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Most Australians live better than the Rockefellers

This article is extracted and edited from a discussion between Hamish Douglass, Chairman and Chief Investment Officer at Magellan Financial Group and Tom Piotrowski of CommSec.


The most important risk at the moment is the pandemic. Usually, you can assess an economic crisis and a policy response and make a decision off the back of that, but this is intersecting with a scientific issue and a medical crisis. The science is very hard to handicap at this stage and the economic crisis will depend upon the depth of the health crisis and we don't know when we'll have a vaccine. The science will guide how long this goes on for and it will guide the economic outcome. That's the number one issue.

Watch the US Senate, not Trump

The second issue is the election in the United States. There is a possibility of fundamental change. Most people assume “Wouldn't it be great for Trump to get voted out” but be careful what you wish for. There's an important element in the Senate that people don't understand. For the United States to get non-budgetary legislation through, they effectively need 60 votes not just 51. There's something called a ‘filibuster’ where somebody in minority can hold up legislation forever. Obama is advocating that the Democrats change the rules to get rid of that rule and make the Senate a simple majority.

And once they do that, they could change the number of states and include two more states in the Union, being Puerto Rico and DC. Then every state gets two Senate seats and they could change the balance of the power. This may give unlimited ability to implement legislation and that could be radical and progressive on taxation and healthcare and unwinding regulatory reform. Some of it could be very positive such as on climate change but some could have a huge economic impact. So while most people are focused on the White House, we're focused on the Senate race.

The other two major risks are the China-US situation and Australia has its own tensions with China as well, and longer term, the consequences of this world of enormous monetary printing. It looks like everybody's got a free lunch at the moment.

When something is too good to be true …

It's extraordinary what the central banks have done. The US Federal Reserve is not just buying government bonds and mortgage-backed securities but they're wading into other asset classes here like ETFs. People are starting to believe that there are no consequences—it's Modern Monetary Theory and interest rates can be held at zero forever. They can keep printing money and spending money.

If something is too good to be true, it normally is too good to be true, but it can go on for a long time before the party ends. It isn't today's issue, but some countries will get into the point where these deficits are effectively beyond their savings. It could lead to a runaway inflation and a collapse in their currencies. So they need to be very careful that they've got an unlimited pool of savings. The United States as a reserve currency of the world has an advantage because it has a global pool of buyers. We're not all treated equally here and ultimately this experiment could end very badly with high inflation and collapsing currencies.

But if you're convinced it's going to happen, and therefore you're going to sit out of markets for the next five plus years, that could turn out to be a very expensive decision to make.

Portfolio positioning amid a pandemic

Since the middle of March, we've been cautious, running at around 15% cash. We really do not know what's coming in the next 12 months or so. I'm just being very honest with people. I haven't got a crystal ball that's going to tell me when we get to a vaccine. If it's rolled out through 2021 with all this fiscal support and monetary support, that should support markets grinding higher.

But if we don't get to a vaccine in a reasonable period of time, and we see a spiking in the latter part of this year in the Northern Hemisphere leading into the winter, and emerging markets come under more stress, we could find ourselves really testing the limits of what central banks can do. The economic scenario could get materially worse than it is today.

Between those two market views, either grinding higher or collapsing, I can't tell you which one's more likely. So in a strange way I'm sitting on the fence. I can see both scenarios.

We still own a lot of growth, with technologies in our portfolio that are doing very well like Microsoft, Alibaba, Tencent and SAP. We've got some strong defensive businesses such as Reckitt Benckiser and Nestle and our US utilities have all confirmed the guidance.

This virus is creating winners and losers. It's accelerating trends that were working for or against businesses, such as traditional media losing to streaming services. Microsoft services such as Teams have received far more users and they aren't going to suddenly turn it off when we're through this pandemic. More businesses want their IT infrastructure in the cloud. We're talking a multi-trillion-dollar market opportunity that is probably a few hundred billion into it at the moment.

Last year, I had the privilege of interviewing Howard Marks and Ray Dalio at the Sydney Opera House, and I asked them their views on gold. Howard Marks gave a classic investment view that gold isn't an asset because it doesn't produce an income, it's a speculative investment. Then Ray Dalio said it's not an equity because it’s a currency. It's an exchange of value, and gold gives a protection against inflation. With the massive trend to printing money, people are buying gold and gold ETFs. But I'm not saying buying gold is the right thing to do at this price of over US$2,000 an ounce.

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Remain optimistic about humanity and future generations

I'm still optimistic on humanity although it sounds a little strange with a pandemic, a cold war developing with China, uncertain political environment in the United States, printing money and running deficits. But remember what's happened in the last 120 years. We had the 1918 Spanish flu, two world wars, cold wars, oil crises, stock market crashes, financial crises. But every decade, the world has become richer. And society has got better with fewer people living in poverty. Our younger generations are benefitting from technology across the world and it will advance artificial intelligence and medical science.

