THE GLOBAL SEARCH FOR YIELD -and other major changes October 2019 - PDF document

Handout prepared for Erskine+Owen Roadshow October 2019. THE GLOBAL SEARCH FOR YIELD -and other major changes October 2019 Tony Alexander Economics Speaker and Writer, tonyalexander5@outlook.com , 027 317-5474 To sign up to “Tony’s View ” email me. It’s free. Issues are also posted here http://www.tonyalexander.nz/publications.php My Aim To help Kiwis make better decisions for their businesses, investments, home purchases, and people by writing in an easy to understand manner. Words We No Longer Use Since becoming an independent economist at the end of September I’ve been supplying a bespoke handout for each of the audiences I speak with at presentations around the country. Recently that meant one focussed on the housing market for property investors in Rotorua, and another focussed on how businesses can handle their changing operating environments for accountants in Wellington and Auckland. This handout is something quite differen t. I mention but don’t concentrate on the overall state of the economy, weak business sentiment, the housing market, and global developments. Instead the material here focusses on ways in which the world we have all come to know over perhaps the last 30- 60 years has shifted in ways a lot of people may not yet have caught up on. In some regards the missing of these changes can be considered “blindspots” in a business management sense. One example of this would be assuming that the best route to making a higher business profit is to acquire more customers and boost output. But this is not necessarily the case in a new world of ongoing labour shortages and labour force management difficulties. In this new environment for many companies greater profitability can be achieved by heavily rationalising customer types and numbers and cutting output. Over the past two years I’ve been building up a list of things which have structurally changed, and defaulted to calling it a list of words we don’t use. My talks around the country for Erskine and Owen are built around this list because it leads very handily to answering the question of why so many more people are now interested in investments such as syndicated commercial properties. So, in no particular order of importance…. Peak Oil Up until about three years ago people worldwide spoke about the quantity of oil available on the planet running out and that we were very close to hitting something called Peak Oil – meaning the pace at which reserves of oil were being run down would exceed new discoveries. But the technological revolution which we are living through has radically changed that, not from the development of just one technology, but the development and cross-blending of three. First, three- Page | 1

dimensional ground radar technologies have allowed explorers to better identify locations where oil would likely reside. Second, fracking technology has allowed the pushing out of low pressure oil by pushing in mixes of sand and water. Third, horizontal drilling has allowed the setting up of drilled pipe networks underground able to extract oil from pockets sandwiched between layers of shale which previously were not reachable. The rapid development of the shale oil industry over the past decade in the United States has now made that countr y the world’s biggest oil producer. This is not something any sane person contemplated at any point in the 1970s, 1980s, 1990s, or 2000s. This surge in oil supply has led to a structural decline in average oil prices which has struck the economies of oil-producing nations which have thrived since the 1970s in particular. It has reduced (though not removed) the importance of the Middle East to global growth, and reinforced the effectiveness of economic sanctions imposed by America on the likes of Iran for instance. Lower oil prices have provided breathing space in countries like New Zealand for governments to raise fuel taxes without pushing petrol prices to truly crippling levels. Governments have effectively captured for themselves the price benefits we consumers might otherwise have enjoyed from low international oil prices. The upshot is that while we may not enjoy low oil prices by any standards we each might have developed over our lives, worries about oil running out have disappeared. Worries now centre around the effects of continuing, gushing, carbon fuel production – global warming. And no-one uses the term Peak Oil any longer. Brain Drain New Zealand has always been a nation of immigrants. But for a while after the combined effects in the 1970s of oil crises, rigid government policies, loss of export markets, and a construction sector collapse, and the impact in the 1980s to 1990s of economic reform hitting farming and manufacturing, we became something different. We became a country which anyone with a bit of get up and go got out of. We developed expectations that our children would leave our shores, at the very least doing an extended OE. We talked repeatedly in terms of the need for job creation schemes, the need to attract industries to New Zealand, the collapse of the regions, Brain Drain, and the last one out needing to turn off the lights. But now things have radically altered and the best way to see this is by looking at annual net migration flows for each of the past four decades. In the ten years to the end of 1988 on average each year we lost a net 16,000 people from migration flows. In the ten years to 1998 we gained 9,000 on average per annum. In the ten years to 2008 on average we gained 19,000 per annum. And in the ten years to the end of 2018 we gained on average 29,000 people per annum. In the year to August the gain was 54,000. There has been a severe structural shift in net migration flows into New Zealand driven by a range of factors. One is that the 1970s-80s were extraordinarily turbulent economic times in New Zealand which directly discouraged people from coming here, encouraged those of us here to leave, and affected our feelings about long-term prospects in New Zealand for a long time. But in the late-1980s, perhaps responding partly to these outflows, the government changed migration criteria from a focus on source countries such as the United Kingdom, to skills etc. This led to higher immigrant numbers from Asia. More recently the development of the New Zealand economy away from manufacturing and farming toward a diverse range of globally-linked technology sectors has encouraged young Kiwis to stay here – at least for longer than they would have done in the past. Page | 2