The cast is now starting. All attendees are in listen only mode. Good morning. Welcome to the big securities webinar, Australia's economic miracle and the challenges that lie ahead. My name is Elizabeth Marana and I'm director of education and research here at FIG and delighted to have with me this morning Warren Hogan. Welcome Warren. Good morning Liz and thanks for having me here today. It's excellent. I'm really excited about this webinar but before we get going I just want to talk through a couple of housekeeping points. Now the first is at the end of the presentation we will have a recording that we hope to get to you later on this afternoon or maybe tomorrow. So you will get a copy of the slides and the discussion today. Also, please ask questions. If you can see a right, an orange arrow at the top of your screen. If you click on that and midway down that panel you'll see there's a question opportunity to ask questions to us. So we will try and answer as many as we can throughout the webinar but keep in mind probably the broader issues are more important. The individual ones are going to be hard to get to and I will ask Warren some of the questions throughout but there might be a point where we just let Warren run through the presentation and finish depending on how many questions we get. So delighted to have Warren with us. He has many, many years of broad international economic and strategic experience. His most recent role was with ANZ for 11 years as Chief Economist and just so fantastic and really excited to have you here. Warren I'm going to hand over to you and let you do your stuff. Great. Well thanks Liz and it's really good to be here and good morning everyone for those who aren't in Sydney. It is a beautiful autumn day at last. So thank you for coming indoors and well I suppose some people could be outdoors listening to this.  I want to relate that to the present. I want to relate that to investment markets but it is by its nature an assessment of some of the issues we face as a country with reference to the economic issues. It's not a specific forecast for the economy what I'm doing today but it certainly talks about the future and the challenges we face. It's not just about Australia. There's many global themes here and Australia is a very active and engaged global participant. So what happens in the rest of the world is extraordinarily important for Australia. So I wanted to start by just before we get into the presentation proper is actually to put a frame around it so that everyone can be thinking in this perspective as we go through and that frame is really some of the conclusions, the big picture conclusions. And these are issues I've been talking about for many years. So the first one is that the world of the last 30 years or the 30 years prior to the global financial crisis really is now history. We're not going back to that world and I think you'll see that that's quite apparent through the presentation. So if anything, the world of the last decade is the new norm and the basic conclusion of all of that from an investment point of view is we have much less nominal economic growth on offer and lost less inflation, a lot less real growth all around the world and that's going to affect investment returns. It's going to affect interest rates. So we are in a low, compared to our history, we're in a low growth, low interest rate world and that will persist for a long, long time. The second point is that we are now facing some significant social and political challenges in the western world and globally as well and I want to talk about those today and relate them to the economic outlook and to the risks around investing. Those social and political challenges have their roots in economic issues and I want to go through that and it's I think very important that we understand some of those dynamics. The key of it though is that we're seeing a weakening of the middle class. The modern liberal democracy that was built in the 20th century is built around a big middle class and the hallmark of this problem we're facing is we're losing a bit of trust in the institutions, government, media, business, we're getting lots of evidence that the broader population, the broader citizenry are losing trust. So I want to talk about those issues and those issues are affecting the economic story and then the final point I think which is really critical from the sort of conclusion point of view is that in the last 30 years we've had lots of economic performance, lots of structural change, lots of innovation and development in the economic and non-economic space and through that period the world has put on a lot of debt compared to where we were in 1980 to now the world is carrying a much larger debt burden both in outright terms and as a percentage of overall economic activity. That debt burden was put on in a period where the economy was performing extraordinarily well and the risks we face going forward is that weaker economic performance may make that debt burden even higher or harder to manage and deal with so that's the theme that will come through. So what does this all mean for investors?  First of all the world is going to be a riskier place. Social political issues, economic and financial issues they're all sort of sitting there and I'll go through them. Second one is that we're going to see these low investment returns persist and that in and of itself isn't a problem especially because of low inflation but in a low yield environment, a low investment return environment it does require certain investment strategies and that really brings I think fixed income into the frame in light of that riskier environment we've had but also it means other asset classes which have had a stellar performance for decades in reality with the equities and property and so forth. I'm sure that they're going to be a lot more challenges going forward for those asset classes. So those are the themes. I just wanted to before again one last thing the short term outlook just the next 12 months or so I'm not going to talk a lot about it but just to be clear I'm very upbeat on where the U.S. economy is going. Again we're not getting the performance we used to get in the in the naughties or the 1990s but we're actually seeing these economies produce solid economic growth and even in the U.S. now we're seeing wages and inflation pick up the feds raising interest rates they're removing QA. These are all signs of an economy that's doing pretty well here in Australia I think the same issues apply. There's a lot of two-ing and frying different views on the Australian economy at the moment but we're making progress and I think RBA Governor Low's comments following the board meeting this week highlight the point and I think we're going to see inflation and wages come through here eventually over the next year or so but that's the short term cyclical and I think this is going to see a push up in yields and I think this represents a great opportunity for investors in fixed income to have a look at those yields on offer because I think you're only going to get so many cyclical up swings in interest rates so even though the interest rates go up and they're going to still be at very low levels over the next year or so whether it's in the U.S. or here very low levels compared to what we've been used to in the last 20 years they're probably going to be pretty good when you're looking forward in a low interest rate well. Okay so that's my sort of leading so let's get into the presentation proper. So I'm going to start with the economic miracle I'm going to talk about that and what I believe are the foundations of our economic miracle and then we're going to go into the challenges. Now with the economic miracle and with the story or the analysis I'm going to provide on that I think everyone should be trying to think about how much of the foundations of our economic prosperity over the last 25 years are repeatable or are still in play or could happen again because I think you're going to find as we go through this there was some pretty historically unique factors that drove this really quite amazing economic performance from Australia. So under the first slide what is the miracle or what miracle I've just got a couple of media quotes the first one is from the Economist Magazine which you know is pretty credible and that was back in 2003 talking about this miracle economy and why was it a miracle economy back then well the essence of the miracle is that we seem to be able to avoid recession in this country and in 2003 we'd really only avoided one recession that the rest of the world had experienced and that was the recession following the tech wreck. The reality was Australia had actually navigated the Asia crisis, the emerging market crisis of the late 90s at that stage as well effectively but this was the first talk of an economic miracle in Australia. More recently last year from the BBC and from Forbes the story of the miracle is continuing to be talked about. So what is it? Well Australia as of the current quarter the June quarter 2018 and I'm pretty sure we're not in recession right now will notch up 27 years since our last technical severe recession that was you know mid 1991 was the last one we had and that was a big one that was our Lehman moment with Westpac suffering what was our financial crisis Westpac was under extreme pressure I think so as ANZ and unemployment got up to 11% in the wake of that recession. We've gone 27 years since that time and this is really at odds with the experience of both our history and the history of modern economies. Economic cycles tend to go for about 10 to 12 years you know we tend to experience a recession every decade or so and we've really we've missed two now we've missed So we're well over June? Well I think that's a mentality some people would say as well over June but the reality is we're sort of in a world that no one's ever seen before and actually the only time we've got the world record if it was in the Guinness Book and I haven't got the latest edition but if it was in the Guinness Book of World Records we'd have it because apparently and of course Treasurer Morrison last year made great sort of headway in the press with this we passed the previous record holder which was the Netherlands they had 103 quarters between 1983 and 2008 where we're actually now heading into our eighth quarter and of course this is another interesting element it's the psychological side of it or the social side is that no one under the age of 40 and you could actually have an argue maybe 45 has experienced severe recession in their adult life where you've genuinely got this concern that you're going to lose your job you're watching friends and family lose their job and not know if they're going to get another one and how long this