Macro

Episode 44: Macro Backdrop WTF is happening with Martin North

Ben Lakoff, CFA
May 3, 2021
61
 MIN
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In this episode, we talk about the Australian & New Zealand Economies, the local investment mindset, and the overall financial markets there. Martin gets quite philosophical on where the world is now as a result of COVID and where we could be going. Martin is a deep thinker and I really enjoyed this conversation.

Enjoy this conversation with Martin North from Digital Finance Analytics.

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Check out https://anchor.fm/investinalts for all the listening options (Spotify, Apple, etc.)

Show Notes

0:00:00   Welcome and context

0:03:37   What is your background?

0:06:36   What is behind the statements that are being made?

0:11:05   Assumption driven decisions

0:13:10   What is happening in Australia at the moment?

0:26:41   How is the Australian Government fighting against the pandemic?

0:36:14   Why is the stuff that the World Economic Forum is talking about looks terrifying?

0:47:30   What are your thoughts on MMT?

0:51:00   How do you think through your investment decisions?

0:55:00   How Australians approach investing?

0:59:30   Is the superannuation investing in real estate?

1:01:35   Where can people find out more about you?

Show Links

Martin’s Website

The Davos Agenda | World Economic Forum

Martin on YouTube

Martin on Twitter

Episode Transcript

Ben: [00:00:00] Welcome to the alt asset allocation podcast, exploring alternative investment opportunities available to the everyday investor. Here’s your host Ben Lakoff.

Hello and welcome to the to asset allocation podcast. Today’s interview is with Martin. North Martin runs digital finance analytics.com is an absolute guru on all things, Australian and New Zealand markets, especially the real estate market.

We talk about Australia and New Zealand. The economy, investment mindset of the investors there in the financial markets, government response to COVID. We talked quite a bit about these markets, but we actually get quite philosophical on where the world is now as a result of COVID and where we could potentially be going things like the great reset are being thrown around.

But what other options do we actually have? I have the little changes and freedoms that we’re giving up. Now, keep playing those, teasing that out a little bit further, and it’s pretty ugly where we end up going. Martin is a deep thinker and I really, really enjoyed this country. So I get a lot of listeners on this podcast, but I really only have like 30 reviews on Apple podcasts.

If you’re listening and you enjoy this, please, please, please take a second and drop a review. If you’re getting some sort of value from this, it really, really helps if you’re watching on YouTube hit subscribe. I’d really appreciate it. Okay. Once you review is done, I hope please enjoy this. Perhaps a bit uncomfortable to think about conversation with Martin North.

Enjoy

Martin. Welcome to the show. Excited to have you on today.

Martin: [00:01:43] It’s great to be with you. And thanks very much for sharing some time with me. It’s 30 degrees here. 10:00 AM in Australia. Just to show you that we’re on the other side of the world, right?

Ben: [00:01:55] Yeah. You’re in the future. So what does what does Wednesday morning look like?

It’s still pretty static.

Martin: [00:02:01] You know, I, I was, I was really, it was really interesting, right. Because everybody was saying, Oh look, 2020 was a disastrous year 2021 is going to be just so much better. Right. And here we are, what two weeks in? No, no, no. It’s the same recording.

Ben: [00:02:14] Well, I mean, the rest of the world doesn’t just stop things that are happening because of a calendar date. Right.  I think this is the harsh reality. It’s probably starting to hit now. This is being recorded January 12th.  I think people are starting to realize you can’t just leave behind everything that was happening in 2020, and it’s a, it’s a new year.

So

Martin: [00:02:33] new time, it’s a nice sort of philosophical, you know, if only, but the reality is that the economic fundamentals that we had last year are precisely the same as this year, that we’ve still got all the issues to do with the virus and everything else. And you know, therefore I think there was a lot of hyping from the media about, you know, new year new start, but actually.

New year, same old, same old back to the future.

Ben: [00:02:59] It’s very, very true indeed. But at least there are some things that are starting to look up perhaps.

Martin: [00:03:05] That’s key thing is beginning to settle. Perhaps

Ben: [00:03:08] it’s a silver lining with every storm cloud, I suppose. Right? Exactly. Well this is, this is a little bit of a different interview and we talked a bit before we started recording, but like a lot of my listeners are based in the U S we’re looking at the U S market U S investments.

And you are an expert within. Australia and New Zealand, so very different other side of the world different day. But the, the content that you’re producing, you really know what’s going on. I think would be a really interesting conversation to know what’s happening on the other side of the world.

And what’s driving that economy happening there. And then what, w what can we learn from that market in relation to our own portfolios? We’ll get into all things, real estate and Australian economy, but let’s, let’s start off a little background on you and what you do.

Martin: [00:03:57] Sure. Well digital finance analytics is my core company.

And what that is essentially is a set of analytics based on household consumer and a smaller enterprise business surveys, right. We’ve been running them since about 2002. And what we try to do is to get really granular into what’s going on. So my frustration was a few years ago, I used to work in the.

Big end of town, you know, be consulting firms and big banks. And there was a lot of high level statements being made about the way the economy is performing, what people were thinking, what businesses were doing, but it was also high level. And so I decided a few years ago to start carving out a much more granular view of what was going on.

So I run continuous surveys and that information then flows into what I call my core market model. And my core market model is effectively a simulation of the Australian economy. And so we’re trying to put all of the information that’s coming in from all the sources that are available and then look at it granually.

So, you know, It, it’s very important to move away from high level statements about what’s going on to a much more granular view. So it’s a really granular analysis that then leads into some insights. And then over the last two or three years, I’ve started to feed those insights through my blog, which is a digital finance analytics.com, but also my YouTube channels.

And so I run daily shows on YouTube called walk the world. And there we discuss all of the things that I’m seeing. And I run sort of weekly live shows and daily updates as well. So it’s turned itself from being a purely analytical task to being a much more educative task, because it’s clear to me having spoken to a bunch of people through my surveys is that the level of understanding.

Is quite low, certainly here in Australia. And I think in New Zealand as well people are being swept along by the you know, the spruikers be their property spruikers or gold spruikers or Bitcoins spruikers particularly on the social media channels. So what I’m trying to do is to bring a semblance of order to say, look here is what the data is actually saying at the moment.

