Welcome to the Mclowd Community Newsletter.
The result is that much of economics as it is taught today is increasingly irrelevant in explaining the past, understanding the present and forecasting the future.
Jeremy Rifkin, Third Industrial Revolution
In 2004 brothers Lars and Jens Rasmussen created what eventually became known as Google Maps, a platform that has been part of our digital lexicon ever since.
At about the same time Steve Coast – a software developer in the UK – began a collaborative project known as Open Street Map, with very much the same (functional) goals as his scandinavian peers.
While Google Maps is a proprietary technology which generates hundreds of millions of dollars in annual licence fees for its parent (Alphabet), Open Street Map is a free, open-source solution. As a consequence it has attracted the support of heavy hitters including Apple, Amazon, Microsoft and Uber.
I was reminded of this backstory when I noticed that the webmasters at Nine Entertainment Co. (owner of the AFR, SMH, etc) have begun to replace Google Maps with Open Street Maps within their website properties.
What this signifies is that Open Street Map has finally reached a point where it is providing a realistic alternative (and given the volumes involved, Nine’s savings will be substantial).
Even more importantly, it highlights that once embedded in the economy deflation feeds off itself. (Nine went looking for a lower-cost mapping solution because the media and publishing industries themselves have been impacted by significant deflationary pressures over many years).
Implications for Superannuation
While it may not be immediately apparent, the above analysis has significant implications for the structure of Australia’s superannuation industry (SMSF or otherwise).
Having hardly changed since its inception, the average PE ratio of the companies that make up Australia’s All Ordinaries Index now exceeds 80 – a five fold increase in less than two years.
Mirroring that statistic, the corresponding average earnings yield is just 1.25%. (To put that in some perspective, a recent Productivity Commission report highlighted that there are retail super funds which charge more than that figure in fees on domestic equities alone).
While it should be acknowledged that these averages are being skewed by the eye-popping valuations attached to companies such as AfterPay:
- Even CBA has seen its dividend yield collapse from 8.9% to just 2.3% over the same period
- That trend is being witnessed across all asset classes
These figures are important, because what they signify is that the tax advantages attached to pension assets (which over the next few years will make up the majority of the superannuation system) are coming under sustained pressure.
Monetary and Fiscal Policies
RBA Governor Phillip Lowe is a classically-trained economist, having earned his Phd from the Massachusetts Institute of Technology (MIT).
He and his peers live in a world of demand and supply curves, and their policies are based on the assumption that if the yield curve is driven towards zero, nominal demand in the economy will go up, leading to improved outcomes in terms of income and employment.
But as Jeremy Rifkin predicted a decade ago, nothing in his training can be applied to effectively explain the process (and outcome) of demonetisation that Open Street Map represents.
The RBA has now signalled that from 1 July they will move to an open-ended program of quantitative easing of $5 billion per month. This figure is equivalent to 3% of Australia’s GDP, and is on top of a:
- 5% Federal Budget deficit
- Similarly expansive fiscal stance at a State level
The result is a ballooning of the collective balance sheet. But – as the price/earnings figures indicate – the P&L simply can’t keep up.
The consequence for investors is very simple: so long as this disconnect (between policy aspirations and deflationary reality) is maintained, yields will continue to fall.
Apple, Amazon, etc (along with Nine) do not support Open Street Map because they are filled with the milk of human kindness. They are all large corporations with stakeholders of their own to manage.
They support Open Street Map because it is in their interests to do so.
While I must admit to a degree of bias, I would argue that in the context of the SMSF value chain (and particularly the decline in tax advantages described above), Mclowd represents a similar opportunity for collaboration.
Mclowd Group Pty Ltd