dislocation to their income will last this sort of thing and look up and talked about this for 10 years in this country about how we're sort of complacent and all this sort of thing there's not a lot of evidence to say that that's made things worse here but it's still it's quite an interesting fact. Okay this is the chart I think that's really important this is Australian GDP growth over the last sort of 40, 50 years and the three things that really stand out is yes the recession of the early 90s and the early 80s are quite clear and they look quite deep and yes we have not had any recession in turn measured in terms of real GDP growth since then but also there is a clear difference in that level of volatility and stability in the economy between essentially the 70s and 80s and since then we've had a much more stable economic environment when you look at it in this sort of very aggregate sense. So that's the recession the recession less economy 27 years average growth through that period of 3.2% there has been a downtrend in that growth and we'll go into that downtrend. So what are the foundations behind this miracle this 27 years without a recession will look this is a complex thing talking about the economy and there's lots of factors but I want to talk about four key ones one is the economic reforms of the 80s two is the strong population growth we've experienced in this economy. Three is the role of China which has been phenomenal in terms of its influence on the performance of our economy and the fourth one is the rise of household debt. These are the key ones for me and when I go through each of these think about what this will look like going forward because these are the things I want to focus in on going forward. Okay so make Australia great again to steal from Mr Trump. Well for us it was real 70s in this country's standard of living falling we experienced a great deal of economic volatility this was a global phenomenon to some extent but Australia was falling behind we really were underperforming the rest of the world and there was many much talk of reform prior to the election of the Hawkeating Government but when they came in they really put the foot down and look I think everyone on this call would be pretty familiar with it so I won't go into the details but we essentially opened up liberalised and our economy we essentially made it more competitive and more flexible and the big ones for me were the financial liberalisation and the floating of the Australian dollar. We essentially went from quite a regimented financial system of fixed exchange rate to one that really allowed price to determine the allocation of capital, allowed the currency to offset the effects of international shocks and we benefited greatly from that. Obviously labour market reforms, tariff reductions and various other things have all been very important since. Now the benefits of these reforms which really started in the late 70s but got going in earnest in the 80s but we really didn't start to feel the benefits to the 90s and I think any of us should forget that there was quite a cost we obviously had one of our worst recessions ever in the early 90s where unemployment went to 11% but the other thing and I think this is where the Labour Party deserves some great credit is that there was considerable cost to the economy and to their base. They undertook these reforms with a long view. Someone once said that a statesman looks to the next generation, a politician looks to the next election and I think it's very, very relevant because the reforms of the 1980s, these were statesmen. They were looking to the next generation. Okay, who were they? Well there we go, Bob Hall. There's a few points I want to make on our former Prime Minister. The first one is that I think we're all pretty aware that he was a pretty big character. He had the world record for Sculling Bee essentially and I think for those who saw the ABC documentary on him just recently I think we got some pretty candid insight into what he was like in the 1970s before he became Prime Minister and Graham Richardson in that basically said there's no way he'd be Prime Minister in this day and age. Social media, community standards just would not have allowed him to have got into that position but he did a powerful role. He led a cabinet. He led all these leaders who executed these reforms and that is something we're really struggling with in this day and age. It seems to be more infighting in each of the different parties than leadership shown and I think that's a really important factor there. The next one's Keating. I think we're all aware he was committed and he really pushed through the agenda very outspoken and I think all know that he's a critical role in these economic reforms and I don't want to forget Mr Howard and I'm doing a bit of photo dropping here but he had two roles to play. One was obviously and others in the coalition but they didn't oppose these reforms. You didn't see them just opposing for the sake of politics which is very much a problem we're seeing in this day and age where the opposition is literally just trying to get score political points and it's not about what's great or important for the country over the long term but it's about the next election. So in the 1980s the coalition helped facilitate these reforms out of opposition. The other thing is in power he was really the voice of middle Australia. This was a guy who knew how to speak to the middle ground and it was from a period of a real place that was really genuine and this is the key thing I think that authenticity was what the Australian people could say. We just don't seem to have those leaders today in this day and age and I'll come back to that. Okay so what did we do? Well we got rid of inflation. I won't dwell on this. This is essentially core inflation in Australia in the last 40 years and you can see that that recession was what knocked it out of the high inflation in the 70s. We lagged the rest of the world but we did get rid of that inflation. Those economic reforms were critical to that. So low inflation allowed for better planning, better allocation of capital and the currency. The floating of the currency allowed our exchange rate to move and to offset these shocks. This shows you commodity prices in the Australian dollar in this mining boom, this most recent episode and it was critical. The first wave of price rises for mining for mineral resources, the currency went off to make sure it didn't overheat the economy. GFC hits, the currency comes back and makes sure that that international shock is muted and then back up again. So these have been critical elements of the reform process. Okay so the economic reforms I think were all pretty clear were critical. Unfortunately the progress on reform basically I think in any significant way ended around the time of the GST and reform has been very hard to come by. Now that doesn't mean there hasn't been reforms, there has been but it's been a lot harder to get. The low hanging fruit is no longer there and every reform seems to be a lot more contestable and I'll come back to a case study right now with the coming tax cut issue. Okay the second issue is population growth. Now this actually chart here shows the GDP growth that I showed you before and your GDP growth and then it shows you GDP per capita growth and it brings in the question our miracle because it shows you that actually in per capita terms we have had recessions particularly through the global financial crisis. GDP per person in Australia in terms of growth went negative through the GFC and I remember at the time a number of economists was arguing that maybe this is a better measure of whether we've got recession but really the point here is that from the turn of the century those two lines have deviated. Before that they were pretty much moving online and the difference is that we saw a slow down in productivity growth and this was a global phenomenon and then the global growth has slowed in the advanced economies and the only thing that's kept us out of recession has essentially been our high rates of population growth. And this is really contentious because population in Australia is, you know, the natural increase is okay, it's slowing like in most parts of the world so it's immigration and this is a highly political issue so I'll come back to it but we have been, this miracle there's been no in no small part due to high rates of immigration. Australia has some of the highest rates of immigration in the world and this is more evidence of that. So this is annual population growth for the US, Australia and China in five year blocks since the middle of the 20th century and I'm just wanting to point out this end piece here. Most parts of the world and I'm using the world's two biggest economies is the comparator group but most parts of the world have seen population growth slow through this last 20 odd years whereas Australia's seen it actually pick up. Now a lot of that particularly ahead of the GFC with the mining boom 457 visas this sort of thing but this has been a critical element in keeping our growth up. So what you're saying is we don't have more people, it's going to be hard to maintain that growth and that we're going to have the economies to slide. To slide, yeah and it just means we'll get our average rates of growth closer and closer to zero and then when we do get an economic shock of some sort, there's more and more chance that we're going to have that technical recession. So population has been critical to holding up the overall growth of the economy. Okay China, again I won't dwell on this, I think everyone's familiar with the story but this is our terms of trade which is essentially our export prices over our import prices and the movement here has all been about the big surge in export prices, a phenomenal shift which we benefitted hugely from, the government benefitted hugely from but we all did to some extent but there was costs as well which I'm sure people are familiar with but that was a huge stimulus after the tech wreck into the GFC and Australia's economy was running hot going into the GFC and that was a huge part of why we were able to sort of dull the effects of the global financial crisis and also at the time, why we were able to as a country continue to attract the capital because we had this great story, we sort of had this story around the fact that we were selling resources to China, we were in the right part of the world, tyranny of distance had turned into the power of proximity and all these sorts of stories so we were able to get that capital from the rest of the world even though the global financial system was under tremendous pressure. We did have a real effect, this is the mining investment boom and it was massive. I think the takeaway from here