Black Swans, grey rhinos and red lorys

It’s mid January. Davos has started and we’ve had three weeks of the financial press alternating between the world economy is coming to and end and it’s all OK.

Christine Lagarde punctured the former view yesterday announcing a reduction in the growth rate from 3.9% to 3.5%. This was ‘backed-up' by Xi Jingping’s comments to the Party faithful to be highly alert to unexpected risks including ‘black swan incidents and also guard against risk of ‘grey rhino’ (unpredictable market events).

The thing is, I am not at all surprised that the ‘world economy’ is slowing down (again). Note I say slowing down not tanking, not heading into recession, not collapsing as some/various headlines state. Depending on who you read and what day any of the above is possible...the future always has been, unknown, unpredictable.

Down here in Australia the news reporting seems to resemble a pin-ball bouncing unpredictability between doom, disaster and downfall and ‘aren’t we wonderful, the housing free-fall merely an adjustment, the credit tightening due to the Hayne Royal Commission is a ‘realignment’ and ‘she’ll be right, we got through the last financial crisis, we were the only ones that did, we’ll do it again.’

I am calling this the ‘red lory’ event (yes there is a bird called the red lory and it’s found in Australia).

Apparently the world’s CEOs think Australia is going to be their saviour too based on the latest research from PwC released at that meeting of the world’s best and brightest in Davos.

If they really believe this we’re all in deeper trouble than I thought.

So I am calling the downturn/slump/malise/recession here inAustralia and here’s why.

1. Australia has cruised since the GFC.

The politicians and population have developed a level of complacency that I find extraordinary. Most somehow think it was great policy intervention by the government that saved us from the GFC tsunami…it was China. Now China is in slow down…well if you think 6.6% growth is slow I’d love to know where you’ve been for the past 20 years. Yes I know it’s slow for China (its lowest growth in 28 years) but not for pretty much every other country on the planet.

Of course Australia’s complacency and increasing entitlement attitude are thanks to China’s growth.

2. The IMF’s latest downgrade

Christine Lagarde shared with the Davos devotees that world growth would note be the projected 3.7% but 3.5%. This should not surprise anyone and if it does and they working in banking, finance, government or the media they need to find a new job.

Next to the ECB the IMF has rarely got any prediction right. That could be because the decade of QE has skewed the developed nations economies for too long; that there are so many black swan, grey rhino and maybe a few red lory events around – US-China trade war, Turkey’s troubles, Italy, Greece, Spanish instability, Brexit, Russian spying, Chinese cyber warfare, the South China Sea, North Korea, Iran sanctions, Taliban resurgence, the rise of dictators . . .and so on; or that HFT and algorithms have taken over the market leaving mere mortals and some of the masters of the universe pulling up stumps.

No wonder archaic world institutions and their well-paid bureaucrats are having a hard time picking what’s going to happen to specific economies let alone the world economy. Having studied politics and economics at university and retained a vital interest in both throughout my life I am slightly bemused by the thought that so many of our world leaders extrapolate future events based on past performance. The future is unknown. Yes we can postulate about what might happen, what's likely to happen but swans, rhinos and now lorys ALWAYS get in the way.

Let’s just grasp the notion that we don’t know, that the world is a highly unpredictable place made more so by Donald Trump who thrives on unpredictability and fear.

3. Australian politics, red lory in the mine

Australia's political system has been hijacked by interest groups who have taken rent seeking to new heights. We might not have a Donald Trump (oh...maybe we do, Clive Palmer) but I am thinking that we might have something just as bad. Politicians from both sides and the independents are spruiking their favourite rent-seeking group demands as considered policy.

Does this ad remind you of anyone?

The latest absurdity is the Labor Party’s $1 billion pledge to a ‘national hydrogen energy hub’ that just happens to be in Queensland a state the Labor Party has to win some seats. (Pork barrelling methinks). From where is the $1 billion coming I ask?

As for the Liberals, the Prime Minister has pledged a mere $6.7 million for the refurbishment of the replica Endeavour in time for the 250th anniversary of Cook’s discovery of Australia . . . great use of public funds I don’t think. And the drivel that he spoke when announcing it. ‘That’ll be great for tourism (that old fav) and it wil also be a great opportunity just to talk about our history, of the view from the shore, the view from the ship, and very much understanding those two stories’.

