Unconventional wisdom: Is government intervention imperiling super?
From Trump to China interventionist economic policy is in vogue.
Conventional wisdom is a byproduct of groupthink that presents solutions good enough for the average person while simultaneously not being right for any individual. You follow it at your peril. Each Monday I will challenge the investing norms that just may be holding you back from living the life you want.
Unconventional wisdom: Is government intervention imperiling super?
“Democracy destroys itself because it abuses its right to freedom and equality. Because it teaches its citizens to consider audacity as a right, lawlessness as a freedom, abrasive speech as equality, and anarchy as progress.”
- Isocrates
I’ve been contemplating what to do with my super. Late last year I wrote an article outlining my concerns with using a pre-mixed option from an industry super fund. I received a good deal of helpful advice from readers.
The combination of being busy and inertia means I haven’t done anything yet. Now I’m ready to act. The trigger is Jim Chalmers calling for industry super funds to invest in clean energy and housing.
I understand the logic from Chalmers’ point of view. The government wants to increase the supply of clean energy and housing but doesn’t have the resources to do so. The super funds are a huge pot of money. Chalmers has connected the dots.
The industry super funds haven’t rolled over – so far. They are sticking to the principle that the government shouldn’t dictate how they invest. No kidding. It isn’t their money and it isn’t the government’s money. It is our money.
Yet they are also laying some groundwork for a compromise and pushing for the government to take on the construction risk – in other words, the downside risk. Investors would benefit from the upside. This heads you lose, tails I win form of capitalism disappoints me as a taxpayer.
I can pontificate about the whole thing. Or I can act. I’ve made my decision to do something.
However, I also acknowledge Australia is just following the global trend. There is no shortage of instances where governments and private enterprise are getting into bed together. This could have ramifications on all investors.
More on that later. First a story about trousers.
Supporting the madder industry…with your life
The rose madder root has been used since antiquity to produce red dye for clothing. By the Middle Ages Provence was the centre of madder cultivation. The French government was eager to protect this industry.
The French are a civilised people. And unless you are Scottish it is uncivilised to go to war without trousers. With a fashion forward citizenry and eager to support local industry the French figured those trousers might as well be red. This meant more demand for the friendly madder producers of Provence.
In 1829 the French Army adopted the pantalon rouge. And the French love of tradition meant the pantalon rouge soon became sacrosanct. Other major powers choose drab khaki and grey uniforms under the sensible view that standing out on the battlefield wasn’t ideal in the age of rapid firing weapons.
The French were undeterred by this logic and off they marched into World War I in their red trousers. The ingloriously attired grey-clad Germans promptly mowed them down inflicting horrendous casualty rates on the French early in the war.
The relevant part of this story to investing is what happened between the 1829 adoption of the pantalon rouge and the guns of August 1914. In 1869 the Germans developed a synthetic dye substitute for madder. This destroyed the madder industry.
The original reason for choosing red trousers was no longer applicable. The problem was that red trousers had developed a constituency. The military thought red represented the elan of the army and their Napoleonic zeal for the offensive. It was so important to them they purchased the synthetic dye from their traditional enemy the Germans.
The pantalon rouge no longer benefited the madder industry. It certainly didn’t benefit the soldiers. But the Generals were happy that the army looked the way they thought an army should look.
Lesson: Whatever the original merits of government policies they tend to take on a life of their own long after their original purpose no longer applies.
Trump’s big, beautiful charts
Trump loves to hold up a chart in front of a camera. Every performer needs a prop. Recently he has started to use charts showing how much money the US government is making from tariffs.
He likens this to ‘free’ money that other countries pay the US for the privilege of selling things to profligate Americans. Inconveniently other countries aren’t paying the tariffs. It is the importers who pay them by raising prices on consumers. It is Americans that are copping the bill.
Whatever you think of Trump’s tariff regime it is not a uniformly applied government policy. Trump is picking and choosing which countries and which industries pay tariffs.
Sometimes the justification is economic. Sometimes it is political. Sometimes it is based on national security grounds. This is a degree of government intervention that we have not experienced in a long-time…..at least in the west.
Lesson: Beware of trying to predict the unpredictable.
The Chinese share market and government intervention
In 1982 Chinese leader Deng Xiaoping coined the term ‘socialism with Chinese characteristics.’ Translation: China was introducing a market economy.
Chinese economic growth has been admirable. Between the end of 1992 and 2022 the Chinese economy grew 13-fold. That is impressive. The Chinese share market over that 30-year period was flat. That is not impressive.
Investors like linear relationships. Equating growth and high returns is a particular favourite. Yet growth alone does not lead to shareholder riches. What matters is the growth translating into profits…for shareholders.
In China companies serve many masters. Shareholders are frequently last in line. A prime example was the 2020 government crackdown on the local tech industry. The central government saw the big tech companies as a threat to their power.