is prior to the mining investment boom associated with the rise of China and demand for middle, we had a steady state where we basically invested about and this is actually not the year on your growth, sorry I've mislabeled that chart, this is percentage of GDP so in business as usual sort of state, Australia over many many years would invest about one and a half percent of GDP in this sector of maintenance, new mines, that was the steady state, the new steady state most studies point to is between two and a half and three percent so the point is that we had the big boom and that's now sort of flowed through and we've had our challenges good and bad around that but we've got a much bigger mining sector, it is more important to us than us. So for those of us who grew up in the 70s we all got told about how important mining is to us as a country, well it's more important than ever, we are more than ever exposed to the shifts in energy prices, the shifts in mineral prices and obviously volumes and markets and so forth which is important in thinking about what's going to happen going forward. Okay, factor number four, household debt I think we're all familiar with this, so there's good and bad news in this one, this is a very long-term perspective of mortgages as a percentage of GDP across many modern advanced economies. So the first thing is that we're in good company so to speak, it's not just Australia that's had this big rise in mortgage debt, it's happened all around the world but if you look at the history, prior to the late 1990s Australia was at the bottom of that international distribution in fact we had very very low levels of mortgage loans compared to many of these other countries and now we've gone right up to the top of it and I'd suggest it's the result of two factors, one is strong economic performance, we've had this renewed confidence in the economy, in the country and of course that very much projects into the future, mortgages are by nature a very long-term commitment and I think it's also the nature of our financial system in Australia, we can see it today but it's really been happening for a couple of decades, the best business for these banks, our big four banks is to write loans into the mortgage market, they got the biggest margins, the biggest return on equity. But also that's really fueled the higher prices hasn't it and we're just starting to see some of those restraints put in around interest-only loans and LVRs etc starting to come to the fore and slow things down a bit and slow property prices down a bit but to my mind household debt is the most frightening aspect of our economy, I don't know if you think so I totally agree, it's our big vulnerability and I think that'll be pretty clear over the next half an hour as we talk about the future and you're exactly right, it's incredible how much of an impact that sort of tightening up of the regulatory frame has had and it just shows you that it was a little bit precarious. I think we'll find in history when we got a bit of time down the track looking back at this that they probably should have done it a little bit earlier. The bubbles are a bit bigger. By the time we got around to putting these macro-prudential policies in place, there had already been a lot of pretty marginal loans written and as we're now seeing with the Royal Commission, we're sort of seeing practices in the system that weren't necessarily great but from a macro point of view, Australia has gone from a country that had a pretty low sort of mortgage exposure to one that's basically one of the highest in the world, I think maybe the second highest and of course house prices have surged. These are real house prices so adjusted for inflation, they're not right up to date but I think the long picture just shows you that we've seen a very big increase in real house prices and this is the core of affordability. A lot of people say, well 40, 50 years ago it was always hard to get in the property market. Well it was pre-1980s, one of the biggest challenges of getting a property market was actually securing a mortgage because they were much more strictly controlled. We've opened it up but in real terms, adjusted for the price of all the goods and services in the economy, housing is massively expensive than it ever was so I think that's at the very core of the affordability issue. But within that whole frame because the big rise in house prices, the big rise in debt, the household sector's balance sheet is not only much bigger, much much bigger, we've got a really leveraged household sector now compared to any time in our history but they're wealthy. The ABS data on this household sector net worth is by almost double in the last 30 years. So these economic reforms, this opening up of the economy, obviously things like the China boom, the population growth you can argue, all these different factors have actually made us quite wealthy, which is a good thing. It's just how much vulnerability it's brought with it as well. Okay, so that's sort of the scene setting. So we've talked about what I believe the foundations of the economic miracle and I suppose now it's to think about well how repeatable are these going forward and also what is the environment we're now finding ourselves in. So I want to talk about as it says here these five factors which really are the themes I suppose. And as I said at the beginning they point to a riskier world in many respects. That is we are seeing much more political tension both domestically and geopolitically out there. We have a much more indebted world. In fact we've seen these unconventional monetary policies like QE have to be enacted post the crisis which have created potentially some pretty significant financial imbalances in the world. And then here in Australia we've got again similar political issues. We rely on things like immigration to keep a bit of that growth in the economy, have we reached debt limits and as you said the recent sort of modest adjustments to the mortgage markets seem to have had a big effect and is that a signal that we're reaching these limits. So how much growth can we get out of this? And then the final point is that Australia is a very correlated economy. At the core of it is these sort of big four banks that not only provide a massive amount of credit not just to households but to small business. And big business. And big business. They are also a major part of people's retirement savings plans. In fact I've long argued that when the question has come up why don't we have a big retail bond market. I've long argued that we have actually a really big one. It's the investors treats the bank shares like their bonds. They want the dividend. And that's been bank shares and property have been a financial retirement strategy for generations. And that's all worked really well in this boom period we've had for the last 25 years. But if it goes the other way, all these correlations will go. We'll see dividends from the bank's weekend as their business weekends as the economy weakens and does that affect the supply of credit. Now I don't want to scare anyone. This isn't a forecast but it is a correlated economy. And of course too their property prices start to fall. That all makes us feel wealthy doesn't it? Well this is the one thing we can't deny when it comes to sensible financial management is the power of diversification. And it's going to be beyond the remit of this discussion. But it does suggest to us as Australians in our retirement income strategies we really need to be thinking about diversification and how to get away from that correlation if the bad scenario plays out. Which hopefully it doesn't. So let me go through some of the issues and see if everyone can draw their own conclusions. So first of all the global scene. So this is sort of world debt. I've only got it going back to 18 years or so. I would have liked to have shown a much bigger picture. But world debt is just continuing to rise. It's been sort of a little bit more modest in the advanced economies as their populations have slowed as their economies have slowed. The emerging economies have really taken up the mantle particularly China. But global debt to GDP is at an all-time high. But if the global financial crisis was a debt problem, which really most financial crises are a debt problem, the response to that seems to have been to generate more debt. And the issue is how much debt can we have? What is an optimal debt level? Again, I'm not here to sort of ring the bell and say it's all over because I just don't know the answer. But we are carrying a lot of debt and it's important because that debt has been put into the system in a period where the economic performance is very strong. Whether it's the emerging markets of the last 10 to 15 years where they've had high rates of growth, they've reformed and liberalised their economies. So servicing of that debt's been easy and the real value of that debt's sort of declined vis-à-vis the economy in terms of the serviceability. But of course interest rates have been low too, haven't they? So it hasn't been so expensive to try and repay it back. But the rising interest rate environment, all of a sudden was a lot of pressure, isn't it? This is really the centerpiece of why it's going to be very hard to see interest rates rise. Because the actual underlying economy will not cope. We will not be able to service these debts with much, with a significant high level of interest rates. I just think the rhetoric from the RBI in the last four months just highlights that point. The only reason they're not raising interest rates is they're sort of fundamentally scared that they're going to knock the household sector over here. Which is a good reason, they're doing the right thing. But interest rates in this country are not in line. The cash rate is not in line with the underlying rate of growth in the economy there. And they're just scared of getting it to where it should be because of that reason. And I think that's all part of this dynamic. So debt's been going up. And to deal with the crisis, we did this unconventional monetary policy and QE is essentially expanding the balance sheet of the central banks, going in and buying the government debt, which takes some of the pressure out of big fiscal stimulus, puts more liquidity into the banking system. But the most powerful effect of it was to lower long-term interest rates. Because essentially it was the short-term rate, which is the focus of monetary policy in all countries, the cash rate we call it here, the Fed funds rate in the US. That had reached zero. But they wanted to provide more monetary stimulus. So they'd go and buy the 10-year bond or the bond, the Treasury night in the US or the bond in Germany. And they would try and drive that yield down.  