stevens from a speech back in 2010.

Around the same time, Stevens and another RBA Board Member, Phillip Lowe, made the point the Australian economy was operating at close to “full capacity.”

Australian unemployment reached an all-time low of about 4% in late 2008/early 2009, spiked in the fall out from the GFC and then dropped to just under 5% in 2011/12 before beginning the inexorable climb back up towards a more realistic level.

Unemployment is currently at 6.4% with an upward trend, but we forget that prior to 2001 unemployment was consistently much higher than 7%.  I am not making it up. Check out the link attached below:

Australian Unemployment

Before I go on, let’s be clear on a couple of things about the mining boom. 

Despite the unbelievable impact on GDP the surge in investment and commodity prices benefited a small proportion of the economy, rather than the majority;

  1. It caused a flight of capital into Australia that saw the AUD appreciate far beyond its true value, with this appreciation killing some businesses and hastening the death of sections of Australian manufacturing;
  2. False economies were created in WA’s north west, goldfields and other areas where salaries, rents, costs of living and property values appreciated far beyond fair market values or realistically sustainable levels; and
  3. Saw unemployment in the mining states (WA and QLD) fall below what might be termed “full employment”, resulting a drop in labour productivity and a dramatic skills shortage.

Yes, the mining boom was cool.  Nice to watch.  Made us richer, improved Perth and Australia in general as a place to live, but it also had some pretty bad, distorting impacts.

Now, I went to another HLB Mann Judd function last week, courtesy of The Networker, this time themed around crowdfunding.  Crowdfunding is currently seen as pretty cool, using the internet and social media as platforms or a medium to ask people for money using one of the following 4 approaches:

  • Reward for your funds:  if you contribute you get some type of reward.  Ticket to a show, free record, some other type of consumable;
  • Donation:  you are giving to a charitable cause;
  • Debt:  you are lending on an unregulated basis; and
  • Equity: you are seeking to invest, primarily in private ventures, not listed entities.

Before we go on I have to say it was a good presentation so I have attached a link to the Speaker’s company site.  Not as any kind of promotion, but more as an indication of what you could expect from a crowdfunding private equity firm:

Fat Hen Venture Capital

This function was primarily about equity investment, which made me think about a comment I have been hearing a lot lately.  Here it is:

 “Gee, there’s a lot of money out there.  And it’s looking for a home.”

This statement has made me ask “Where is it?   Who owns it?  Why is it homeless?”

Well, the most obvious answers are:

  • It’s in ASX listed shares, property assets or the bank;
  • Superannuants owns most of it; and
  • It’s not homeless; it just doesn’t like where it currently lives.

But, is it?  And if so, why does it want to move?

First, some context. 

One undeniable impact of the boom was the movement of a lot more cash into Australia. 

Quick interlude here.  Money already in circulation exists in what’s called in mathematics a “zero sum game”.  Money isn’t made or lost, it just changes hands.  So the money made in Australia during the boom was made at someone else’s expense.

This concept is actually pretty nicely captured by Michael Douglas’ Gordon Gekko in 1987’ Wall Street.  Check out a montage of scenes and monologues here:

 

Anyway, last week’s Update showed the change in GDP between 2011 and 2012 from roughly $400 Billion to $1.6 Trillion.  HUGE!!

And back to that growth figure.  2.5% is OK, but it’s a lot less than the IMF’s forecast for Global GDP growth in 2015 of 3.5%, and laughable compared to the Chinese Government’s just released target growth rate for the next 12 months of 7%.

Now, GDP isn’t a good tool for measuring wealth, as it’s just a way to measure the volume of the flow of goods and services. 

Like the difference between a company’s Profit and Loss Statement and its Balance Sheet.  The P&L shows income, and the Balance Sheet shows net worth.

Better tools for measuring wealth might be the value of the Australian Stock Exchange (ASX), the value of Australian property or the total value of bank assets and liabilities.

(Just to clear something up, a bank’s asset is your liability: a loan, while a bank’s liability is your asset: cash).

So, here are some comparative numbers from 2000 and 2013:

That’s interesting, isn’t it?  Just to show I am not making this up, here is a link to the report that contains the 2013 data:

It looks like, in order, most Australians’ new found wealth ended up going into:

  1. Debt funded housing;
  2. Superannuation assets;
  3. Cash in the bank; and last but not least
  4. Investment in equities.

Now, the other thing in the above table that sticks out like the proverbial dogs balls is the difference in the cash rate.  And that rate is an indication of why our money doesn’t like its home and wants to move.  The return on cash is too low.  In fact, the return on everything bar quite risky investments is too low.

With interest rates at ridiculously low levels investors are not really interested in leaving their cash in the bank where they get 3%.

Superannuants are searching for yield, as it’s often a large part of their income, and aren’t that concerned about capital growth.  But the majority of blue chip, high yielding shares only pay around 5% or less.

So, who is making the decisions about where it goes?  Well, I found some information about the major shareholder groups in the ASX:

So, 75% of ASX listed shares are owned by super funds, insurance companies and a fairly generic group called “rest of the world”.

Not exactly risk takers.

The source of this, and some more interesting data can be found via the attached link:

ASX Stockmarket Report

And this link takes you to a cool infographic showing share price movements over the past 100 years.

Long Term Australian Stockmarket Price Movements

And crowdfunding is trying to get in touch with smaller investors who might be interested in private companies with good ideas and cool technology.

My initial perception was the traditional gatekeepers like super fund managers, private capital managers and corporate fund managers won’t be too keen on crowdfunders.

It will come in the form of objections about protecting “unsophisticated retail investors” but is really about protecting the status quo.  Given the use of social media in other events such as the Arab Spring uprisings and the Occupy Wall Street movement I can see crowdfunding making a large dent in the finance world.

Food for thought…