Better political speak I don’t think I could have written myself to channel Obe Won Kanobi.

Yes, I know, we have a state election here in NSW in March and a Federal election in May, but the throwing away or future commitment of tax payers money by both parties is appalling and it’s only January.

4. The Hayne Royal Commission

We're a bit slow here sometimes in Australia, and our complacent attitude combined with 'we're special' belief meant that we really do think we're unique..we dodged the GFC black hole. The reality is we have been teetering on the event horizon ever since 2008 in terms of reform of our financial system. I should know I've been researching and writing a book about this over the past four years that might see the light of day some time soon.

While the Hayne Commission was needed the shellacking of various bank representatives throughout 2018 has already leading to plenty of totally predictable ‘unintended consequences’.

The first of these is the tightening of credit to home borrowers, small business and commercial investors. Why anyone was surprised about this is beyond me. So now we have various interest groups campaigning for special treatment. If everyone is special, no-one is.

Second, we have an increase in non-bank lenders and a rise in neo banks to fill the gap (oops I mean offer competition to the Big 4). It seems many of our politicians don’t really understand either given their questions at the current Senate Inquiry into payday lenders, debt management firms and buy-now pay-later (called layby when I was growing up) businesses.

Thirdly, we have the rise of the neo banks, like the newly minted Volt Bank (I thought it was a promo for a new Marvel film when I first saw it) and not so new but still ‘neo’ Prospa, Archa (that of financial whizz kids rugby union player Quade Cooper and Emily Skye), Zip and more. Apart from the fact that they are targeting millennials – that group of the population that don’t have full time jobs and probably never will, have huge HECS debts, can’t afford the deposit for a one-bedroom apartment let alone a house – the cost of their funds are substantially higher than the banks, and most are not required to check the creditworthiness of their customers. So when some fail, as will inevitably happened if you’ve read points 1 and 2, we’ll have the all too foreseeable ‘unintended consequences’ occur. Just think Storm Financial...that so aptly named non-bank financial company from the pre-2008 period. Hey it could phoneix as STRM then it'd be a neo bank and the regulators wouldn't feel they need to regulate it – they didn't do a crash hot job the first time round so perhaps the might have improved.

5. The Australian psyche

Australia has changed in the 30 years I’ve lived here. Just read Paul Kelly, Paul Megalongenis or a range of Quarterly Essays if you're interested. It’s become more divided, more sexist and more racist. This is not to say every Australian is racist and/or sexist rather that we are more polarised. While corporate Australia is seemingly working hard to be more diverse this does not reflect the population as a whole. We need to own up to this if we’re going to grow as a genuinely more inclusive and open society.

Of course, it doesn’t help that most of our male sports teams are performing poorly and many have a deeply embedded attitude of arrogance combined with a high level of complacency and entitlement. The women’s teams are doing much better but get less air time and less pay (how surprising).

It also doesn’t help that our political parties are woefully not diverse, and I mean way more widely than just the number of women in the politics. The preponderance of white, middle-aged males, former political staffers or union representatives is simply not representative of the population.

Just watch as more independents win seats in the upcoming federal election and the one after it. The binary Liberal coalition/Labor offering is no longer serving us, and many know it.

Is Australia the economic saviour of the world?

So, if the world’s leaders think Australia is their saviour, I’ve got news for them it’s not. Flat wages, declining house prices, tightening credit, more royal commissions than you can poke a stick at, billions in compensation from banks, companies and the government, rent-seeking pay-off policies and low productivity mean Australia and Australians are living in a bubble of complacency and entitlement, bolstered by an ill-informed view of our specialness.

Australia is not special. It is lucky in that we have the fortune to dig any number of minerals, ores and precious metals out of our ancient landscape. We're used to a boom and bust cycle, but in the global service economy, China growth absent, we're a red lory in the headlights.

Australians have to adjust their expectations, spend less, work harder and stop loading up the next 2-3 generations with the predictable and foreseeable ‘unintended consequences’.

We need to be kinder, more supportive, more community-minded, engaged. Be open to and prepared to discuss our different points of view and find a way through that we can all live with rather than take an either-or, us or them approach.

The red lory’s are out there sitting on the branches . . . they bright red so they’re easy to see, if you are looking.

Enjoy your Australia Day where-ever you are. It is a terrific country to live in but we all have to work to keep it that way.