And this has been playing out for a decade now. This is the classic element of the hump for yield. Now look, this has got to be reversed to some stage. You would have to think, and of course the Fed is already committed to doing that and started to do that. And that in itself is going to be a great challenge. I think the dynamics around these markets this year are very much about how QE has been withdrawn. So let's put QE in reverse and just focus on the US. The Fed goes and lows their bonds to mature. They take that money and they don't reinvest it like they had been for the previous decade. And of course the Treasury has to go and issue a bond and they have to attract new money into the market. And of course that's going to be a private investor who is going to have to either sell a corporate bond or an equity or what have you to buy this Treasury. But the process is that Treasury yield has to go up to attract that money in. So what you're going to see is this process of unwinding QE, pushing up yields that'll attract money in, putting pressure on things like equity into some extant corporate bond spreads. And the Fed will be very cautious on this. But I think the real issue is around these assets. So this is data from Robert Schiller, the Nobel Prize-winning economist who became famous ahead of the GFC around talking about the housing bubble in the US. This is a cyclically adjusted price earnings ratio, which is his key metric. And it goes all the way back to 1880 as you can see there, versus the US 10-year bond yield. And you can see the latest data and I did this get this off his website and it's all free out of Harvard there. We've got an equity market right now because of QE, in my view, because of QE, that is historically at a point that has been a bubble. Looking pretty toppy. To not put a pretty finer point on it. Enough to chill down the spine of investors. The 1929, the year 2000, these were severe equity market events. So look, this has been what QE has done. The underlying economy is good and that's why the equity market is performing. The earnings are good, the economy is stable, unemployment is falling. But that extra liquidity that's coming out of the central bank in the last decade is forcing people to find investments and making things expensive. So they're unwinding that. So my view and as a basic overview of this is the equity market is going to struggle to go anywhere this year. I think the economy is going to be fine. I think the interest rate increases are going to be modest. I think the withdrawal of QE is going to be modest. But every time they take that QE out or that liquidity out, that's going to take money from the equity market back into the bond market. So I think you're going to see the equity market really struggle. But that being said, it's not going to fall a lot because there's still a lot of liquidity and interest rates are still low and the economy is still doing well. So it's going to be good. And we're employed, right? We've got money. We're feeling wealthy. The prices have gone up. And you're seeing it in the last few months. The equity market is just volatile now going sideways. And I expect that to continue. I think eventually there's a risk that they're going to have a big fall. But it's probably not going to happen until the economy rolls over, which I don't think is for at least another 6 to 12 months. Okay, now this is the one risk which is outside of the frame that I've been describing. So this is inflation. And it's global measures of inflation, annual inflation, going back to the 1960s and the headline is back to normal. And there's been a lot of concern about deflation. Inflation being too low and all this sort of stuff. And then that concern's been appropriated at times. But the reality is inflation is now back to where it has been for most of the last year, human history. The 1970s was more of a black swan event, more of an outlier, more of something that was unusual economically than any of these financial crises. We just have never seen anything like the kind of high and persistent and globalised inflation that we saw in the 1970s any time before. We've seen bouts of it and it's usually hyperinflation because of really bad monetary policy like in Zimbabwe or in Germany in the 1920s or what have you. But this was an outlier. Inflation is back to normal. That big fall inflation and I'll just go to the next chart coincided with a massive fall in interest rates. So interest rates moved with inflation and it went all the way up and then all the way down. That's been a big factor along with the technology and financial liberalisation and the underlying growth in the economy. But this has been a big factor in driving debt in the world in the last four years is this big fall in interest rates which has allowed higher and higher service ability. Now the risk is that this inflation goes up. Because you were talking before about how the RBA is running the cash rate at less than the true growing or underlying rate. Well the nominal Australian economy is growing at around four to five and the cash rates at one and a half. So does that not mean then that theoretically inflation could spike? It could start to go. That's the precise sort of conclusion you draw historically but at the moment we're just not seeing it. Now QE, this sort of production of liquidity, this printing of money it's been called in various ways. The printing is not quite right in the digital age but that's created asset price inflation not consumer price inflation. Globally inflation has been held down quite low. I think there's some historical technology factors here. The globalisation of the retail markets, the globalisation of retailers, the sort of technology and supply chains, fees competition to keep basically global goods prices down. On top of the big surge in capacity that happened with China investing in it. Kids toys now are basically cheaper than they were 30 years ago in outright terms. Motor cars, television sets, all of that. That effect may start to wane but so far all the easy monetary policies showed up in asset prices not in consumer prices. If something happened that meant that that dynamic changed and we started to see this inflation pick up it would be a disaster because interest rates would follow and in a highly levered world as we alluded to before that could cause some real problems. Now I think this is less of a risk than the other risks I'm talking about because I think that we are in this low inflation environment. Okay, I've got a great question from Ronnie here and he's just regarding household debt and he says the generic economy economic policy in the past 40, 50 years has been in developed economies has been to stimulate aggregate demand by making consumer credit increasingly available. Giving the scenario with the household debt growth it's not surprising but what would you think is an optimal household debt level as a percentage of the economy for a developed country? I think the first point to note is it's probably different for different economies. So household access to credit is going to be different, household attitudes to credit is going to be different. So the reason I say that is the US in the crisis got a household debt income ratio which I believe off the top of my head was around 125%, 130% and that seemed to be a breaking point for the US which their crisis was very much about housing, very much about mortgages now, admittedly it was about mortgages to the people who couldn't afford it so that was a level that seemed to be a limit for the US. Australia got to about 150 at the time 150, 160, so we're miles above the US and we didn't seem to have a crisis, we went sideways on that for a while. We're now up towards 200, the Netherlands is up around our sort of level.  It is hard to fathom, so this gets back to one of the thematics I'm sort of trying to draw out here with it successfully or not is we have taken on this debt with an expectation that's probably of our incomes going forward, of the economy going forward, that's probably pretty much based on what we experienced in the last little while. There's a lot of evidence to say expectations are essentially a reflection of what's going on now in the recent past and this is what worries me, I can paint a picture of a world here where we're not going to get the same level of economic growth, we're not going to get the same level of inflation and this debt will become more and more burdensome. In terms of the mortgage market it's quite clear we're seeing it already, wages growth in Australia is low and much lower than we've seen for 30 years and probably much lower than what people expected when they took on mortgages 3, 4, 5, 6 years ago. But of course that's too, that's coupled with lower investment returns, well we're all saving madly for retirement, lower investment returns, correlated risk as you were talking about before and that's the need for really sound diversified portfolios to weather the storm and to protect your capital. Exactly right. All income growth, whether it's measured as wages at 2, 2 and a bit or whether it's measured at a very defensive portfolio which is returning sort of 2 to 4 at best are much lower than they have been before and they're looking like they're being sticky at this lower level. Now I have no doubt over the next year or two we're going to see a cyclical pickup in everything, investment returns and in wages but it's not going to be back to where it was in the old days. How much of this debt we've seen built up whether it's Australian mortgages or whether it's global is based on an expectation of what the world was like in the past will determine how much of a problem it is going forward. Okay, so let's move to the economic side. So these global financial issues are sitting there. We've got QE in the system, we've got QE having to come out, we've got very highly valued asset markets that is not just equities, it's property around the world. Commercial property in many markets is very, very sharp valuations. All of this asset price valuations are susceptible to disruption. This is a risky global world we're seeing. I now want to turn to the economic and financial because I think that the economic and political, because if that financial vulnerability I've painted around debt and very expensive assets is upset by the economic and political scene then we could see some problems and this is what I'm getting at is the riskier watering. So the first thing is this picture which actually when I was at ANZ we did this many years ago, so the numbers might slightly be different now, but essentially we're painting a picture of what we describe as a major shift in the structure of the world economy. So a few years ago US and Europe were together worth about half the world economy and the 10 biggest economies in Asia were