Right? And then we move from there to say, well, in fact, what’s, the data is saying, here’s some things you might want to think about, but I don’t make specific recommendations. I don’t give financial advice. I’m not trying to sell anything. What I am trying to do is just lay you know, lay some goats and lift the level of awareness so that people can make better decisions for their own financial futures.

Ben: [00:06:30] Nice. And you used a term that I’ve never heard before. Spruikers I imagine

Martin: [00:06:36] that’s an Australian term, which basically says there are people who were saying, you know, property markets never fail. Right? Like, you know, there there’s, there’s a school of thought that says property prices in Australia double every seven years.

Right. And it’s amazing how often that gets trotted out. Right. And there are websites and other social media sites, and even some of the mainstream you know, Hi, newspapers who are basically basically also own real estate portals, all spruiking. In other words, encouraging people to go and buy property and the government’s doing the same.

Well, we’ll come onto that. Right. So that’s what spruiking is about. And, you know, if you, if you go onto YouTube and listen to you know, there are people there. So no, no, no, the future’s gold, right? You should be holding gold because basically the USDA was going to collapse and you know, therefore a hyperinflation, therefore you need gold.

Right. And so, but when you actually look at it, they actually own gold companies and they sell gold to people and they make money from selling gold. So how objective is that advice? Right? Same on Bitcoin, right? There are people sort of talking about Bitcoin and how Bitcoin is the future. Of course, it went very high.

It’s come back a bit now. All of these things are because I know people are very passionate about a particular dimension, right. But it can easily fall over into frankly, a commercial model, which means that you can’t really take what they say as being clean and clear. Right. That’s what I mean by spruiking.

So essentially it’s trying to persuade people to do something and they’ll put information up and they’ll make an argument, but they don’t necessarily declare all of their interests. And that I think is a problem. Absolutely.

Ben: [00:08:14] That’s exactly what I figured it was, but I I’ll use that term now that that’s great.

Martin: [00:08:19] Well, it’s an Australian term, but I think it deserves to go around. Yeah, absolutely.

Ben: [00:08:24] It’s prevalent in a number of things, right? It’s talking your book, it’s that financial advisors that make money from turning your accounts. It’s like all of these things, it’s misaligned incentives and, and lack of disclosures.

Martin: [00:08:36] Yeah. And it’s worth saying, I think my training actually is I’m a philosopher by training. So I went to Oxford and spent some time doing philosophy. So I always want to ask the next question. Right. Which is what is behind the statement that is being made. What’s the assumption that’s being made behind the statement, right?

And then you start peeling back the onion and you realize that there’s a bunch of other things going on below the waterline that. You never dreamt was actually going on. Right. And that’s what I’m trying to get to. So I’m trying to lift the level of awareness and understanding simply by asking that next question, but, you know, but why are they saying that, you know, what is, what is it that’s driving that particular perspective?

And that takes you into some very interesting areas. And by the way, you can trip over it quite often because people say my worldview is very different, so I don’t agree with you, but that’s okay. Let’s understand. Everybody carries around their worldview, their set of assumptions about the way things are.

Right. Sometimes it’s good to just question those rather than just around as a set of implicit assumptions is that you never actually get exposed. And that’s partly what I tried to do on my channel.

Ben: [00:09:38] Awesome. Yeah. Well, I mean, we have to have these lenses in these, with these mental models to understand that the torrent of information that’s constantly coming, Capto have a way to kind of put it, put them nicely in their places. You just don’t lose your mind everyday. Right?

Martin: [00:09:52] Well, you know, and, and the fact is everybody has one, right? You know, it’s a matter of survival. You need a mental model. You know, evolution gives us that to be able to survive because if you have to stop and think about every decision and everything that was going on all the time, you wouldn’t move.

Right. But there’s a, so there’s a natural set of filters that go on and, you know, you know, you, you sort of say, Oh, that’s a person. So I might take more interest. You know, you ignore the rest of the environment you’re in, but it’s the same with everything else. Right? You have to actually understand that there is a set of assumptions that actually are wired into the way that you think about things.

Right. And it’s fine and that’s necessary because otherwise you wouldn’t move. But sometimes it’s really important to question. The validity of those assumptions. W what if I’m wrong? What if that particular assumption that I’m making is actually incorrect? So, you know, go back to the, to the gold Bitcoin conversation, right.

You know, if it is true that the us dollar is likely to degrade in terms of its role as the, you know, the support currency around the world. And if it’s true that inflation is going to come raging through, then sure. Gold might well be an answer. The question is those two assumptions are really big assumptions.

And very often they’re wired into just the way that people think. So they don’t question.

Ben: [00:11:10] Absolutely. And even asking what assumptions am I even making, because they’re so baked into the way that you perceive the world and the way that you think through things that you’ve, you’ve gone so far, that you don’t even realize that these are, these are.

Really large, some sentences that are impacting a number of follow on decisions.

Martin: [00:11:31] Yeah. And what’s interesting is sometimes, you know, you’ll have a discussion with somebody, right? And you realize that you’re never going to agree with that other party because their basic assumptions are different to yours.

Right. And so even whilst you might think you might be having a discussion here at the middle, right? The world views are so different that effectively you will never come to a common understanding. And that, that really is both frightening, but also quite interesting, right. Because what it says is it’s really important to understand some of the bigger picture stuff.

Ben: [00:12:02] Fantastic. And then I didn’t want to go too far down that tangent, but it’s so I know you said you didn’t want to give investment advice, but my God, what good broad investment advice is that to question your assumptions and think through like the second, second order effects of these assumptions and how they impact your investment portfolio.

So I am glad

Martin: [00:12:22] and very important question. The assumptions of those who are actually giving advice to you, right? What’s driving them. What’s the motivation, right? What are they really trying to achieve? Right? That is probably the most critical, questionable. Oh, yeah. Oh

Ben: [00:12:36] yeah. Well, this is the first time I’ve gone into a more philosophical right off the bat.

But I, I do appreciate it. That’s for sure. I, I love these discussions, this is also the first episode that I’ve done with somebody that’s very New Zealand, Australia and New Zealand specific. And  I love the data-driven approach that you take. Let’s back up a bit and I mean, this is kind of, the benefit is you’re, you’re analyzing all of this data and then presenting it via your blog and YouTube channel in a more palatable way.

Let’s just start off a little bit more macro view. What’s happening in Australia. What’s happening in the Australian real estate market and then go from there.

