1. The underlying issues in the global economy …
Greg Clerk
Head of Investment Strategy
Hostplus
September 2017

2. contents What is going on … What are the global forces at play?
It is a tale told by an idiot, full of sound and fury, signifying … something.
What is going on …
What are the global forces at play?
How are they playing out globally?
How are they playing out locally?
What is really going on …
The world has changed, and is changing, but some things remain the same.

3. the global economy has two problems
… well, at least two.
Too much debt.
Massive wealth disparities.

4. How is debt reduced? 1. Earn more (aka higher GDP growth)
Like with your mortgage, there are four main ways for Central Banks.
1. Earn more (aka higher GDP growth)
2. Lower Debt Servicing costs (aka lower interest rates)
3. Reduce the Debt amount (aka higher inflation/CPI)
4. Forgiveness (aka default/restructuring)
Inflation and Forgiveness aren’t necessary – they’re last resorts.

5. Deleveraging The Central Banks are getting there … at loooong last.
The debt is still with us. But maybe the tools are starting to work.

6. Growth is all we need. Provided interest rates are low(er).
Growth is recovering
Growth is all we need. Provided interest rates are low(er).
Report card
The report card to date is good. So Central Banks think their job is done …

7. But The easy days have ended
… though the good (growth) days are here.
The biggest global challenge for Central Banks is to increase rates without killing the growth.

8. Markets have enjoyed the largesse
A lot of wealth has been created since the GFC.
Central Banks (literally) made a lot of money. So who got it?

9. Central banking actions
Capital won big, consumers and workers … not so much.
Capital
Consumers
Workers
Everything became more expensive … which was great if you owned it before it got expensive.

10. globalisation Capital Consumers Workers
Capital wins big, consumers win too … but workers lose.
Capital
Consumers
Workers
Everything becomes cheaper … but the jobs go overseas.

11. Everything becomes cheaper … but the jobs go. And don’t come back.
technologisation
Consumers win … and workers continue to lose. But capital loses now too.
Everything becomes cheaper … but the jobs go. And don’t come back.

12. Central Banking Actions
The scorecard?
Good for those who have jobs, or who have capital. Not so good if your job goes.
Central Banking Actions
Globalisation
Technologisation
Capital
Consumers
Workers
So who are the winners?

13. Only A few. Which is a problem
The 8 richest are wealthier than 50% of population (3,600,000,000 people).
Which is unsustainable, as even these 8 know. Because …

14. (almost) everyone gets to vote
And politicians will play that advantage … to their advantage.
Central Banks reversing? Globalisation rejected? But there’s no stopping technologisation.

15. Australia … lucky, lucky, lucky
We’re in the third phase post-GFC. We’ve done well to date …
The Global Financial Crisis ( )
Heavily indebted … but no deleveraging while the world succumbed???
How? Commodity prices bounced due to China. AUD fell but earnings in USD. AAA-rating and strong banks (with Government) meant funding and capex for mining to stimulate the economy (while AUD recovered).
The Commodity Bust ( )
Massive mining exposure … but no recession as prices plummeted???
How? AUD fell (increased earnings). Debt denominated in AUD (unlike EM). High cash rates eased to 1.25%. So all debtholders/homeowners got wealthier, and building construction climbed (Chinese buyers helped too).
The Pivot? (2017-?)
Highest housing prices in world … but not yet a bust.
We still have flexibility (low rates but not zero). Mining volumes strong, and prices recovering.
Highest Balance of Trade figure ever. We’re in transition … but risks due to China still.
Not out of woods … but can see the clearing, and if world growth keeps going … we might come out unscathed.

16. our jobs are pivoting
Growth is in the services. While mining and manufacturing contracts.
We’re finally focussing on “renewable” resources.

17. But no job is sacrosanct
Though leisure, hospitality and tourism are likely to thrive in the interim!
While other sectors wither …

18. The destination is reasonably clear … not so much the path though.
conclusion
The destination is reasonably clear … not so much the path though.
We are largely out of the GFC … though relapses remain possible.
Globalisation (& Central Banks) created massive asset wealth ... but didn’t share it well.
Voters begrudge that, and want changes … or rather “changes back” (conservatism).
But Technologisation change is here, irrespective of voters or politicians … or capital.
This change will benefit the end consumer immensely …
… provided society survives the transition.
Australia has some challenges in this environment though …
… Tourism/Accommodation are better placed to weather it.

19. Thank you