worth about a quarter. On some pretty conservative projections it's likely that that's going to turn itself completely on its head and that Asia's going to be half the world economy by the middle of the century and the US and Europe combined will be about a quarter. This represents changes in just the way the whole thing works. Everything from economics, trade, politics to military to everything and how we deal with that is really important and I'd have to say at the moment we're sort of struggling a bit. So what are some of the dimensions? So this is investment as a proportion of GDP in the world economy. You see the black line is overall world and it's stable in most economies and in the world in aggregate it's about 25% of GDP. We invest, we build factories, we build infrastructure, we do all this sort of stuff. Now then it's split between emerging economies and advanced economies and this is the starting foundation point of how the whole world's shifted economically and it's creating problems for us socially. Trump, Brexit and I'll go into that in a minute, but essentially with the rise of the emerging economies, China being at the core of it the world's marginal investment dollar increasingly went to the emerging economies and the advanced economies have seen their rates of investments. So I'm not talking about outright levels, I'm talking about the rate of investments slip right down. We're investing less in these economies in terms of new capital than we have for decades if not generations. Now some might argue well now it's the new economy, it's digital technology and this sort of thing and there is some truth to that for sure but there is no doubt that there is also just a transfer to other economies that places like China and India and Vietnam are actually the ones where the job creation, the capital investment is going on. This is a famous chart called the Elephant Chart. It's essentially how income has shifted between 1988 and 2008 and I'm sure many of you have seen it but just to explain it quickly is that the richest people in the world their incomes in that 20 years to the global crisis went up by about 60%. The middle of the world distribution through to the poorest except for the very poorest all went up by between 50 and 70% and then there was this group in the top there that actually felt that group in the top remember this is the globe is essentially the working class or the middle class of the West. These are the Brexiteers, these are the Trump voters, these are the people who've lost their job in manufacturing, these are the people who have impacted in Victoria or South Australia. This is where that big shift in the structure of the global economy has first struck and the reality is they're not happy. The reality is that we as a society probably haven't managed that well. This neoclassical sort of you know the world we've got to listen to market signals, things have got to adjust, it's fine but we've underestimated the human cost and these people are doing either not working or they're doing much meaningful jobs and they started their careers with what they thought were appropriate and either way these people are upset, they feel like they've been left behind, they don't feel like they're sharing in the broader prosperity and this is the start of the sort of unwind of the social fabric if you will. It's showing up around the world in the first big shift towards fringe politics. We are seeing a big move away from the centre the heart of the build out of the sort of the economic miracle of the 20th century was about a thriving middle class a liberal democracy and it really became about contesting from the centre left and the centre right around these ideas and you know just the fact that the Hawke Keating reforms were essentially the sort of reforms you'd expect from a conservative sort of right of centre government came from a left of centre government highlights how well that worked and this is all around the world in the middle of the 20th century we saw this but now we're seeing economic stress come in, we're seeing people being felt like they're being left behind and in a democracy they get a say and they're moving away and they're voting for the fringe they're voting. This is the rise of popularism and this is what we saw ahead of World War II and of course back then it was associated with economic distress and we're seeing it happening here as well. This comes from Bridgewater, it's a few years old now. It's interesting that they feel like they've been left behind when everyone's feeling rich or wealthy or on an increasing level. Have they lost their jobs or they just feel like they're not keeping up with their neighbours? They're not keeping up, some have lost their jobs. First thing we've got to realise here in this country we're experiencing this to a much lesser degree than other places and part of it's because of our economic miracle because we've had a better performing economy, we've had some luck like the China story and so forth but we are still getting it and we're seeing it here come to the Australian scene in a minute but it is certainly just about being left behind. Because Alan has asked a question about falling productivity so what do you think falling productivity and artificial intelligence, what sort of impacts do they have on the economy do you think? Well there's no doubt that the productivity piece is real wage growth so wages going by more than inflation is all about productivity and the world has had this real productivity problem now for almost a decade and that's been an important part of why when wages fell cyclically they haven't been able to pick up again. So that's an important part of it but then of course technology is a critical element of this, it's not just globalization. So talking about say Trump wanting to retract industry back to America, well the reality is that most studies suggest that at least half if not up to three quarters of the jobs that have been lost in manufacturing in the US have been lost to technology not to China or to Vietnam or something. And if a car manufacturer or a pharmaceutical company or a toy manufacturer came to the US and built a factory from scratch it would just be heavily automated. There would be robots and the kind of factory workers, there would be a few but most of them would actually need to operate the robots and so forth and software engineers. And the jobs are going on to that lower, middle or white? Yeah so you can argue that it's very easy in a world of populist politics to argue it's about jobs going to China and the Chinese are bad and there's a little bit of truth in it and that's what I sort of started to emphasize at the very beginning but there's also a technology piece here. So yeah it's not that we've made big mistakes it's the fact that the world's changing it's how we deal with it. So the world is getting more politically difficult, domestically. So this is for America, this is for the UK, this is for France. The other thing is we're getting more politically difficult geopolitically or globally. And here I show essentially what I see is the full fronts and they are basically the front lines between rich and poor. So you can see Europe, Middle East, Russia, you can see Trump's Mexican wall or I'm not sure how that's going but it still is a sort of an issue. You can see the China, Korea and Japan thing and you know we had some lovely images of Korean leaders shaking hands last week but it's early days and I think our Prime Minister is sort of his caution around that was most appropriate.  And I think this is I'm not going to go into all of the geopolitics but I think we're all aware that there's a lot more geopolitical tension in the world than there has been since World War II essentially. The Cold War was the standoff. There was a lot of stuff going on in the third world. The end of the Cold War we saw that so the whole idea that liberal democracy won the Cold War, the free markets won and that we knew that this was the famous book from Francis Fukuyama, The End of History and the Last Men's was all about we know the way we should organize ourselves. There's no point arguing about it. It's all about democracy. It's all about free market capitalism. Well that proved wrong. We had the rise of fundamental Islam. We've had all sorts of problems since and now we've got our good old friends the Russians back with Putin because there's all sorts of problems and of course the Chinese are flexing muscles. I want to focus on China because it's what matters for Australia. But before I do that this geopolitical issue is an economic story even if it doesn't get hot the fact that there's geopolitical tension will translate into global military spending and this is from the Stockholm International Peace Research Institute and it just shows you that there's been this long term slide in the amount of resources we dedicate in our societies to military spending. You know there's a lot of talk when the Berlin Wall fell about the peace dividend. Well actually the peace dividend had been gradually coming through except for Reagan when he got in and sort of ramped up the rhetoric and not just the rhetoric sorry also the military spending. We've seen it sort of been a trend down when we could be at a long term turning point. So when you get this peace dividend you free resources up from the military spending to the private economy which will in I think most people except will allocate the more efficiently you'll be more productive and there'll be better things they're producing. They'll be producing toys for kids and stuff rather than military weapons. Well we're going through a turning point. Don't believe the China numbers. The Chinese economic statistics on end of the year are always questionable and I'm sure they're not telling anyone they're right numbers on military spending. So Warren what's the law that's turned up quite steeply there? Which country is that? That is Russia. Okay. At least the Russians are telling us that they're doing it. I think America's on the way up. The starters obviously comes out with quite a lag as you can imagine because you've got to go through the Stockholm Institute here wants to get the right numbers. Right the Chinese numbers are pointing up. The American numbers will point up. We'll see in our budget next week. There's no doubt in our budget next week there'll be a bit about the Australian numbers pointing up. Okay so let's turn back to China and Australia. Australia is not just this sleepy backwater. We're not just this big island that we don't have to worry about. We are right in the thick of it. So let me just put one strategic perspective in this. It's more to wet your appetite and sort of make you realise why Australia's part of this big geopolitical thing is that China is resource dependent. It