Martin: [00:13:11] Okay. Yeah. So it’s been a pretty interesting ride over the last two or three years, if you go back pre COVID. So, you know, January last year, the Australian economy was slowing.

Unemployment rate was arising, a little house prices were wobbling. They they’d been quite strong from, let’s say 2000 onwards. We have a very slight wobble through the global financial crisis, but hardly any falls, nothing like you had in the U S or indeed in the UK. So we have very strong home price growth, and we were basically watching it pretty stable with slight moves up.

Right. And the government pretty much declared that they would be out of debt. So they said, right, we’ve actually achieved our objective of repaying, the government that, and therefore we are now going to be in the black and therefore we’re going to speak, keep our spending under control. And that will lay a nice foundation for the next data three to five years.

So that was the, that was the story December, January, and then something happened. Right. Which of course was the virus. And so we had wave one, we had significant lockdowns here in Australia. It was actually remarkably quick. So the borders were closed, which stopped people coming in the State borders were also locked down as well in some places that people couldn’t move.

And, and, you know, we, we were really pretty firmly locked down. New Zealand did the same. In fact, New Zealand was earlier than Australia. So there was a very significant freezing of activity. As a result of that, the government then announced very considerable support. So there was a scheme that allowed people to get money from the employee from, from their employers.

So money went from the government to the businesses and the businesses then passed it on to people who had served to keep them employed as it were. They also lifted the level of support for people who were unemployed because the employment started arise. And there was a few cycles of this as the consequences of both the global and local situation came through and about April and may, a number of the major banks came out and said, Oh, we think price hot property prices will fall about 30% over the next two to three years, based on nobody’s buying none of the international buyers that were there and supporting the market previously or buying you know, unemployment’s gonna be a lot higher.

They were talking of maybe 10%, 11% unemployment. We’d been at about five and a half percent. So it was a situation where we had a major switch. Now we have a conservative government here liberal nationals, and they’ve tended to want to keep government spending. Quite limited. Although actually, if you look at it under the covers, they’ve actually been growing government debt quite firmly, but that’s another story.

But philosophically, they had to turn a completely on their tail and basically say, right, we’re going to throw a lot about liquidity into the system. So they did tax breaks. They did these liquidity injections into businesses and also through unemployment and the reserve bank who is our central bank here cut the interest rates.

And we went from a reasonably low rate, you know, I think at one point they said, well, we’ll never go below 2.5% or that 1.5% and they cut the rates and they’ve cut them now to not 0.1% the last cut a couple of months ago. Right. So. They were there for doing that to try and control the yield curve.

And it’s the same strategy, the fed and the other central banks around the world. They upped the ante in terms of their liquidity injections. They’ve announced they’re going to do quantitative easing. And the other interesting factor there is that they have started to lend very cheap money to the banks to try and get the banks to lend more.

Right. So that’s the sort of the journey that we’ve been on the first lockdowns eased a couple of months later, and we got close to suppression or elimination of the virus in Australia. And so we started to see the first signs of some return to more normal, normal activity within the country, still international borders shut.

So no students, international students being a very large. Economic driver for what was going on in Australia, no international tourists, which was another big driver for the economy. So all of those things internationally were still frozen, but the local economy then started to recover a little and then we had another breakout in Victoria.

So Victoria is one of our main States. And so they went into another deep lockdown for another, probably a couple of months in total. And that took us through the second half of the year and or September, October started to come out of that. And then since then we’ve had a number of smaller. Spot fires.

If you like in terms of the virus, which means local closures, local lock bounds more so, so we’ve got this stop start, stop, start, stop, stop, start thing going on right now, the total infection rate is still very low relative to where it is in the U S or, or Europe. But the economic insane consequences are very serious.

So we’ve now got a government. Remember I said at the beginning, they were celebrating that they were in no debt. They’ve now expecting to have at least 1.1 trillion Aussie. Of government debt over the next few years, because of all this stuff that they’re putting in to the economy to transport it. So we’ve got a government that’s turned from don’t want to lend too much into the economy to that would just throw out a sorority and that’s just, that’s just throwing it out, right.

It’s a very low, so they can say, well, the cost of that debt quite low, the reserve bank has taken rates really, really. They have also encourage the banks to lend more, as I said, but also the government then said, well, we need to encourage people to go buy houses. So there were schemes, both at the state and the federal level to try and encourage people to go buy new properties.

And so rather than seeing a fall of 30% in properties, right, we started now to see properties beginning to rise again, and we’ve started to see the property market in the middle of all of this chaos in the middle of all the risk of defaults and all those things that are going on more broader properties.

All right. So you’re going up in a number of areas. It is remarkable, right? And in New Zealand who actually were at this earlier, probably prices have gone higher than they’ve ever done in the last 12 months. It is crazy, crazy, crazy. But the problem is, and this is where I sort of come to the yes, but right.

Whilst you can support the property sector. And whilst the argument is, well, there’s a million people who are actually working in construction Australia. So we need to make sure that the construction sector continues to employ people. It’s all about trying to support this wonderful policy scheme that we’ve had in Australia for years and years and years, property prices relative to income are some of the highest in the world.

The debt that Australians have is some of the highest in the world relative to their, to their incomes. And give you an example, typical debt to income ratio today, if you go get a loan is five, six times income, right. Which is extremely high. So we’ve got this crazy situation where the government’s strategy for solving the issues with regards to the virus has been pumped the property market.

And so now the expectation is that probably prices Caldwell rise by five, 10, 15% over the next two or three years. So we’ve had this really big roller coaster. And the problem is that what we’re seeing actually is a, what I call a bifurcation of the economy. So we’ve got some parts of the economy. Is it think of it as a CAE?

Right? So one leg of the K is doing quite well. So where you’ve got government support and government incentives doing quite well, but you’ve got this other group. And, you know, if you think about the total household count in Australia, there’s probably 10 million households in Australia, but about 3 million are in this group who still have higher unemployment have high levels of debt are unable to maintain their mortgage repayments and rental payments.

And so you’ve got this bifurcation. So essentially what’s happening is that the disconnect between the haves and the have nots, you know, those with savings and those with for example investments are doing quite well, those without or not. So what’s happening below the waterline is high government debt sort of pulling apart of the, the, the fabric of the society between those who are the haves and those who have not, it’s looking more and more light where perhaps the us was.

