5 December 2019

Insights

Meteorites and the Death of the Dinosaurs

Capital needs to work to create value and earn a return

Fear is a common denominator of the conversations we are having with people from all walks of life. The feeling is that social and economic progress is stagnating. Things don’t seem to be working and many people fear they are getting worse.

There are some who treat this as alarmism. To the economists in our team - oh, we are a dismal bunch - there is one warning bell ringing that we simply can’t ignore: extraordinarily low-interest rates and quantitative easing are the new normal, globally.

Our fears are founded on facts

Japan’s 30-year predicament was seen as peculiar to Japan. It is now becoming the norm. In Germany, banks are charging businesses to take their deposits. In Denmark, 10-year mortgages are currently negative. In Australia, the Reserve Bank has cut rates to historic lows.

These indicators are shouting at us that a fundamental change is already underway. The time value of money is effectively ZERO. People, including the growing number of retirees, cannot access ready income. Cheap money has fuelled inflated asset prices at risk of creating bubbles and distorting investment choices. Job insecurity is endemic. Wages are stagnating. Individual well-being is ambiguous. Loneliness is an epidemic. The value of old business models and ‘legacy assets’ is being challenged.

To us geeky economists, it’s as if a meteorite has struck Earth. It is the kind of meteorite that wiped out the dinosaurs. The old is dying, but something new and smarter is being born.

So, what went wrong?

The universal solution of the 20th century was to make everything bigger- scaling up. Last century’s logic was about boosting efficiency by finding ways to standardise processes and apply them to as many people and places as possible. This logic was applied by big business, big government, big technology and big finance. It produced at its peak some truly extraordinary gains, but at a cost. By surrendering to the logic of big, we surrendered responsibility for ourselves. The problem is that when big rules, individual human needs are too small to shift the dial.

In this environment, many traditional companies are struggling to grow. There is a surge in corporate M&A, which is described strangely as a growth strategy. Many outsiders view this strategy as the opposite. Companies must consolidate and cut costs to drive the growth of earnings per share, not growth of capability. You can’t shrink your way to greatness. Examples abound, but some classic examples are the Kraft-Heinz merger... or Alcatel’s merger with... anybody.

We can see this failure in the increasing expenditure by government and big corporate for consulting services: the value of the advisory market is up 8% in 2018 compared to the national growth rate of 2.8%. This ‘expertise’ is wasted on supporting an obsolete structure. Consulting is not the same as building capacity.

Venture Capital is seen as a solution, but it is also a symptom of the problem. Chasing high-risk, high-return start-ups with an influx of cheap money – without capability building – has created a culture that is accepting of many failures in pursuit of the next unicorn. WeWork is the highest-profile example from a list of many. And even when VC is wildly successful, it is too small to move the needle on delivering substantial capital to the economy.

In an era where robots and A.I. will take over standardised process jobs, the focus will be, and is now, the human. Emphasising the human value is a profound shift, a disruption. And what we have seen in this period of disruption is that large dinosaur companies and legacy institutions cannot make the change – they never have in the history of disruption. Propping them up is why interest rates are zero. Big capital can’t get to the human level. As we have seen everywhere else, the change IS coming, but it will come from something new.

Thinking small for big impact

Local enterprises and infrastructure are best positioned to meet human needs. They have the flexibility to adapt and innovate in a way that dinosaurs can’t – both in legacy structure and mindset.

Jobs of the future will be created at the local level because of technological disruptions impacting employment in large legacy organisations. In Australia (2018 FY) small and medium-size businesses employed approximately 70% of the workforce, increasingly in service-based industries. This is where the real value and potential for innovation lies.

Back the human, not the dinosaur

Patient capital is helping people meet immediate needs, run better businesses, and receive productivity gains as a reward. Beckon believes that this is the smart solution. Sixty per cent of Australian GDP is from SMEs – 2.2 million human-scale businesses. By supporting these businesses, we can get a stable return and reduce investment risk, delivering more financially resilient projects. This is grassroots economic empowerment.

We are about to witness a complete change in how our lives are organised, by moving back to the local and the human. Supporting local enterprises and local infrastructure will provide productivity boosts to the largest employer and value creation group. As we said, the time value of money is now ZERO. There is now no profit in doling out money to dinosaurs. To earn positive returns suppliers of capital must work with people to build capability. The value creation by sitting alongside enterprises and projects at the human-level will deliver a significant uplift in the quality of the lives of people and generate returns needed by savers.

We back the human, adaptive and resilient to deliver real, sustainable change.