requires energy. It requires metal. It requires food. In fact to some extent you can argue it also requires export markets. The reason the South China Sea is so important to China is that is their access to the world for their trade, for the resources to come in and for their resources to go out. Now sure the American Navy has been very good at securing shipwrecks all around the world for 50 years but really the Chinese government can't say to their people they're one point something billion people. We're relying on the US to keep that key shipping lane the South China Sea open for us. They're going to take responsibility for it. Now I'm not condoning what they're doing in the South China Sea is right or wrong or anything but it's just obvious. This is critical to China but it also is so that's the South China Sea piece but look at Australia. Metal, energy, food. Look at the size of us 25 million people. There's about 3 billion people up there in India, China, South East Asia. Now we've got to trade with them. We've got to give them access to this and we are and we're all for this but it goes wrong. They're going to want this. The Japanese wanted it. Their Pacific Basin Water Alternate, I'm sort of getting a little bit off taste, was in Papua New Guinea in Rebal. We are so attractive to these places. They don't have our natural resources. We are in their region. So we've got a very tricky position we're sitting in. We know the rhetoric. It's shifting. These big issues move slowly. We don't necessarily see them day to day but it's worth paying attention to. So Australia's reliance on China, I think it's all pretty obvious. It's mineral resources and it's energy exports. Now we don't send all of our iron ore and all of our coal to China and all of our LNG to China. We send a lot of it to Japan, Taiwan and Korea but China's the biggest customer globally for these things and China affects the price maker. We're the price taker. So even though they can't completely shut us out of the market, they can affect the price we get for it. The thing I'm worried about though is now, and actually I saw something in the AFR today which proves that I'm sort of on the right track here, is that two of our biggest exports and two of our biggest industries, tourism education, Chinese are now dominating it. And the Chinese government can pull lots of easy levers to affect that. And so what did I see on the AFR today? We've got a long weekend coming up this weekend in China. A lot of people wealthy and middle class Chinese travel advisory warning security risk traveling to Australia. It's a subtle little, now what's security risk in China? What's that about? We're in there with Thailand and three or four African nations. Really? And the US got put into it, we got put into it. Security risk. These guys can control the flow of kids to be educated and people to come here on tourism. I mean that's just a subtle one. They can change visa arrangements like that. They're a dictatorship. They control. That's the way they go about it. Look, this is, I'm not saying they're going to do it, but China can do stuff that makes our life difficult.  We can't just bank on it. It's really what you're saying. You've got to be aware of the risks and the downside. I spent a year at Federal Treasury and our basic sort of security clearance. But one of the many impressions I got, but one was that this, you know, no matter what our business people say, no matter what the media says, our government is very infrastructure, our security infrastructure, all that, the Office of National Assessments, ASEA, all this. This isn't saying anything that's not public, but they are worried about China. And there's a very simple reason for it. They're not a democracy. They're not transparent. They don't have the same checks and balances on the way their government acts. And we're leveraged to, we got to look to things like India and other countries that are, I got better demographics and so forth, but to try and share these economic risks. But it just shows you we're in a riskier environment and that wonderful sort of economic impulse that China gave us through mining investment and capital and all this sort of stuff in the last decade. I'm not saying it's going to reverse, but are we going to get that again? Or could we get something more tricky out? Okay, domestically in Australia, look, I think this is more for an international audience. I think we all know the story. We sort of lost our way a little bit. And it all started when Julia Gillard toppled Kevin Rudd. Australians didn't like it at all about a first term elected prime minister getting toppled. Kevin Rudd certainly didn't like it.  Now, people can argue all they want about whether or not it was appropriate to do it on the inside from us on the outside looking in. This was almost like a coup. And it really has been a reflection of a, you know, the, the, the hawk Keating Howard years just looks so much in contrast to what we've got now. Now, look, that's not a forecast. Hopefully things will improve. And in Turnbull's actually looking, I think, okay, better. He's got a few, I think issues, but, but we really are struggling without, you know, we've got a lot of politicians and not a lot of statesmen at the moment. And also, you know, that it just creates uncertainty for business and investment, doesn't it? You're not sure what the direction is and they change directions and they reverse decisions.  I would utterly agree. And I think actually it's been masked thus far by the just vast amounts of liquidity out there, the strong performance of the Australian economy and the basic institutions in this country are holding up just like parliament, war, that sort of thing. If the world gets trickier, if there's less liquidity, if you have to sort of compete a bit more for capital, then these issues might become even more of a flashpoint for our society. We are not getting away from this sort of minus party sort of populist thing. It's happening here as well. So it's really important. And I just sort of raised one case of it and Bill Shorten has seen this. He's seen Brexit. He's seen Trump and he's gone, I want that disaffected class. He got so much out of the Bank Royal Commission when he was talking about it pre the last election and he's going hammer and tong about these company tax reductions. This is popular stuff. This is about appealing emotionally and about these people being left behind. I mean, look, the ultimate expression of popularism is that there's this massive population who thinks the system is rigged for the elite. And stuff like Royal Commissioners don't help that impression when you hear about things swindle and illegal stuff. But let's just talk about the company tax rate because it is absolutely a live issue. And it's economic reform. It's not economic reform necessarily in the broad tax reform basis or advocating or even how to form. But it's something we have to do.  And if we keep our company tax rate where it is now by 2020, there's only going to be one other OECD country that has a higher company tax rate than us. Now, if we go back to the turn of the century when Peter Costello as Treasurer cut the company tax rate, which I think was from 34 to 30, there were 19 countries with higher corporate tax rates than us. You know, as a capital dependent country, as a capital importer, as a place that year in year out for 200 odd years is relied on people coming investing in here. And that's a very important part of, you know, if you're going to have a high migration rate, you also need to bring the capital in to support the infrastructure to support the investment that can build out a stable sort of economy in society. So we're in that sort of obviously feeds in to growth as well and to investment to like individual investors looking at the forward market, you know, that the company tax cuts are really important for all of us. They are. And it's not so much about lots of jobs and growth, although there is an element of that. It's actually about making sure that we just keep pace. You know, we need this foreign direct investment, you go back 50 years before the big development of the national capital markets was basically how we funded our economy. There wasn't big debt capital markets and big portfolio equity flows. Now that's been going down a lot, but still 25% of the funding in our economy is foreign direct investment. And the reason that's powerful is it brings us connections to the world economy. It brings us into global supply chains. And more importantly than ever before is it brings technology and skills with it. And if we make it harder and harder for big multinationals to come and invest here, we're going to lose that is my view. I mean, I basically spent my career selling Australia to the world trying to attract capital, telling everyone that wonderful. I've had an easy story is I'm just it's been very easy in this boom miracle economy. It's going to be much harder in the future. But my instinct of speaking to investors all around the world for 20 years in all different asset classes is that we need to do this. And Bill Shorten is just tying it to a small social class warfare sort of thing. I think he's going to be successful, but isn't the right thing to do? Is it statesman? I think this is just a sign that we're not immune from these trends that are going on in other Western countries. No, no. OK, so let's just move on to now that we're talking politics, the budget, it's coming out next week. I've just got an overview of what a sensible fiscal policy looks like. And basically that was Australia's fiscal policy ahead of the GFC. I don't think people got to remember that Howard and Costello got in and they said, we're going to fix the fiscal mess that happened through the last recession. And they had a surplus within a couple of years. Now there's a bit of privatisation and there's a lot of cutting of this and the other, but they did it and then they ran pretty much balanced or surplus budgets right through that term. And Australians liked the government that ran its finance as well. It's interesting. On just a recent study that was the second most important thing to people that we... I was blown away by that. I was fascinating. I've been preaching this as an economist, but to see it come through in that kind of data was reassuring. But as a political scientist or as a political strategist, they should be paying attention to it. They can't help themselves. They all want... This is where economic policy, the independence from the political process is so important. We've seen it with monetary policy, although that was a long time ago. But this charter of budget honesty, which Costello and Howard put in was all about that, trying to put some frameworks so that they couldn't. My view is that fiscal policy needs to be run with discipline, aiming for a balanced budget, which is something that for hundreds of years that we've done. This new wave of economists saying that we've got to allow it to move. Well, yes, you do. When the economy slows, let the automatic stabilisers move. And yes, if there's a big shock, if there's a GFC, as it says here, in case of emergency, break glass. But it's got to be for very specific reasons in sort of almost a crisis. And I think the experience of Australia, which has been in the country, that's actually done pretty well in the last 10 years, is shown. Now, at the GFC, we had all those handouts. And some people at the time were questioning the morality of them, just handing cash to people. But putting all that to the side, we had the fiscal stimulus to help keep us out of recession, which I suppose worked. But we just haven't been able to get back. This year, the government is going to have a budget that is in deficit to the tune of 20 bill, or almost 2% or 1.5% of GDP. It's the 10th in a row. But this does feed into interest rates, as we were talking to you before, doesn't it? You've got a big deficit that higher interest rates are going to mean higher costs to repay back the debt and the interest costs. It's got a slowing impact. Look, it is. There is that crowding out issue, and I do want to touch on that. But in the end, it's a lack of will to get the government out of the economy. And whether it's a politician or a public servant, some of the mentality of some of these people is that the government runs the show.  