A decade or two ago, right. And Australia traditionally has been quite it gets tiring, but it’s falling apart. So that’s sort of in a nutshell where we are and New Zealand is larger still because both Australia and New Zealand are very reliant on tourism. They’re reliant on international students where both of those are turned off.

They are also of course, reliant on some commodity exports and the other factor to bear in mind. And the thing that’s really saved Australia, but also has created another bigger crisis is that the bulk of the Australian economy internationally speaking, is digging stuff out of the ground and sending it overseas mostly to China, mostly iron, all Eleanor price today is 175 us way harder than anybody expected.

And so that has saved the Australian economy and it will continue to for time, the question is how long will that go on for. Because all this money that I mentioned earlier on has just been to support the property sector in short term. There’s no long-term strategic plan for developing our economy into new areas and, you know, creating new innovation on those things.

It’s just what sometimes call houses and holes, right? That’s what the Australian economy is houses because that’s what people are essentially putting all their money and holes as we dig stuff out of the ground and ship it overseas. So this economy is very narrowly based. If you look at it on some of the international metrics, I think we’re the fourth most concentrated sorry that the 40th most concentrated.

So I know we’re right down the list with some African countries, very little diversification, a very small tech sector, very limited capacity. To create innovation and new businesses. And my surveys of SMEs are saying, Oh, well, you know, we’re not sure what we’re going to do because the other thing I will say quickly is that they turned off director responsibility for trading insolvent and they turned off the need to actually close businesses if they were insolvent.

Well, that’s now turned back on again under the year. So I’m expecting small businesses who really aren’t getting the support. They need to start turning over. So we’re in this sort of amazing. I call it Alice in Wonderland world where the property sector is booming. Right. And by the way, it’s not like as around the world of booming and everything else is looking pretty shaky.

Yeah.

Ben: [00:24:20] It’s well the markets have a way of making the logical. Thinking mind look silly, right? And this is just a whole new meaning to kick the can. It’s like boot the can as far down the road, as you can. And then hope that, you know, whenever you get up to it again, you can kick. I was actually, I was living in Bali in March and I had a visa run as set to go to Australia.

I’m very aware of the first initial strict lockdown because I could have, I was real close. I think two days from being locked down in Australia, which would have been, I’d probably still be there. It’s interesting to think through this. And I mean, th th there’s a lot there to unpack, but the way that I kind of want to push this and thank you, I thought that was an amazing recap.

And you have a fantastic memory of all the events and things that are moving on this. You can tell you, you talk about this quite often on your YouTube channel, which I’ll link to in the show notes. I think my key takeaway there Well, there’s a number, but the one I want to go through is the government has been extremely accommodative.

There’s QE lending, supporting low rates, driving them down, even lower tons of government support. I’d be curious on your thoughts of. How much different this looks then the way that the U S or other economies are fighting this pandemic and where it’s perhaps better or worse and the way that they’re attacking it.

Martin: [00:25:47] Okay. So I think there’s two levels. The first level is on the health end of the spectrum. I think we’ve been quite fortunate being a big Island, of course. It’s a little easier to insulate ourselves and we did put border restrictions in place quite early on. So international travel is banned. So unless you’ve got a particular reason to go overseas, you can’t.

So it, you know, and so that, that’s the interesting trade off between civil liberties and and trying to get the virus under control. And I think what was interesting in Australia, Australians tends not to be particularly compliant generally, but actually most Australians understood this was important and sort of accepted it.

So, so we’ve got a string of you know, barriers around the borders, right. And that’s the first thing. And I think you know, airlines in Australia was saying, well, we’d think it’s unlikely that we’re going to see international arrivals really ramping up for at least a year or two. They’ve started to change their tune a bit more recently, but they may just be a bit optimistic.

So, so I think that was the first thing. So seating the border and accepting the removal of civil liberties that that actually represented was that was the first point. The second point was that there, the mistakes that they made in Victoria and indeed in new South Wales was not being completely strict on those quarantine regime.

So effectively the breakout in Victoria was actually because people who were in quarantine and being looked after in quarantine, transferred the virus into the community. So they are getting stricter and stricter. So for example, they’re now saying that air crew, when they fly and need to be T. To be tested and people will need to be tested before they got on an airplane if they’re coming to Australia.

Right? So this, this is, he’s a remarkable, but probably quite searching. The first thing, second thing is they’ve had very good track and trace particularly in new South Wales. So as soon as the virus outbreak appears, and there were still mystery cases that pop up from nowhere, people don’t quite understand where they come from.

So, but then they go into massive track and trace and then give you a lot, a whole long list of places. If you were in that particular place, in that particular time, then you need to, so I might get tested because I have a 14 days you’re locked down, but not everybody’s locked down. Right. And we had a recent outbreak in what’s called the Northern beaches, which is North of Sydney.

And they ring fence the whole area and said, nobody in the Northern beaches can go beyond the normal. So that’s the sort of strength or. Disruption, depending on how you look at it, that actually effect with the virus. So, you know, is that sort of society you want? No, not really, but the question is it has worked in terms of, we don’t have the same spread of the virus that you do in Europe, or the U S are interested in New Zealand actually went even further and they did a very severe lockdown.

Initially they had a couple of breakouts beyond that, around quarantine, but they’ve recently declared in New Zealand virus free within the country. Right. So they’ve still got the, the ring around the border. So it’s remarkable that you can create effectively this eco space where effectively the virus is much more under control.

So in theory, the local economy should be able to motor up a little bit more, but then you get this sort of, I don’t know when you, you know what I mean by a whack-a-mole, but a whack-a-mole was a game where you have a head knock up and you get the head pop up with a hammer over that. Right. That’s what it’s like.

Right? So you play, keep playing whack-a-mole and I think we’re going to go on playing whack-a-mole the quirk, the concern I have is that people haven’t twigged yet that whilst you might get the virus controlled locally, because of so much of our economy is linked to the international community. Right.

For as long as the virus is raging in the U S or Europe or, or Asia, the economy is not gonna be normal, can’t be normal. Right. So that’s the sort of angle. The second angle then is from a financial perspective. We were late to. Taking interest rates down, we were sort of behind the fed in terms of their quantitative easing programs.

And in fact, in Australia our reserve bank said, no, we won’t need to cut rates anything like as much more. Well now they have. So they were late to the party. They followed the same playbook as the fed, I think they’ve done pretty much the same sorts of things, which is yield curve control. And that’s, you know, with the bond issuance and all of those things.