So, I look 30 years or so into the future, it will be more technically advanced, we will probably live longer than we do today. We're in a period where the noise looks overwhelming with a poor political environment and the inequality. But if you look how we live today compared with 100 or so years ago, I would say that most of us live better than the Rockefellers. It’s an extraordinary statement but did they have video, iPhones, air conditioners, etc?. We’re looking into space travel again. There are so many things such as the standards of education that we now have in the world. So while there are many problems, I have hope in what the human race can do. Let's keep educating our young people. Let's keep investing in venture capital. Let's not destroy the machine that created so much for humanity over time.

There's a risk we will go through a period where we start reversing. I know that capitalism isn't perfect, but you don't want to stop innovation and progressing while we address inequality issues. We should not kill the system that has created so much benefit for the world.


Hamish Douglass is Co-Founder, Chairman and Chief Investment Officer of Magellan Asset Management, a sponsor of Firstlinks. This article is for general information only and does not consider the circumstances of any investor. The full discussion can be viewed here. Extracts taken with permission of CommSec and Magellan.

For more articles and papers from Magellan, please click here.


September 06, 2020

Just on inequality. Back in the 1970's in a Germany that had rebuilt itself following WW2 a CEO typically earned 6 x the average salary. Now it's closer to 150 x. Do we benefit as shareholders ? If a CEO is paid $ 1m and we double their pay to $ 2m do they work twice as hard ? Do they make twice as good decisions ? How about paying them $ 4m are they better still. NO - it's a total waste of money and we get nothing extra. So it begs the question of why this has happened and whether it's healthy for society. The issue is not inequality per se and we all accept this cannot be avoided but it's whether the level of inequality has any benefit to society.

September 06, 2020

What a lot of misery gutses, except for Trevor. Most of those who have commented would have a bigger carbon footprint than Al Gore (that would be impossible) but do nothing about getting rid of the air conditioning or the gas guzzling SUV. You just want to whinge about government and big business not doing anything. Just get off your bum and do something to reduce pollution yourself and stop telling everyone else what to do. I don't see China's communist system creating a more equal society. The disparity between rich and poor is far more extreme in China than in the West and the persecution of minorities is far greater there than in the Western world. At least in the US we are shown atrocities on TV for all to see. Can you imagine that happening in China. The totalitarian regime would never let that be broadcast to the world

matthew smith
September 06, 2020

Well done Lew. The only rational comment fo the whole lot.

August 28, 2020

I'm a week late, but I think most of you missed the point re the Rockefellers. There is specific mention in the article about advancements in technology, education etc. I believe his argument to be that advancements in humanity have given more people luxuries compared to what the extremely wealthy had in the mentioned era. They didn't have tech such as TV, computers, internet etc., not to mention qualities of life and other things we take for granted because these things simply did not exist, regardless of their personal wealth. Most average people in developed economies would have these things today, and therefore 'living better' than the Rockefellers. The overall point is the advancement of humanity and technology since those days has had a broad impact on society and is likely to continue to do so and these are the areas he suggests will be important from an investment / economic perspective.

Dan N
August 25, 2020

First time poster...basic economic theory explains that the gains from trade or exchange of goods and services between individuals makes everyone involved in the trade better off. This is mathematically proven and a simple proposition. This is a time honored principle, going back to barter trade. Over time, this basic tenant has extended to companies and then countries and has become increasingly integrated and complex through shipping, finance and the use of technologies. These gains are enjoyed by billions across the globe, according to what they bring to the table. It's a giant market place. Is it fair that German's enjoy a greater quality of life than Africans on average? Why do they enjoy a greater quality of life? Every day I use goods invented and made in Germany that improve my quality of life and which I can rely on - Stihl, Bosch, Miele to name a few. I am a Social Worker by profession (with a Ba Economics) and save my average wage to afford these items, as they are not cheap. My point is that inequity is a part of life, but we should not overlook the overall gains made due to this evolving, ever changing network of individuals, companies, countries trading goods and services, for all our benefit, even the poor - some call it capitalism. IMO society has a responsibility to then redistribute those gains to those most vulnerable. Most countries do this to varying degrees - how much should be redistributed and how is a point of contention.

Michael Walsh
August 24, 2020

I would say ask most Australian's about what makes their lives better and they would say love, security, freedom, connection, few surprises and comfort. That's different to objective "stuff" like technology, toys and longevity. And inequality (particularly during recession) takes away that sense that we are enjoying those things that make our lives better. Most are certainly not thinking about becoming philanthropists! The Rockefellers had it all - all the stuff imaginable at that time and all the qualities that would make their lives the best it could be - philanthropy included.
In any event, why is that statement relevant to prospective returns from shares? If it's stuff=living better then the pandemic recession is testing that thesis, no?

Mike M
August 20, 2020

interesting until the comment about climate change! Really Hamish, are you one of these woke financial people, out of touch with reality. I know the financial sector loves to hate Trump but we will all be worse off if he departs the scene. No one left to fight for capitalism. Isn't that what you finance folk are supposed to be doing. 

