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Newsletter 28

28 May 2021

Global Macro-economic and Geo-political Update

Global Economic Outlook

The global macro-economic environment continues to reflect a number of inter-related factors. Firstly, and most importantly global trade declined in 2019 and the figures for 2020 are not yet available although the effects of Covid will likely mean a further decline. Unless the “pie” grows then global GDP will fall and so will global wealth as reflected in the increasing wealth gap across most advanced economies.  Another key factor is the world has become more indebted with countries embarking on major stimulus programs and “aggressive” monetary policy. Central bank manipulation of interest rates is disrupting the efficient allocation of capital, and this is best illustrated with corporations continuing to buy back their shares rather than investing in new technologies and business opportunities.

US and Chinese Economies

The ratio of US debt to GDP is now about 120% and increasing. The US Federal budget deficit in 2020 was $3.1 trillion. When Obama left office in January 2017 it was about $587 billion and trending down. This explosion in the budget deficit reflects the Trump tax cuts and the increased fiscal spending to counter Covid and fall in tax receipts also because of Covid. There is historical evidence that as national debt increases as a percentage of GDP, further stimulus measures have very short term and a marginal impact on economic growth. In the longer term it has a negative impact on growth. Japan is a case in point.

Recent inflation figures in the US indicate rising inflation; however it is important to look at the trend and successive figures not just a single published result. The Fed is trying to encourage inflation as it wishes to inflate the real value of the debt (as distinct from the notional value) away. This is leading to a loss of purchasing power (inflation) as prices have risen on critical food and commodity, e.g. lumbar items in the US.

China’s published macro-economic figures are questionable. Some key developments are China is buying less US treasuries and has banned crypto-currencies. It continues to wield market power as it is a low cost of production economy and with a population of over 1.4 billion it will continue to grow. India and China in the last 30 years each have developed a middle class of around 400 million people who are major consumers. Economic growth will come out of Asia.

Australian Economy

Australian budget deficit is forecast to be $161 billion in financial year 2021. Total government (Federal, State and Local) debt as a percentage of GDP in 2019 was 48% compared to 120% for the US. This will obviously increase with the major stimulus programs outlined in the May 2021 budget. Australia comparatively to the US, Japan and Eurozone is well positioned to ride through the Covid crisis although there are challenges particularly Australia’s relationship with its major trading partner China.

Real Returns

Real returns (after inflation) are close to zero and as highlighted many times they are negative on international bonds even before taking into account the cost of currency hedging. It is for this reason that for a number of years we have very limited investing in international bonds.

The table below shows how yields across all asset classes have fallen over the last 10 plus years. For those who are retired or planning retirement it is important to understand that the income levels that a “standard” portfolio, i.e. 60% equities and 40% bonds previously generated is no longer the case. This means that to increase income, investors need to take on more risk, i.e. more equities. If you are willing to ride the market ups and downs, i.e. accept unrealised losses (do not sell) this approach should be adopted.


We have written a lot about this over the last 12 months and we continue to monitor this closely. There has been a slight “kick up” in inflation because supply chains that have been disrupted by Covid are coming back online despite the trade war between China and other parts of the world. Equally, “Government handouts” reduce the purchasing power of money and are a disincentive for some folks to work, however we believe inflation will be temporary. This is subject to these hand out programs not continuing as high levels of global debt, falling global trade, high levels of under-employment and lack of real wages growth are disinflationary. In our view the Australian dollar is more likely to appreciate against the USD in the medium term because Australia’s stronger economic fundamentals relative to OECD countries and Australia is viewed as having managed the pandemic well. As a safe haven economy a strengthening dollar means inflation is not imported. This could change of course and we need to closely watch for more sustained inflationary pressures. We do not see 1970/80s levels of inflation breaking out as the economic circumstances were very different, e.g. oil shock and breakdown in Bretton Woods agreement.

We continue to adopt a diversification by country, product, currency and theme approach to protecting capital and generating the best returns.

As usual we are available to discuss. Stay safe!

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