And I think the problem I’ve got is we’ve now got precisely the same problem as the fed and other central banks that we’ve got ourselves into this cul-de-sac of ever lower rates, but I can’t see anybody talking about how you get out of it. Right. Other than doing more quantitative easing. And I’d also have the view and you know, other people might disagree that the quantitative easing program started.

After the global financial crisis and it never solved that initial problem. So we’ve actually got a continuance, a continuation, and just going ever larger. So how, how much debt is too much debt? Well, more than you might think. And so you’ve got this artificiality to both the us economy and the Australian economy.

It’s not really capitalism anymore, right? Because businesses are being supported and they’re stopped from failing. The true value of, of money is all over the place. And if you look at a lot of corporates, who’ve got a lot of zombie corporates around there who are able to get really, really cheap data and just keep buying back shares and things like that.

And in Australia, interestingly, we had this some government support, as I mentioned to individuals via their jobs, I think called job keeper. And interestingly, a lot of large firms actually reported excess profits this year. Because they got all this money from the government and that meant that they were actually able to you know, pay Supreme high, higher dividends to shareholders and to pay bonuses to the execs.

So what’s happened is a lot of the money that was created. It’s flowed into the big end of town. Now I would argue that that’s exactly what’s happening in the U S as well, that what you’ve got is a support mechanism. That’s supporting the financial markets. It’s supporting the big end of town, consumers and small businesses while they might get a few breadcrumbs.

But, but, but no, it’s really a complete distortion of, of capitalism. You know, the idea is that capital goes to those areas where you can get greatest returns. Well, that’s gone. I mean, we, we’re not, we’re not in that situation. We’re in a controlled. Economic environment where effectively central bankers think they’re so clever that they can pull these levers and just throw them all to code at a year.

And we’re breaking more and more of the economic reality. And so I look at the Eurozone and I look at Japan, who’ve been at this longest, right. And I think we’re going to see the Japanese nation of Australia. In other words, no real inflation, more like deflation, the central bank holding more and more assets and buying more and more bits of the economy.

I think the central bank has something in Japan has unlike 40% of the Japanese economy now

Ben: [00:32:40] higher. I mean, I’ve heard it’s just crazy. Right.

Martin: [00:32:45] And they bought stocks, shares, you know, pretty much everything. Right. And. Rights in Japan are negative. Right? And so there’s a big debate about well, negative interest rates.

And now the reserve bank case, I don’t know, we’re not going to go into negative interest rates to which I reply yet. Yeah. I’m pretty sure negative negative rates will come. And that’s because this is a one way street. I can’t see a way back unless, and this takes us into another very broad discussion, unless you have some fundamental reset or restructure of the economic fundamentals and that’s where some of the world economic forum staff, which we can go into if you want is scary.

But that’s why some people are now saying. There has to be a reset.

Ben: [00:33:28] Yeah.  The old Testament had a debt Jubilee every 50 years.  This is the path I go down. Right. I, I look at these things. It’s, it’s widening the wealth inequality gap. It’s it’s every scenario I kind of go through.

We’ll just keep pumping this debt bubble until, until you can’t. And then basically it ends with pitchforks and torches and some sort of a reset. And it’s, it’s crazy to hear that the exact same thing is happening and in Australia, which, yeah, it’s not the biggest economy in the world, but like, you know, I look at the U S and it’s like, Oh man, this is a disaster.

It’s the death of fee money. Everybody else is in the same boat, which is even more terrifying. Right?

Martin: [00:34:10] Yeah. This is a, this is a planetary thing. I would say, I would say the most economies around the world. And even if you look at Japan, sorry, if you look at Japan. Yeah. Big example in the future, but even China, you know, the superficial numbers in China may not be bad, but they’re buying back bonds and they’re actually supporting their banking system and they’re reducing their capital structures to support the Chinese economy.

Right. So there are still some of the same things going on over there too. So pretty much wherever you look amongst more advanced economies, you’ve got the same old, same old it’s true.

Ben: [00:34:44] Talk to me a bit about the world economic forum and what they’re talking about and why that’s something that’s so terrifying for you.

Or maybe it’s not terrifying, it’s this, it’s this new world that’s going to solve everything, right?

Martin: [00:34:55] Yeah. Well, I mean, I, I suppose it depends on what you, what you think of a reset might look like. Right. And, and, you know, and that there’s a clear set of arguments that I would say what’s happened over the last 20 odd years.

Economically speaking has been a disaster for the majority of people around the world, because what you’ve got is you’ve got a concentration of wealth in an ever smaller group who’ve done very well. But if you look at the wealth distribution, it means that those with assets, those in the financial markets who are being supported by the central banks are doing really, really well now wonder stock markets are relatively high at the moment, but everybody else not so much.

Right? So, so there is a fundamental problem with the way that the system is working that system, which is controlled by central banks and central bankers. And, you know, whether you put it down to group think because all the central bankers get together and talk to each other under the BIS or whether you think there’s something more sinister.

I personally get group think, I think it’s just that, that’s just the way that they think because central bankers have a particular way of thinking. They are actually partly to blame for this. And the war I got there is that central bankers are not accountable to anybody. If you look carefully, right?

Because they are carefully separated from governments. And I don’t know what it’s like in the us, but you know, the central bank guys go and sit in front of parliament and the parliament ask them a few gentle questions. We call them Dorothy Dixon type questions in Australia. In other words, ones that really are not particularly hard to answer, but they never asked the really hard questions.

Right. So the central bankers get away with murder. Right. So then that’s been what’s what’s happened. Right? So, so there is a need, I think, a need to think different about now the question is, is what the world economic forum is saying then more than that. And is it sinister? And it depends on how you go.

So there was an article published a few years ago. It was actually an article written by a Scandinavian politician who basically talked about. You weren’t doing anything, you won’t need to own anything because basically it’ll be on demand. Right. And so, and they talked about using AI to be able to, you know, service people’s knees, et cetera, et cetera.

And it was a sort of a utopian view. And it’s interesting when that was purchased first published, it was sort of trumpeted by the world, economic forum. They, since have you noticed they’ve changed the title of it. And they’ve sort of said, well, this is just one scenario, one example. Right. But what they were doing there was, was highlighting how the combination of digitalization, the combination of you know, the, sort of the digital change.