We've organized the government to help us do the things we can't do. It's not the state that runs the society. It's the society that runs the state, and that's what democracy is all about. But in fiscal policy, these guys just can't do the right thing and get... And of course, when the government's in there, yes, it can push prices interest rates up. Now, I just want to show a fascinating piece of evidence of that. And this is the household saving rate versus the government's saving rate. This goes back to the 1960s, and back in the 60s, 70s and 80s, corporate savings was very low. So it sort of mucks around with it. But since the corporate sector's got its balance sheets very much better managed in the modern era, the average... The correlation between government saving and household saving since the turn of the century or December 98 is negative 90%. But basically, that means that if the government dis-saves or runs a deficit, it just means the household sector's going to save. They're going to offset it because they know that in the future they're going to have to pay the taxes back or interest rates go up so they don't borrow as much or whatever the case is. There's a certain futility to persistent government deficits apart from issues of morality and financial stability. And of course, the government's financial position is gradually improving. We're seeing the household saving rate come down after being extraordinarily high and people are showing more confidence. I suppose what I'm getting at is Australians love a government that looks after its finances. And if they're not looking after their finances, they worry about it and they save. And they probably save more than they need to. So the good news is that the government's financial position is improving. I think this government's doing a pretty good job all low. We've just found out they've got an extra $6, $7, $8 billion. We don't know for sure but if that's a hint. So what are they doing? Well, they're going to spend it. They're going to keep the same trajectory for the balanced budget surplus being three years out. And they're going to give tax cuts and probably spend on a few range of pre-election things. So just again, another thing politicians can't help themselves. But the improvement in the government's position is good for the economy. It's going to keep that saving rate in the household sector a bit lower and keep consumer spending, which is important. Okay, in terms of looking forward around the population, these are projections from the UN. And it goes right out to 2060, which I know is crazy, but demographics are a lot easier to forecast than just about anything else. But just let me reiterate something. Australia is much higher population growth than all these other, whether it's BRICS, the big emerging economies or the big advanced economies, they're all slowing and going negative. The reason we're hanging out there is that the UN or the IMF is assuming our migration policies start the same, which is a rate off. So the current rate of immigration, they're projecting forward, which means over this next three or four decades, the numbers of immigrants coming in are going to go up massively because the rates start the same and we're getting bigger and bigger. So if we got this, this high immigration outcome, yes, we're going to have a much greater foundation to get growth. But I would argue we're already seeing the political challenges to it. And Australia's been pretty disciplined around immigration peace. We've had Abbott and some other conservatives in the last six months talk about it. But with affordability, congestion, it's easy to blame it on immigrants and we're pretty good at not doing that. But there will be a point. This is where the economics and the politics gets really close. And all I'd say is that we're not going to get any more growth from our population, just to hold where we've been is going to require a fair bit of political tolerance. We're also spending on infrastructure, right? Oh, and we're going to have to build for it. We're going to have to build for it. And how does that actually fit into interest rates then? Because obviously, you know, our clients, very cognizant of interest rates and rising rates here in Australia, you were saying, low for longer, what's your sort of forecast or thoughts for interest rates in the next 12 months or a couple of years? Well, I think we're going to see Australian interest rates and this highlights the point and not going to go miles through global interest rates or US interest rates. No, they just can't. If anything, the outlook over the longer term is that our interest rates, as it has been the case for many years, is high. So I think Australian interest rates are generally on a rising trajectory. The caveat on that, and that's because of the good economy, the caveat on that is if any of these risks start to play out, because these risks are all obviously downside risks with the exception of inflation. Yes. So, and then just to finish off, this is the big one, the debt one that we've started with, we're going to finish with. This is 1870 business loans as a proportion of GDP, residential loans as a proportion of GDP, and you can just see that we've got more leverage in the system than ever before. Now, we have a much more sophisticated economy, a lot more sophisticated general population to deal with it, but it is a risk factor. I'm not calling it. I don't think we can take residential mortgages much higher as a proportion of the economy. I think the growth of that market's got to slow right down, but this is our vulnerability. If something goes wrong, this is going to be the channel that turns it from a shock to an economic crisis. Yeah. And here, as I said, the correlated economy, this is some data from probably APRA RBA. We have a very concentrated system, not just the four big banks, but also the fact that where their main lending is to the household sector. And so Australia's lending, the Australian Bank balance sheet exposure to mortgages, as you can see, they're probably on average over 60%. And the next highest is Norway at about 45, and then most countries are down at sort of... And that's why international analysts have looked at Australia as like a basket case, waiting for it to all topple over. Started in 2003, the Economist article, the Miracle Economy, they've been doing it for a long time. Yeah, they have.  But eventually, you know, we're getting... People have almost become attuned to it, but it's a financial risk. It's a big risk. We know the lack of diversification. We know the concentrated risk create problems. I'm not... I'm hoping it's not going to be a big issue, but that is our vulnerability. And of course, if the banks get into trouble, if the house prices go, the consumer balance sheet goes, we've got lots of buffers, and we're a wealthy country, but it will create some real challenges. That's when interest rates will go back down. That's when, you know, growth will be low for an extended period. I don't think those risks are playing out now. I don't think this rural commission is going to trigger that, as some people have been eluding. I know, certainly, our clients are looking at what are the prospects for the bond market in the next 12 to 18 months, two years. Do you have any thoughts on investment into that market? Certainly, we're getting a lot of demand from our investors for bonds. And some of you would know you have to wait list for bonds. So there's not enough supply.  Don't actually need to raise further funding? Look, I mean, I don't have a clear view on it, but I can't see why there wouldn't be a normal demand for credit. From the corporate sector, I think the big issue around the economy and the business sector is the changing nature of the economy and where there's going to be new players coming in. I know a lot of existing companies are trying to adapt to the digital world and change, but there's also a lot of new players. So how they get credit, I've got a clear view on that. But my view from an investment point of view is that as I said at the start, we're getting these good outcomes. The economy is doing well in the US. It's doing well in most countries around the world. And here I think it's doing well. We're lagging a bit. And we're going to get interest rates, I believe, whether it's at the short end. But more importantly, in that five to 10-year area, the bond market, the yields, that are probably going to be very attractive on a medium-term basis. You're going to get some really good yields, I believe, in the next year or so that will hold you in good stead right through the next half decade. And that's just from an outright interest rate point of view. If any of these risks come to pass, I mean, one of the fundamental problems with Australia's system, as I said, is that we treat the bank shares as bonds effectively in terms of retirees and self-managed super funds and self-funded retirees. And they're not. I mean, there's a lot of tax advantages and that's what encourages it. But then if any of these risks play out, then you're going to get hit with the bank shares there. The dividends are going to get moved. And that's going to be when you're going to find out this is not a fixed income product. It's