Monthly Report – August 2017
Once again we have seen a fairly stable month pass by with generally small positive impacts on portfolios. The Australian share market continued its sideways march moving down just 6 points for the month, with the ASX200 going from 5721 to 5715. US markets managed a rise of 0.05% (yes, 1/20th of 1 %), and the Australian dollar dipped for the month from $US0.7987 to $US0.7898, but is now back to over $0.80. The Australian Government bond yield for 10 year bonds moved from 2.63% to 2.66% (i.e. bond prices down slightly), but in the US, 10 year yields went from 2.30% back to 2.12% - an improvement in prices probably due to the fears of a Trump/Kim Jung-Un catastrophe. All in all then, not much to report on the market front.
In one sense it feeds into the current story that there is no growth and not much happening. On the surface that might have some appeal, until you start to consider how radically our world has changed in the last 10-20 years. The internet has been making an impact now for 20 years, and the iPhone is about to celebrate its 10th year. Between Google, Apple, Facebook, Netflix and Amazon, our daily lives are dramatically different to just 10 years ago. And yet the economists would have us believe that we are seeing very little productivity growth, they report full employment, but almost no wages growth. And inflation is low but positive. Apparently. They struggle to explain some of the "at odds" issues, like full employment vs no wage growth.
Clearly, there is a conundrum not being addressed adequately by economists or commentators. I read a paper about 10 days ago from a US economist, Dr Woody Brock, that may answer some of these issues.
He believes that the digital revolution has led to massive productivity gains that are not properly factored in when US and other statistics organisations (i.e. our Bureau of Statistics) are calculating inflation. The current approach to inflation really only measures price changes in a small number of existing goods. It does not measure the impact of new goods, nor does it measure the improvement in quality of delivered goods. There are other shortfalls too.
Now, consider the smart phone. If the average phone price across all phones lifted from say $500 to $600 over the last couple of years, the $100 change would be considered as part of electronic goods inflation. But that doesn't consider the fact that one smartphone now includes not only a phone, but also REPLACES the need for a camera, a Sat Nav system, your local bank branch, a calculator, a diary, it gives you internet access anywhere, it’s a music player, it replaces the need to buy newspapers etc etc. I counted at least 16 substantial functions that now usually appear in any smartphone package. The potential savings are huge compared to owning all of the replaced items individually. But the inflation number doesn't capture that value properly; if it did, we would be talking about very serious DECREASES in costs for consumers across multiple items. That inflation number is also a critical component in determining real growth.
So, Dr Brock's paper suggests that we have been in a period of serious disinflation as a result of the Digital Revolution delivering huge quality improvements, and yet we have still managed some growth against the negative tide of disinflation. In other words, the economy is actually running extremely well all things considered. Some parts of the paper are a bit heavy going, but it’s attached for those keen to do more reading or research. The really good news from the paper, if you accept his premise, is that these low interest, good real growth circumstances should be expected to continue for quite a few years to come. One important consequence if all that holds true is that the Bond market may not be as overpriced as some suggest. Feel free to pass the paper on to the next "Bear" that wants to tell you how bad things are!
PS. For all the techo's out there that want to argue about the price of a smartphone I used, you'll notice I used "average" price for my example. Interesting to see that the new iPhone X will be released shortly at an eye watering $1829 for the top of the line fully specced model. Ouch! The Chinese alternative is $599; How much for a badge? Dr Brock's paper doesn't cover globalisation also exporting deflation to the world, but it just further makes his case.
PPS. I've attached a small graph that shows Dr Brock's "outward shift" in the supply curve to cover off the economics behind it.