So for example, you don’t need to own a kitchen. You can just have a fry, a frying pan delivered when you want to use it. Sort of, it was the sort of the example now, You could argue that that’s just sort of a, you know, a nutty sort of way to sort of think about a future. Right. But I worry that the combination of digitalization, the combination of the concentration of debt and the concentrate well from all those things could lead us to a situation where the likes of world economic forum and their connections to Davos.

And by the way, I always get Davos and Davos. Marla. I don’t know whether, you know, Dave Ross, but if you follow Dr. Who and the Darzalex, right. Deborah Ross was the guy who I actually created. No. Well, I, okay. Okay. So th th th th the diver also was the founder of the creator of the dollars. Right? Well, and Davos is the you know, the, this got a group of very powerful, rich people who get together and talk about the future.

Right. I wonder whether this is a coincidence. I’m not sure whether there is, but, you know, I think it’s quite interesting. So, so I I’m worried that these powerful people, these rich people, these affluent people are going to be trying to dictate. A future, which effectively is sort of coming top down, you know, come down through central banks, come down through, and we won’t have a chance to really debate it locally.

Right. So I’m very worried about that. Now. I also think that if you bring into the mix, then, you know, I’m Prince Charles, a good example of somebody who saying, we got to thinking about the environment and, you know, eco as well, because we are on this one sphere, right? This one arc we’re part of it. It’s not like it’s us versus the earth.

The earth is us. So if we actually take the you know, the earth into an area where effectively it becomes uninhabitable, then we, we, we kill ourselves. So we should be taking that seriously too. So there are clearly some big questions to be asked about how does. Economics work in the future. How do economies work in the future?

You know, what’s the right degree of, of personal freedom, local freedom and international coordination of some of these big questions. But the worry that I’ve got is that people are jumping to a particular solution where they use technology and they use central planning and this feels more and more like you know, communism and control and anything else.

And that worries me. And yet it seems to me that maybe because of the virus and maybe because everything else that people just seem to be sort of sleep walking into this future of digitalization digital money. Right. First. So for example, so what happens if suddenly like in areas of China, where they’re using digital money, right.

And they’re actually giving out digital money. But then of course, digital money means that you can associate it with a social score. You can be controlled, it can be turned on, it can be turned off

Ben: [00:40:20] lately. It can be blocked and censored for certain ways. It’s yeah.

Martin: [00:40:25] And I’ll give you another, another local example.

Last year in Australia, we have an attempt by the government to ban cash transactions above $10,000 between businesses and individuals. Right. And it was brought in as an initiative to you know, deal with anti money laundry areas. But the truth, the truth was that this was essentially a removable civil liberties.

We have today to be able to settle in cash. If we want to. Now we actually launched a reserve resistance movement, partly through this for the DFA channel. Right. And we actually got three and a half thousand submissions to parliament. Which was probably as many they’ve ever received on any issue ever.

Right. And then through a series of hearings, it finally got killed. So we have no cash ban in Australia. And that’s the example of democracy in action right now that took a lot of time. Whenever a lot of people are lot YouTube channels because the, the formal government processes just didn’t work right now.

That is what I’m on about in terms of there are things that if we’re not careful, I just happening to us and little bit by little bit by little bit, we’re giving up freedoms, we’re giving more and more accountability or responsibility to some, you know, autonomous authority, be it local or global. That is what’s going to happen unless we stand up for it, unless we actually say no, no, no, no, no freedoms have been hard won over generations.

Right. And we’re not just going to sort of turn around and say, Oh, that’s fine. Feel free to just, you know, and that’s why I get really twitchy with these lockdowns that we’ve had in Australia with the virus. Right? Like I said, civil liberties were actually crucified in the process right now. We rolled over.

I put, I wonder how many of those we rolled back. So we are, I think at a very precarious time, no evolution, right? Because the, on so many fronts, we seem to be hitting the boundaries between inequality, you know, wealth versus those who really don’t have enough to get by the digitalization of everything and the control that, that, that leads to.

And I also am very concerned about the broader environmental and social issues that they create too. So, so there are huge, huge, big picture issues here. Right? And my worry is that what we end up doing is dealing with the spot fires rather than actually the strategic picture. And I tell you, I said that that was a philosopher, right?

I want to know what our future is going to be. And I want to us to have a debate about what that future should look like and what controls we are prepared to accept and what controls we aren’t prepared to accept and how much government debt and spending. Is appropriate rather than it just being dictated to, which is what’s happening at the moment.

Ben: [00:43:20] Well, yeah, the frog in boiling water analogy is completely incorrect, but that’s the way that I think about it. It’s like these little things and I actually thought they use the coronavirus as a, as an opportunity to band cash. It’s like this cash is so dirty. It transmit to the virus, we’re going to push this a digital only version, you know, and it’s kind of a

Martin: [00:43:43] it’s happened in areas in Australia.

There are, there are some who are not taking

Ben: [00:43:47] cash, push it further and further there. And it’s an easier way to push a UBI and stimulus and, and fiscal policy. It will be so much more efficient and you know, it’s like a dangling the carrot and you, you’re just you’re giving up all of your financial privacy and, and eventually even, even more privacy because the ability for Some governments shut you off completely when it’s completely digital.

That gets, that gets real big Brother-y and not very fun.

Martin: [00:44:15] Well, what’s interesting here is that we’ve had a removal of press freedom and personal freedoms over the last 20 years in Australia right now. You know, when I first came to Australia, I felt that Australia was a relatively free and open society, but little bit by little bit by little bit, thanks to risks of terrorism, you know, and all of those things and bad things that happen.

It’s a little bit by little bit things are being eroded. Right. And I don’t, I don’t think there’s a complete blueprint from soup to nuts. Some people have argued that there is, I don’t think there is. I think there’s just an incremental ism, but the trajectory of that incremental ism is what concerns me.

Right. Because. Every time we lose a bit of freedom, right? It’s going to be really hard to pull it back. And every time we’d lost a bit more the analogy I sometimes use is it’s like the sea coming in and eroding the cliffs. Right? Little bit by little bit, a little bit. The cliffs get eroded and you come back 10 years.

Legend. Ooh. I’ve lost 12 meters of land. Well, that’s how I feel about what’s going on at the moment.

Ben: [00:45:18] A hundred percent. It’s like a glacier melting, right? I mean, every year you look at it, it looks the same, but you’d look at a picture from 50 years ago and it was a lot bigger than, and it’s, it’s very drastic.

