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2021 & Beyond

Updated: Jun 30, 2021

2021 & Beyond

June Update:

To say that we are surprised by the market during the first half of 2021 would be an understatement. We forecasted that the termination of government handouts would translate into a gross increase in both the population's marginal propensity to save and an accelerated rebound back to stagnated productivity growth. Now with unemployment decreasing to 5.1% and the Australian Dollar reaching 90c USD in fair value, we acknowledge that we have been wrong in our previous assessment.

One key omission on our side of research was the projection was China's blockbuster post-pandemic growth and subsequently its demand for iron ore. The historical high price for the red mineral has been widely seen as the primary factor behind Australia's most recent current account surplus. We have no reason to disagree. This export of raw material captured a significant portion of China's productivity growth in its crusade to supply the world with finished goods.

One major misjudgement was our forecast of both consumer and business confidence levels. Measuring the sentiment of society has and will never be an easy task. Both PPI and CPI figures are at large a vote of confidence and we have made the error of qusai-confirmation bias when comparing Japan's recession with the Covid crisis in Australia. Prior to its bust, Japan's real estate bubble was decades in the making and subsequently rooted itself within almost every corner of Japan's economy. This, to an extent, could explain why Japanese society has a tendency to avoid gearing and save large quantities of cash. Australia's 3 decades of economic growth could be described as a market miracle but is far from being a bubble. Since the baulk of the nation's economy relies on harnessing productivity growth from developing countries through its export of raw materials, most of Australia's dollars are backed by hardcore growth as opposed to psychological growth sentiments. We remain in the research process of evaluating productivity growth in developed economies but wish to convey our regrets in this misjudgement.

To sum it up, for now, we don't believe a recession is likely in the short term. Instead, we hold our view of an inevitable correction in the next 5 years. Our evaluation of China's margin of safety remains intact and we still believe it is the best market for investors to find value in upcoming decades.

We will continue this reflexive process of research and will always admit errors and subsequently update them for the benefit of both ourselves and our readers.


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