SMSF Trustee
August 24, 2020

You've got to be kidding. Trump is not fighting for capitalism, he's fighting for Trump. He's a narcissist and egotistical sociopath, not a capitalist.

Plenty of others out there fighting for capitalism.

And in any case, what is ''capitalism'' ? A System in which the owners of capital are allowed to employ it to achieve their own private ends, not state-driven ends. And that's exactly what capital owners are doing when they choose to invest in industries that are either contributing to the reduction in fossil-fuel usage or will benefit in some way from climate change. This is capitalism at work, nothing to do with being woke or whatever silly term you wish to use.

August 20, 2020

Indeed, Fergus, but life expectancy in 1850 was 38 years and in 1890 42 years. Now it's, what, 90.

August 20, 2020

A long life in poverty is perhaps worse than a shorter life in poverty. Noting that a 90 year life expectancy is not for every one...many will live much shorter lives (including indigenous Australians), as life tables are based on averages. Plus the Rockefellers were very wealthy - billionaires [John D Rockefeller was also the richest man in American history, and possibly in the history of the world" maybe the US in:
" I would say that most of us live better than the Rockefellers" refers to - 'us billionaires' ?

PS - The US, the WORLD and the FINANCIAL MARKETS will not miss TRUMP at all. Capitalism will continue to march on (regardless of whom sits in the WHITE HOUSE) but maybe, we may start to also see some humanity and a move away from constant self interest and what is in it for me...a pipe dream I guess.

August 20, 2020

A very good and interesting dissertation. However the bit about "most of us live better than the Rockefellers" was frankly quite misleading !!

Gary M
August 20, 2020

John Rockefeller was born in 1839. Imagine the disease, health, life expectancy then. Technology, travel (usually), medicine, entertainment, food quality, hygiene ... the list goes on. In what way is it misleading to say we live better now?

August 20, 2020

Yes, but the RICH lived above the disease and poverty - and always have and will. Hence yes the poor live comparatively better (depending on the country they live in) than they did in the 1800s...but the ROCKEFELLERS did not live in the slums and hence perhaps Hamish's quote:
"I would say that most of us live better than the Rockefellers" refers only to those who are not currently living on on the streets (including in SYDNEY, AUSTRALIA) or in a slum (in too many countries to count) etc.

August 20, 2020

Need to put most of those issues aside because they would have had the best of those that were available at the time. The context needs to be relevant to the time frame. I saw a doco on the rockefellers and they lived a life of luxury compared to most of the population at the time.
A total of 81 Rockefeller residences are on the National Register of Historic Places. Not including all homes owned by the five brothers,. Mansions, servants etc. He lived to the age of 97.

August 20, 2020

Unfortunately a lot of innovation is leading to more inequality and inequity and this is likely to get worse as those at the bottom of the food chain see less and less opportunity for them. It would be nice to hear a fund manager talk about this and the fact that climate change is likely to make the environment more inhospitable to man kind, especially those again at bottom of the food chain, who cannot access shelter / air conditioning or heating. Meanwhile the richer will continue to become richer and the poor even poorer.

Nick Game (Australia)
August 20, 2020

Fergus you just don't get it! The rich maybe getting richer, but the poor are getting richer faster in virtually every country. Wealth disparity should always be looked at in relative terms this is the point that Hamish was making in reference to the Rockefellers.

Michael Walsh
August 24, 2020

"the poor are getting 'richer' faster in virtually every country" Really? So "relatively" speaking if an African nation's average personable disposable income goes up 50% from $2 per day to $3 per day is comparable (or not? I'm confused) to the share price movement of Facebook shares?

August 23, 2020

You are arguing against the ONLY system that produces WEALTH and making statements which are ideological
and NOT based on reality . The world is better now than it has ever been . Mankind HAS adapted the world to make it a
safer and more productive and better place for humans to live. There are more trees now than 100 years ago because people stopped cutting them down for fuel and burnt coal and oil instead.There are MORE people NOW than ever
BECAUSE the environment has been improved to allow that AND a much fewer percentage live in absolute poverty.
There are more rich people and fewer poor people....although there still exist "pockets" of poverty in third-world-countries.
Food production has improved along with health , housing , education and all the other material benefits that ONLY the Western Culture and Capitalist System can provide and as it is adopted and implemented around the world it lifts
people out of poverty and into relative prosperity and wealth. If they have nothing then you can't make the poor even poorer
can you ! So , that is an absurd claim. Sure , the rich are getting richer.......but so what ? So is everyone else.That has to be good ! The wealth generated can be used to develop more business and employment opportunities , also a good thing ! Capitalism always creates UNEVEN wealth , so what ? If someone is becoming fabulously wealthy AND you are
"doing alright" then what is your problem ? They are paying a lot more in taxes than you are , so you should welcome that.
No.....your inequality and inequity seems to be based on "envy" and "a feeling of entitlement" rather than anything else.

Gary M
August 20, 2020

Good to hear a fundie admit they have little idea what is going to happen, and in fact, it could be at either end of two extremes.


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