All of this stuff is pretty dire. I mean, th th the, the world economic forum,  go to WWII forum.org/great reset. People, people are talking about this. It’s almost impossible. You can pick up the little breadcrumbs, but it’s almost impossible to know the entire picture and what it will look like.

There are things like BMT that are popping up, like where, what are you kind of thinking through the way of some global bank Corp and global centralized government? Like, walk me through how you’re thinking through this.

Martin: [00:45:59] Yeah. I mean, I, there are people who believe that there is a blueprint, a globalized blueprint that’s sort of there somewhere and is being rolled out.

My own view is I think that’s. Relatively unlikely simply because I just don’t see how that necessarily formerly would happen, but informally, right. A little bit by little bit, as people get together and talk, and as you know, central bankers get together and talk and governments get together with the G 20 or whatever, you can see how the components could almost by accident end up in that direction.

Right. And frankly, with totalitarian you know, people in power, you know, look at what Trump was doing. So quite reasonably other, other places to even here in Australia, we’ve got a more dictatorial spirit coming through at the moment in, in, in our leaders than previously. Right. There’s much less feeling for consensus, much less taking us with what’s going on.

It’s more sort of. Do this, do that jump here, jump there. So there is a tendency to sort of follow the story. So I I’m of the view that there is certainly a risk of some of these things falling the wrong way. And essentially the combination of the digitalization that I’ve mentioned, the globalization that I’ve mentioned could lead to things like a currency that, you know, what, what are what’s after the door.

Right. And Mark Carney a couple of years ago used to be the, the guy at the bank of England. He actually made a speech at Jackson hole saying, well, the next S you know, currency after the U S country might not be your own, it might be a digital currency right now, if that’s the case, it could be a global thing.

Right. And if it starts getting global, then you’ve lost another element within the way that economies actually work and the autonomy like locally. So, so there is a risk. There is a risk that some of this globalization stuff and some of this top-down stuff. And I have to keep saying, well, who is the world economic forum and United nations, and some of these other large organizations who are they accountable to, right.

Who’s actually, who’s actually keeping them in check and under control because it seems to me it’s coming the other way around that they’re actually publishing these missives and saying, well, jump here, do that. You know, bank for international settlements has imposed capital adequacy rules on banks around the world, such that lending to small businesses is more capital intense than lending for mortgages.

Now wonder then that banks prefer to make mortgages. I mean, there are consequences for this top-down governance control and I just worry that we’ve lost the plot.

Ben: [00:48:41] I completely agree. all of these factors and these big moving pieces, how, how does one think through in the investment decisions you’re making now?

Some of these things it’s like, okay, well I buy a bunker and a bunch of gun non-perishables right. Like, cause that’s a scenario, but like, you know, I don’t want to go down to dystopian. Yes. This is a bit Orwellian and big Brother-y, but like how do you think through investment decisions taken now with these facts in play?

Martin: [00:49:11] So I think there’s a few as a few observations and I don’t give investment advice particularly, but you know, the fact is you need diversity in any investment strategy. Right. And ever more than ever. I am really worried when people. It just tells me, well, I’ve decided to put all of my savings into Bitcoin.

Right? It’s gone up so much. I can’t lose well, maybe, but what happens if you’re wrong? Right. So I do think there’s a really important place for diversification. I also think that the chances are that we’re going to see the financial markets have a significant hiccup ahead. I don’t know when that’s going to be.

I don’t know whether it’s going to be the next week or the next month. The next year, my feeling is with all the central banks support. It’s probably going to be months or maybe years ahead away, but it could be wrong. Right? So at some point, those because the valuations are totally stretched. If you think of any stock at the moment in the market and look at future earnings growth, which is how you normally would value stocks, they’re about what 40% over value on average.

And there are some even more, you know, tech stocks even might look at Tesla for example. So, so you’ve got to think that the, the, the logic about. You know, the search for value is actually quite different from where it was. The other point to make there is that, of course, it’s the tech sector that’s done really, really well over the last few months, particularly with the virus.

And the question is, is that going to continue? Well, recent wobbles suggest, maybe not, maybe, maybe not. There are some sectors that are out of favor at the moment. Well, maybe they’ll come back, but then how quickly will the airline industry, for example, or tourism is going to come back? Well, depends on the depends on the virus.

So there are significant risks. The other point to make is with savings rates. So low, I mean, I don’t know what term deposit rates are in the U S but here you get almost nothing. Now, if you put money in the bank, And so people are being forced out from holding money in secure bank environments, even as a risk of bail in which, you know is maybe low, maybe high, but they’re being forced out into the market.

And in fact, the reserve bank here keeps saying, well, people are going to have to take market risk. So they’ve been forced to play that game. And I think I’m concerned by that as well. So diversification is pretty important. I also think that you’ve got to be really kept going back to the spruiking point.

There are, nobody can tell you how this is going to turn out, right. There are too many variables. There are too many countervailing factors. So anybody who says futures gold or the futures crypto or whatever it is, right. Nobody knows. Right? So the level of uncertainty that we have is probably as hard as it’s ever been.

And that suggests to me that there needs to be a little bit of conservatism in terms of an investment strategy. As I say, spreading the risks. And also, I guess you’ve got to ask the question, are you thinking of investing to protect the assets you’ve got or to try and trade in or create growth?

Right. Because you know, there are people who’ve done quite well with Bitcoin over the last three months. If you bought it, then sold it recently, then you’ve probably done quite well. The question is, is that repeatable and you know, that’s another question. So there’s a bunch of really big investment questions.

It’s really complicated. And what I say to people is anybody who thinks that there was a simple formulation and a simple answer to this are just deceiving you there. Isn’t right.

Ben: [00:52:37] They’re just missing a lot of it. Right. And they’re just not thinking through a lot of these things, which sometimes is the case.

Yeah, I think that that’s very sound advice and yeah, it’s pretty scary out there I’d like to pivot perhaps a bit and talk a bit about Australian investors and the way that they approach investing in the mindset and diversification and things like that. And how that might be different than like the average American investor.

Martin: [00:53:05] Well, let me start by telling you that we are probably some of the largest, most sporty gamblers in the world, right? We, we have a large number of what we call pokie machines here. You know, those things where you go into that and you pull the lever and you’ll see whether you get three lemons or whatever.