A series of antitrust investigations and new regulations followed. Some tech CEOs were arrested. Government entities took ‘golden shares’ in many tech companies which effectively gave them veto power over decisions despite holding a miniscule amount of equity.
I personally don’t invest in China. There are many investment opportunities. I’m happy to avoid a country where I have serious doubts about my rights as a shareholder. But in saying this I’m being somewhat hypocritical.
Lesson: In a multiple stakeholder environment make sure your interests as a shareholder are aligned with the other stakeholders.
Are we any better in the West?
In the depths of the global financial crisis it appeared as if the foundations of capitalism were at risk. Many people were scared. I was scared. Governments and central banks around the world intervened. In a very big way.
The shout from critics was moral hazard. But the critics didn’t offer an attractive alternative solution. They seemed satisfied if people just learned a lesson – even if we all went back to hunter gatherers. I supported the interventions. But also think the critics may have had a point.
We’ve all become very comfortable with government intrusion in the ‘free’ market. The global financial crisis was a genuine emergency. The financial system was saved through measures that were part equity investment, part bailout and part favourable regulatory intervention. Those same measures are now being applied globally in situations that are not emergencies.
Take the US. Trump is cajoling companies to invest in the US. The US government is exchanging subsidies to Intel for an equity stake. In a recent acquisition a Japanese steel maker gave the US government a golden share for allowing the deal to go through. Nvidia is paying the US government a 15% share of the profits from selling AI chips to China. Perhaps the US is embracing capitalism with Chinese characteristics.
Lesson: Government intervention can tilt the competitive balance in favour of certain industries and companies.
What does this mean as an investor?
There is a low bar for declaring something ‘unprecedented’. Civilisation has been around for a long time. Most things aren’t unique. Even in the most capitalist countries the level of government support and intervention waxes and wanes as time passes.
Countries have always supported local industries and favoured companies. There have been tax breaks, loan guarantees, sweetheart licensing deals, industry / regulator ‘collaboration’ and trade facilitation. These deals may not have been so publicly and combatively negotiated but that doesn’t mean they didn’t happen.
As a citizen I’m very concerned with what I’m seeing. As an investor I see opportunities and risks. I’m trying to apply the lessons from this article.
The risk is that investors face more noise. These are not backroom deals that can be careful studied after a formal announcement. The negotiations are increasingly taking place in the media – social and traditional. There are dramatic headlines and seemingly random course changes.
Good luck if you are trying to predict what Trump will do next and adjusting your portfolio at each twist and turn. Trading too much and focusing on the short-term are two ways investors sabotage their outcomes. Be careful.
The opportunity is related to moats or sustainable competitive advantages. Government can play a significant role in supporting or breaking down a moat. Government favouritism through regulation, trade-policy or licensing is a form of intangible asset. Tariff policy can establish or destroy a cost advantage by rewarding production in one jurisdiction over another.
The benefits from moats accrue to investors over the long-term. Don’t try and time the market or guess what the next headline will be. Be patient. Think through the competitive environment that companies face. Think about the impact of the changes that are taking place.
The structural changes in the global economic order are unlikely to be short lived. Government policies tend to linger long after their usefulness expires – just ask the French infantrymen in the First World War.
Final thoughts
Back to super. At first glance the calls for super funds to invest in certain projects seems to match the times. Just another government intervention to support national goals. I’m not so sure. To me there is a fundamental difference. These are not the collective resources of a country being invested. This is my money.
I think the amount of capital in super helps the country. That doesn’t mean it is collective pool of money that should be directed from Canberra.
Maybe investing in housing and clean energy will be a great investment and benefit the country. I honestly do think that is a possibility.
My worry is that over the long-term once that line has been crossed there is no telling what will happen. I’m not sure my interest and those of the government are aligned.
Next week I will outline what I’ve decided to do with my super. In the meantime, email me at [email protected] to share your thoughts on appropriate colours for trousers or anything else you wish to share.
I have a favour to ask
The book Shani and I wrote is currently in presale which is an important time to show our publisher and book retailers there is interest. If anyone would like to support this project you can buy the book now. Thanks in advance!
Our book Invest Your Way will be released by Wiley on October 9th in Australia.
Invest Your Way is a personal finance book that combines foundational investing theory, real-world application and our own experiences. It is designed to help readers create a financial plan and investing strategy that is tailored to their unique goals and circumstances.
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What i’ve been eating
I had a couple beers watching the Wallabies thrilling comeback against Argentina. As is apt to happen I got hungry. And I was craving sushi. I am fortunate that Izakaya Fujiyama is in my apartment building. I had some sushi and sashimi. I drank the recommended sake from the long-time waitress who always seems to serve me. Things were going well.
Traditionally you finish a sushi meal with the thinly layered omelette called tamagoyaki. But I was in an izakaya and I was yet to eat my favourite thing on the menu. The beef cheek bun. Slow cooked beef cheek with some kewpie and a bit of cabbage for crunch. I could eat twenty of them. Throw in a Japanese whisky and it is the perfect way to end a Saturday.
