Platinum's "Illusions of Comfort" by Marc Lerner

Platinum’s “Illusions of Comfort”

Marc Lerner

At Valor Private Wealth, we take great interest in Kerr Neilson’s view as he has a wonderful track record at Platinum. We are happy to hold an allocation of our client’s money with his funds and in his business. In August 2012, Platinum wrote a report which in the face of Australia’s rising sharemarket, should be at the forefront of investor's minds.

The report charts the last two decades of booming economic growth in ‘the lucky country’ and the economic trends that have accompanied it. Rather than being used as an opportunity to reform government policy, this period has instead been used, largely, to increase the size of the government, particularly in the area of regulations. The report predicts it is likely this will end in “breaking-point” regulatory reform when the good times end, similarly to what happened in the early 1980s after the disastrous inflation of the 70s.

The report recounts how the boom in China led to a mining boom in Australia, which spread through the economy and into areas like housing through an overblown and subsidised financial sector. The good times will end, it predicts, when China slows down heavily, leading to a fall in commodity prices and a consequent rise in real wages (wages relative to the price of the output being sold). This will lead to rising unemployment, as those businesses still remaining afloat cut back on labour in the face of rising real costs. Whilst interest rates can, and likely will, be cut down further as a measure to stimulate the economy, this will not help with the structural problems of misallocated assets that the boom has resulted in. The report speculates that BHP’s recent announcement of $100 billion in investments over the next 8 years (more than it has had in capital expenditure in the last 20) could well prove to be a ‘peak bubble’ signal.

Overall, the report provides an interesting discussion of Australia’s recent economic past and the mistakes that have been made in it, as well as future challenges we will likely encounter. In the meantime, of course, the great Australian bull market will continue, with dividend yields being the main – if not only - motivation for buying shares relative to staying in cash.