Our Perception Gap: One of the Biggest Risks to Aussie Financial Markets

Our Perception Gap: One of the Biggest Risks to Aussie Financial Markets
Nick Hubble

My family moved to Australia in 2003 — on New Year’s Eve. I remember how the place seemed back then. Literally like paradise.

Leaving Germany, the idea of throwing my surfboard into my boat and taking off down the river towards the beach was inconceivable to me. And yet, it became normal.

The idea that the weather could be good enough year-round to have louvre windows was just as shocking. I remember my mum poking her hand between the slats, confused by the concept. A house without double glazing was shocking enough to a German, let alone the security risk of wooden slats.

By 2015 I was back in Germany.

My Australian university housemate and his partner happened to be visiting Europe. We caught up in downtown Frankfurt, and were charged by mounted riot police.

They were trying to break up a Jewish-Palestinian protest and counter-protest march. We walked right into the fray from a side street, on the way to pick up a German football jersey for the two tourists. It wasn’t a great impression for the visitors, but I wasn’t surprised.

I don’t really know how to convey this message to you properly, and at risk of causing offence, but Australians do not have a healthy understanding of how bad things are outside our country.

It’s one of the reasons I left and moved back to Europe.

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Australia felt like an artificial bubble, like living in the film Pleasantville.

Obviously there are exceptions. The recent bushfires showed Aussies face hardships too, of a different sort. But I’m sure you can get a feel for the point I’m making. The world is falling apart in ways that Aussies can’t even conceive — even when it’s right in front of them.

Consider this billboard from the streets of Beirut:


Source: https://twitter.com/rsherlock

[Click to open in a new window]

Lebanon is experiencing a financial, economic, and political crisis. Recently, Jim used it to point out how ice-nine can strike down a financial system.

But businesses are marketing gold-coated chewing gum to the ruling elite and wealthy in a way that is utterly shameless. It spits in the face of those they rule and ruin. And they get away with it. It’s normal. The company has an entire range of such ads.

What Lebanon is going through is something Aussies cannot understand. We’ve had banking outages often enough, so the financial mess is vaguely familiar. But the ad on the billboard is about something deep that few Australians truly grasp.

It also shows that many of the shocking things Aussies hear about overseas are becoming an acknowledged norm.

A few weeks ago it emerged that the European Central Bank had financed the wealthiest man in France to purchase the US brand Tiffany & Co. The Europeans are literally printing money and handing it to the rich for vanity purchases…

The Guardian newspaper revealed that a third of EU voters support euro-sceptic parties. And that was before Turkey opened the floodgates to another wave of refugees and immigrants this week.

The US may soon elect a socialist president who wants to print money to finance deficits.

In China, millions of people are being interned for their religious beliefs and used for forced labour. Those are the lucky ones, with live organ harvesting kept for the less lucky…

The list goes on and on. Whether it’s inequality, political repression, poverty, or the desire to be heard, all around the world things are falling apart. The amount of protests, the extent of violence, the golden chewing-gum, and the extraordinary economic policies of the powerful and wealthy are not out of The Hunger Games movie. They’re real.

And they’re the sorts of problems that Aussies don’t get.

They don’t understand what they mean. The idea that the government could kidnap you, torture you, rip out your organs while you’re still alive and sell them, is simply not conceivable. And yet, it is reality in China right now.

The perception gap

I often read out loud to the office here in London what passes for news in Australia. The newspaper headlines of what’s considered a problem in Australia makes people here in Europe laugh.

The recent London terror attack which social media managed to cover so well happened a few stones throws away from our office. A few months before, there was a knife murder outside my front door — one of many in London. And the UK is comparatively stable.

In 2019, an extraordinary long list of violent protests broke out around the world.

Australia’s perception gap is just the first half of what I want to tell you about though. The odd corresponding fact is that Australians are disproportionately exposed to financial and economic risk.

They over invest in stocks in their super funds. Debt is high and the housing bubble hasn’t truly popped. And banking and commodities dominate a disproportionate chunk of the Aussie stock market and economy. These are cyclical and prone to crashes.

I’m fascinated by these two facts. That nothing seems to go badly wrong in Australia compared to places around the world, despite the disproportionately large risk exposure.

Sharp thinkers will draw the link quickly. Australia’s stability is what allows us to take on so much risk. I agree.

But there’s a deep flaw to that thinking. Didn’t 2008 teach us that problems overseas translate to financial crashes in Australia, even if the risks of something going wrong domestically are so small? We didn’t even have a recession and yet our stock market plunged more than most in 2008. Especially currency adjusted.

I believe the perception gap is quickly emerging as one of the biggest risks to Aussie financial markets.

When political changes begin to play out around the world and we don’t understand where they came from, or what they mean, our financial markets will go haywire again in ways that surprise you.

Events that only shock Aussies

My message to you is that, outside of Australia, the world is fraying at the edges. In ways that Australians find difficult to conceptualise, let alone understand. I struggle to explain them to you — as I am right now.

But Brexit wasn’t a shock to Britons — I was there for the vote. Trump wasn’t to Americans either, as Jim often explains.

Isn’t it interesting how surprised Aussies were by these events? They still struggle to comprehend them now.

The Aussie media still portrays them as aberrations like an unusually bad summer. They were not.

They were important and explainable signals of what’s going on around the world.

Something Aussies aren’t aware of.

Eventually, something similarly misunderstood will impact Australia more directly. You’ll see the carnage in financial markets and wonder where it came from.

As though it is a surprise, when it shouldn’t have been. And it wasn’t to people outside of Australia.

My advice this week?

Don’t be one of the Australians that believes ‘it couldn’t happen here’, or think that the consequences won’t reach our financial markets.

I may be preaching to the converted if you’re a subscriber to Jim Rickards’ Strategic Intelligence.

But don’t get complacent like the rest.

Until next time,

Nick Hubble Signature

Nick Hubble,
For The Daily Reckoning Australia

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