Dear Reader, ‘Acceleration of digital, tech, and analytics. It’s already a cliché: the COVID-19 crisis has accelerated the shift to digital.’ McKinsey & Co report ‘From Surviving to Thriving: Reimagining the Post-COVID-19 Return’ To paraphrase Ernest Hemingway ‘how did technology change society? Two ways. Gradually, then suddenly.’ Prior to COVID-19, technological change had been incremental, but the trend was evident. In November 2015, I wrote an article in The Daily Reckoning that explored the potential impact technological advances were likely to have on society. Here’s an extract… ‘Perhaps we’ll see a complete 180-degree reversal and people move out of the cities and re-populate regional towns. Looking for a lower cost and better-quality life — growing veggies, collecting their own water and harnessing solar power. ‘The technology trend is going to be a global deflationary force. This deflationary pressure could be compounded if there is a collective re-evaluation of “what’s really important in life”. ‘Deflation brings with it lower rates of return. Retirees will be burning capital to fund their lifestyles. Retirements will need to be re-evaluated. ‘What if, due to these deflationary pressures, society decides “there’s more to life than keeping up with the Jones’s or having the latest toy”? The whole credit consumption economic growth model that evolved from the economy’s previous trends may be rendered obsolete. ‘What will that do for banking shares? What does that do for real estate values in cities? Will building smaller, more sustainable housing be a profitable trend?’ While it’s early days yet, there are signs the migratory trend to regional areas is underway. As reported by ABC News on 26 August 2020 (emphasis added): ‘Urban dwellers who are fed up with working from home in expensive city homes during COVID-19 are fleeing to country lifestyles. ‘And analysts say that may just have a silver lining for regional housing markets across Australia. ‘Before the pandemic, Melbourne resident Ellie Bonnett had spent two years unsuccessfully trying to buy her first home in the capital city market. ‘Then the pandemic hit. ‘After years working in a CBD office, the human resources director found herself working from her rented apartment in Melbourne's south-east. Cooped up in her living room, she dreamed of a country lifestyle. ‘The millennial bought her first home in the country town, two hours north of Melbourne, in May. It cost just under $600,000 and has several bedrooms, a backyard, and a balcony with views over rolling country hills.’ More bang for your buck. Better quality of life. And what was the catalyst for this change? ‘The urban claustrophobia intensified when the tech company Ms Bonnett works for announced it is closing all of its offices globally and will go entirely remote.’ Technology has made what was previously thought impossible, possible. Be employed by a big city corporate while working and living regionally. Announcements of corporate office closures are not confined to Australia. The Telegraph UK on 25 August 2020 (emphasis added): ‘Two of the City’s most powerful firms have called an end to the daily commute by allowing staff to permanently split their time between home and the office after the Covid crisis. ‘The world’s biggest investment bank JP Morgan has told staff in London that they will be continuing to work remotely on a part-time basis. ‘Meanwhile Linklaters, one of London’s elite Magic Circle law firms, said employees will be free to work from home for up to half of the week. The pair’s decision to abandon the traditional nine-to-five shift will send a chill through the Square Mile, and is likely to spark a response from a raft of rivals keen not to be outdone. ‘A raft of companies such as Britain’s largest fund manager Schroders have already rewritten the rules on office use following the huge success of home working during lockdown. ‘Fears are growing that many workers will never return to their offices full time — putting the prosperity of central London and Canary Wharf at risk after decades as a global hub and massive investment in millions of square feet of world-class office space.’ That last paragraph should send a shudder down the spine of investors in REITs (real estate investment trusts). What happens when leases expire and are not renewed? Or, in order to attract tenants, lease rates are reduced significantly? ..............................Sponsored..............................Gold’s ‘Last Call’ Before AU$4,379? With gold hitting record highs, Nick Hubble argues this could be your last chance to buy the precious metal before it jumps out of your price range… If he’s right, gold investors could soon go into ‘panic buying’ mode, sending the price soaring…and forcing more supply shortages... CLICK HERE to read his latest research. | ..........................................................................
Investors relying on these once almost certain indexed rental returns are suddenly faced with a future of reduced income and much lower capital values. Not good news for retirees. Then there are the small businesses that relied on corporate trade — cafes, pubs, restaurants, stationery suppliers, office fit-out firms etc. How many of these are carrying business and personal debts that need servicing? What about their staff? They’ll be the first overhead to go as the business does all it can to stay solvent. COVID-19 has also accelerated the deflationary trend that’s been lying just below the surface since 2008/09. The trend in our nation’s economic growth has been in decline for decades. The only thing that’s kept us in the positive has been our love affair with debt. According to the Australian Debt Clock, our total national debt — private and public sector — in 1990 was $787 billion… Today that number is $7,477 billion ($7.477 trillion). An almost 10fold increase over the past 30 years. Given the disruption and dislocation caused to our economic model by COVID-19, can this debt accumulation trend continue for the next 30 years? Will our nation’s debt load be $75 billion in 2050? If you think that’s unlikely, then you should be prepared for a major trend change. The combination of more subdued debt growth and banks provisioning for worse and doubtful debts, is the opposite of the past three decades. But then again, so is the trend to re-populate regional areas. The issues raised in November 2015 are suddenly becoming serious considerations… ‘Deflation brings with it lower rates of return. Retirees will be burning capital to fund their lifestyles. Retirements will need to be re-evaluated. ‘What if, due to these deflationary pressures, society decides “there’s more to life than keeping up with the Jones’s or having the latest toy”? The whole credit consumption economic growth model that evolved from the economy’s previous trends may be rendered obsolete. ‘What will that do for banking shares? What does that do for real estate values in cities? Will building smaller, more sustainable housing be a profitable trend?’ Since 2015, bank shares — with the exception of CBA — have been struggling…and even more so since COVID hit. Bank shares were once — and still are — the mainstay of portfolios. Fully franked dividends that increased on an annual basis. But that was then, what about the future? Debt write-downs. Bad loan provisions. Lower lending demand. More competition from online financial services. And what about property values? The initial data from Core Logic indicates regional areas have held up better than the cities. However, it is still too early to say whether this is a new trend or simply a temporary disruption in the old one. But if the trend to relocate to regional areas does take hold, this will cause further pain to the banks that have lent heavily to city-dwelling property owners. The biggest threat to the debt-funded economic growth model is this… ‘What if…society decides “there’s more to life than keeping up with the Jones’s or having the latest toy”?’ All it takes is a shift in the collective mindset and what were once considered set in concrete trends suddenly turn to clay. This is what former Melbourne resident Ellie Bonnett said in the ABC article… ‘I definitely can't wait to get the hell out of Melbourne. I do feel like I'm escaping. Thank God and sorry, but I'm out of here.’ The trends, they are a changin’. Regards, Vern Gowdie, Editor, The Rum Rebellion ..............................Advertisement..............................‘Not since Hitler’s Germany have our relations with another country soured so badly, so quickly…’ China is boycotting Australia. And that is a very serious sea-change for our economy. As Bob Gregory, an economist from the Australian National University, puts it, when you have a benefactor like China behind you, ‘the size of the economy, the nature of the economy, shifts’. The same thing happens when that benefactor starts pulling away… To find out what this means, and how to prepare, click here. | .......................................................................... |