Structural change brings wolves to the door

Adrian Blundell-Wignall issued a wake up call to politicians yesterday, but it applies equally to chief executives.

The deputy director of the OECD in Paris, remarked at an Australian Business Economists' forum in Sydney that: "We are in a once-in-a-lifetime situation where you have got this collision of major structural trends that have been building up over a very long time."

"Most policymakers are not really used to dealing with these major collisions. They are used to fine-tuning in a Goldilocks world.”

So are CEOs and directors. They are also confronting difficult structural change, and these days the common big question being discussed around the board tables of Australia (and the world) is: Is it cyclical or is it structural?

And from that flows another set of questions. If it's cyclical, how long is this bloody cycle going to go on for? And if structural, is it just us or is the whole industry in this poo together? And does it matter anyway?

It's a natural human impulse to think that it is just the cycle and hold on and hope. CEOs are naturally inclined to tell their boards that it's just a rough patch while hoping that it's true, so they can get to the end of their contracts and pocket some long-term incentives before the manure hits the fan.

But more and more businesses are being forced to confront the unhappy reality that they are in the middle of a big one-off structural change to their businesses. Business after business, industry after industry, is being forced to fundamentally change the way they do things.

It is not simply a macroeconomic problem being confronted by policymakers, as described by Adrian Blundell-Wignall – it's micro as well.

The trends Blundell-Wignall talked about yesterday were: the financial deregulation and innovation of the 1990s and 2000s; the rise of Asia and the industrial revolution in Asia where exchange rates are managed against the US dollar; an ageing population, and; the 20-year experiment with the euro.

To that list we can add the digital revolution and the end of the cult of equities, coupled with the rise of self-managed superannuation.

Equities are out of favour with retail investors because they no longer provide returns that justify the risk. Bonds above 7 per cent and cash above 5 per cent will do nicely, thank you.

The cult of equities began in the late 1950s and became self-fulfilling.

The swing back to fixed interest is probably just a very long cycle rather than a permanent structural change. But for an industry geared to a 60 per cent allocation of savings into shares it makes no difference, this drought will be too long to survive.

Most medium sized stockbrokers are now talking to each other about consolidation and these talks will soon result in a series of mergers and acquisitions. Virtually all of them are losing far too much money to survive alone; maybe they can't even survive together.

The plain fact is that there are too many firms, and too many commission-writers for the level of business being written.

The firms, and the individual advisers, have been hanging on for two or three years, cutting outgoings and doing it tough, but now they can't hang on any more. They have to look for new jobs, or head into the garden.

They might have been telling themselves and their clients that shares are irrationally cheap and must soon come good but, as JM Keynes, observed "markets can stay irrational for longer than you can stay solvent".

As for the media, in many ways it is merely the victim of import competition, like the car industry.

Newspapers and broadcasters have enjoyed a natural protection from imports that gave them enormous pricing power. The internet now allows their customers to directly import content from overseas, as well as from cheaper local competitors like Business Spectator; suddenly their pricing power has disappeared.

Once again, it's an over-staffed industry that must now both shrink and rethink.

To mix nursery stories: Goldilocks has gone and the big bad wolf has taken Grandma's place.

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