still equity. And now, look, I hope that situation doesn't play out, but that's the risk going to be cognizant of. Well, you certainly know from the stats that investors, they have bank shares, they have bank hybrids, they have deposits, and they have mortgages. And so, you know, on many fronts, they're exposed if something goes wrong with the banks. So looking at other corporate exposures in fixed income is sensible to try and create that diversity. But yeah, I think you're going to get interest rates very gradually pushing up. And then I think they'll probably reach their high point at some stage in the next eight months. And that will probably be a high point for a number of years. And those yields that you'll see are going to be the best yields you'll get. I'd be buying into those rising yields, basically, and trying to get some duration on board as well. Once we start to see. I mean, I don't know the levels right here, but I think we're getting some good opportunities to invest. Yeah, great. Excellent. Any more slides? The last slide is just a conclusion. And, you know, it's not saying anything that we haven't touched on or talked about, but Australia has had a wonderful 27-year economic expansion, no technical recession. We've had our hiccups and we've dealt with it well. And it's a testimony to the reforms, our flexible economy, the economic management, especially from our professional bureaucrats, the Reserve Bank and people in government, but also politicians from time to time have done the right thing. But it's been a very strong period for the world economy. I know the last 10 years has been tricky, but that's been offset by the China story, but prior to that, and we've leveraged to it. And the world economy is looking trickier, economically, financially, politically. And I think it's going to be harder for us going forward. I would not expect another 27 years. Have recessions been spelled? Well, maybe they have, but I think we're going to have lower growth. We're going to have more potential volatility. And I think the risk of a recession in this country in the next three or four years is over 50%. I think there's a two and three chance we'll experience a technical recession in this country within the next, you know, by early 2021. Wow.  I mean, you know, and some of the company results have been really encouraging. Others less so, but it seems like there's a lot of fuel in the economy, but that you think there's a recession in the next couple of years is, you know, all the chances are better than half. That's something we have to think about. So that's really important. I've got some questions here. We've got a few minutes, Lauren. So Miguel asks, with all the changes happening on jobs and the digital economy, do you see enough focus from government companies, universities on investments and planning on the coming opportunities to remain competitive? Are we going to be still competitive? Is there enough focus on that? Yeah, look, I'm sort of some association with the UTS Business School, and I can say that there certainly isn't an awareness of this issue about getting the right skills and getting the workforce of the future. And there's a lot of work being done on the future of work, not just in this country, but globally. But I must say that there is some real concern amongst the experts in this field that we aren't shifting what we're training people enough. There's big debates about this, whether it's the Gonski-type reports or right through into tertiary education. But we're trying. I think that's important, that people are recognising this. But these institutions, which are really quite big businesses now, these universities, they're not nimble, they're not agile. I think we will, but there's more market forces on universities than ever in this country, and it's certainly the way we're going. And so those market forces will force a bit of agility in response to what's required. But it is a problem, because what does a 19- or a 17-year-old know about what the skills they're going to need when they're 30? And we often need that wisdom to set it up for them. They're not the ones who are going to actually know. So there's no doubt we need more computational capacity, more creative capacity, and obviously the technology. Young people just need to be utterly comfortable working in a technology space. A couple of other questions. Rita asks, would you comment on the franking credits, the proposal by Labor to stop franking credits that's impact on returns for retirees? Do you have any view on that, whether it's a good or a bad thing? I don't have a strong view, but essentially the history of it seems to be that when the government had a fair bit of money, back in the Howard Costello pre-crisis period, they extended the arrangements around franking credits to mean you get a refund if you didn't actually have a net deduction. And I suppose the Labor Party is now saying that we can't afford that. Now, that's fine with me, but if that money that they're no longer giving back to the people who were getting it is used for budget repair and good financial management, it's fine, but if it's going to be used for something else or spent or I'm not sure it's worth the disruption to those people, because the bottom line is there's people right here right now who are relying on that. That's right, they've budgeted. They've planned for their retirement. I mean, to my way of thinking, it actually makes it a fair level playing field if you're like in determining what assets to have in your portfolio, because the returns are not inflated if you're like Australia is one of the only countries that has franking credits full stop. But I think from my perspective, with bank hybrids, they include franking in the return. So you can't claim the franking while the returns are very similar to corporate bonds and, you know, which are far superior in terms of their product quality, I think. But that's just my two cents worth. I've got a question from John. He asks, do the recent outcomes of the commission reports on OMP, et cetera, suggest that many private Australian investors are not very competent or sophisticated and so may not be well equipped to effectively manage the changes in the economy. In other words, that recession that you're talking about. I think that's fair enough. I think that's unique to Australia. I mean, these are very complex issues. I mean, Australians are very well versed in issues around the economy and finance and so forth, better than most countries. But I think we are struggling and the Royal Commission is bringing it out to, you know, we've got a very complex tax system. We've got a very complex superannuation system and far more than most countries. And I think this is part of the issue. I mean, the financial advice piece, which, you know, we've heard the horror stories and so forth.  But it's going to make the cost of financial advice go up. So there's going to be a lot of people out there who aren't going to get access to it. Now, obviously, given the shoddiness of some of it, it's probably not a bad thing, but look, I think this is where leadership is so important. And I don't think people should be prepared for the complexity of the economy in the world around us. I mean, this is where the governments and business leaders should be, you know, they need to be people who are willing to, you know, lead the community and people need to have faith in them and trust in them. This is where this decline of trust is important too, because when times get difficult and people don't trust those leaders, then it's really going to be problematic, I think, for this. There's one last, oh, actually two questions. One from Alan, and he's saying, he's talking about the recession that you'll think might happen. What do you think would be the biggest risk and what's the main thing you're looking at as a trigger for a recession? Yeah, look, I'm not looking for a big sort of financial crisis type trigger. I mean, sure, a whole range of risks I talked about today could become acute, and that could be something that happens offshore that then ricochets through here, like our inability to finance our current account, which means that banks can't easily supply credit to the economy, or a disruption with China because they're a relationship with America. But I think the most likely outcome is essentially that the rate of growth of credit slows and that we see the consumer and that we see a rising unemployment, because whether it's the world economy that's going through a slowdown or some reason the drives are here, unemployment goes up a little bit and we see the consumer really sort of tuck their head in and want to fix their balance sheet up. And that could give us what would be a mild recession, but it would be a recession nonetheless. So I actually think you can get a recession that's almost organic in nature, which is essentially the Australian consumer sort of going to ground for a year or so. And part of that will be some stress around the banks. I mean, look, there is some concern that the way this role of commission is going is that banks there may be a shock to the supply of credit banks might not lend money to anyone who's not just the most credit worthy. I have no evidence for that, but that's some of the talk going around at the moment. But I see that that high probability is based on the fact that we seem to this economic expansion is long in the tooth and it's been very much filtered by high rates of credit growth, some pretty amazing stuff out of China and those factors are going away. And it's almost like we're running out of puffs as an economy. I feel for the fire. Yeah. And so in the absence of a big shock, I'm not looking for the crisis type recession with unemployment at 10%. I really hope that doesn't happen. But we could easily see this economy really sort of soften unemployment go up a couple of percentage points. That would probably be associated with house prices coming off 10% or something like that. And that would all feel terrible. But it's not the disaster. It's not the crisis. The crisis is likely to have to come from overseas. Okay. I think on that night we're going to finish up because it's a nice summary of the presentation today. I want to thank you so much, Warren. You've bought so many different things into the mix and how they all interrelate. It's been fascinating for me and I hope you've enjoyed listening to us today. I want to thank you all for joining. As you know, if you have any questions, you can ask us, call us. We're happy to help here at FIG. Thank you very much for joining us. And we hope to have another webinar quite soon. So be on the lookout for that. Thanks, Warren. Thanks, Liz. It's been great fun. Brilliant. That now concludes the presentation. Thank you very much. Have a good afternoon.