Right. It’s amazing how much money is spent on those and on the horses. So Australians are, are gamblers by nature. Now, perhaps you could argue that this is a consequences of the you know, being shipped out from around the world, you know, criminals and all of those that I don’t know, I don’t know.

But, so, so there was a very strong gambling. Wagering sort of thing here in Australia. And so people quite often will take short-term decisions on the hope of making a profit. Right. And that has been quite surprising to me because that’s not, I’m not wired like that at all. I was brought up in the UK.

My father was a bank manager. I’ve always tended to go be rational, but go through it and really think it through. Right. So I just watched some of this stuff and that you’ve got to be kidding, you know, but so that’s first point. Second point is property probably, probably, probably is the number one asset class in Australia.

For most people, they believe that that’s where they make the biggest returns. I’ve mentioned the doubles in seven years, even if the data doesn’t support that. So a lot of people will go into property first. A lot of people will also go into the stocks not necessarily local stocks, some international stocks as well because of the con relationship between that and the U S dollar and those sorts of things.

But we’re also seeing now an interesting goal. So we have some gold miners in Australia and people are buying quite heavily into the gold miners, as well as the gold price. And recently crypto has become really quite big here. We have a lot of people, even a lot of boomers now buying crypto Bitcoin mainly, but not only Bitcoin.

And so we’re starting to see that that come in as well. So what I’d say is there’s a lot of confusion amongst investors. There were a lot of people banking a lot on particular asset classes, assuming that that’s the right way to go in line. The diversification isn’t necessarily some which is easy. To convince people to do at the moment.

And the other point to make is there, we have a superannuation system here, which is a force superannuation system. We are forced to save for our old age right now that money is a separate pot. If you’re working a certain percentage is taken out every month and goes into your super. So all people have superannuation that superannuation is an invested by large superannuation funds into all sorts of things.

So as well as the local investors, you’ve got these institutional investors and superannuation investors. So the thing that people don’t get is you’re often competing as an individual investor with the superannuation funds who have huge reach, huge capability and capacity. But also a tend to net average around the index.

So it’s quite difficult sometimes to be able to get a return that’s better than the index as a result of that because of the relative concentration of the superannuation funds. So that’s sort of in a nutshell, the wet the way it goes. We have close to 3 trillion in superannuation and that’s 3 trillion Aussies.

And it’s interesting that one of the initiatives going right back to the virus, they allowed people to draw out $10,000 from their superannuation last year. And this year and 39, 40 billion of super was pulled out. So a lot of people decided to pull the money out and just use it rather than actually safer for retirement because they good.

Right?

Ben: [00:56:40] That’s the speculative nature of the, the investment, right? I mean, if you have the superannuation, this thing, that’s going to take care of you in your old age. It’s like the money that you’re investing today is more of play money. And then it has these bigger instant gratification and social media is everybody’s making millions of dollars.

Martin: [00:56:58] Well, actually a lot of people use that, lose that money from superannuation to go and put a deposit on a house.

Ben: [00:57:05] Well, I mean, real estate prices only go up. It’s a, it’s a sure bet. Right? But are the superannuation funds investing in Australian real estate as well? I mean, it almost sounds like that would

Martin: [00:57:16] happen.

It’s feasible. That’s feasible. Yep. Absolutely. In some, some do, and some have a lot of their superannuation in property in super funds, super funds are basically separate you know, legal entities. So they’re actually managed differently. And there’s also a thing called a self managed super fund, which is basically where you manage it yourself.

Gotcha. So basically you basically have your own portfolio. That’s separate from your personal wealth. And so that’s been growing quite fast as well. Although a lot of people are actually, if you look at the returns over medium term, they tend to perform less well than many other funds, but there’s also worth saying that some of the big what’s called retail funds, the ones run by the big banks underperformed dramatically.

Because they have high fees and they tend to trace the index or below. So it’s a really complex environment. And it’s interesting that the level of knowledge and experience and understanding and education in Australia in an Australian context and for Australians is very low. So there are a lot of people who really think they’re experts in investment and they’re not they’re traders.

Ben: [00:58:18] Nice. Well, people like you doing fighting the good fight and helping people understand this, this important asset class and some other aspects, right. That are, that are coming into play. But yeah. Holds and houses. I won’t forget that one. That’s, that’s a really easy way to remember the Australian economy.

Martin: [00:58:36] That’s what Australia is houses and homes.

Ben: [00:58:38] This is going to be the new mental model, the lens at which I look through that part of the world, unfortunately, or fortunate.

Martin: [00:58:44] And if you added, if you added poisonous. Well, yes. Things that are trying to kill you as well, then you’ve pretty much nailed Australia.

Ben: [00:58:51] Yeah. Well that March trip, that was going to be my first trip. I was actually really excited, had a whole thing, but you know, the virus had other plans and now I’m back in the U S so the other side of the world, but Martin I’ve, I’ve really enjoyed this conversation and quite philosophical discussion on where the world could go.

That’s a, it’s certainly not an easy answer there, and it’s pretty unknowable at this time, but I enjoy talking about the, the factors at play and it kind of lets your mind wander on where potentially we could go.  I really, really enjoyed the conversation. Wanted to just give it over to you.

Where do you want my listeners to find out a little bit more about you and what you’re

Martin: [00:59:30] doing? Well, thank you for that. And I’ll go, I enjoyed it too. And look, you know, you’re always going to get philosophical stuff from me because I keep asking that the next question, the next question, and some people find that really uncomfortable philosophy is uncomfortable, but actually from that uncomfortable journey can come more lasting and deeper truth in the current environment.

I think that’s what we need. Now, if you want to get more about what I do, my main channel on YouTube is called walk the world and I post daily there and discuss a lot of these things so that we have philosophical discussions. We have data-driven discussions. I also have a [email protected] and I post a lot there.

And I’m also on Twitter as well at DFA analyst. Awesome.

Ben: [01:00:15] And I’ll link all of those really appreciate it. Martin really, really enjoyed, enjoyed this.

Martin: [01:00:22] Well, I enjoyed it too. And keep safe and keep watching the sky, sir.

Ben: [01:00:27] Thanks. You too.

There, you have it. Thank you for listening. I really appreciate your support.

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Happy investing.


Ben Lakoff is an entrepreneur and finance professional. He has developed strong global finance experience through 10 years of international assignments in the US, Brazil, Afghanistan, Southeast Asia, Czech Republic and through the award of his Chartered Financial Analyst (CFA) certification.