State of Play: Mixed News
Hi, everyone, and welcome to our State of Play. First up, my sincere and humble apologies for last Thursday. My highest priority was always to come live twice a week on a Tuesday and a Thursday at 4:02 for the latest State of Play. And I had juggling priorities last Thursday at the last minute. Hopefully, you’ll forgive me, and I undertake to make the commitment to be here every Tuesday and Thursday at 4:02 going forward my extreme exception last Thursday. And I think you’ll forgive me because I’ve got some great news and it’s all part of a higher purpose, but we are obviously doing a little bit more right now in terms of bringing you top experts for our Ignite Recession series. Recessions are great levelers. We haven’t had opportunities like these in the last 30 years. We just haven’t had a recession.
So, what I did was, I reached out to top people in their industries around mindset, around wealth, that sort of thing. And what’s happened with COVID and people adopting technology, it means that we can be bring big names to you via live stream.
So, for those of you who joined us on Saturday, when we brought Robert Kiyosaki to you, we were setting up a new studio and equipment and everything so that we could have that, like a well-oiled machine, and it meant that we weren’t able to go live on Thursday, because we were literally building everything we needed to go live on Saturday. So, hopefully you caught that one and got the most out of that day. And if you missed it, I’m going to bring you, I’ve cherry-picked a condensed version, high-level takeaways live with me on Wednesday night. So, tomorrow night, I can give you the skinny and the big frame of what happened and the takeaways from Saturday.
And this Saturday, we’ve got Gary Vaynerchuk. So, for those of you who don’t know Gary, he’s one of the world’s leading social media marketers. He wrote a book back in 2009, Crushing It! He took his father’s wine business from a turnover of a few million to $60 million within a few years just by riding the wave of technology, social media, digital marketing, that sort of thing, and now he’s a go-to guru in that space. So, very hard to secure, but an in-demand speaker. And I’m going to catch up with him on Saturday to ask for his views, amongst other experts. We’re also going to talk about [inaudible] economics and business at the moment. So, that’s this Saturday, and I’ve got a whole lot of other ones lined up for you.
I can announce our next couple of speakers. So, the two weeks after that on [inaudible] Saturday we’re going to have Brian Tracy. Many of you would know Brian Tracy, as well as John Demartini whose work personally has influenced my life. And that’s just the start of speakers that we’re going to be bringing to you on this series of live streams. I chose them because they’re top in their field, they need a very strong mindset, mental toughness, to get where they are. So, they’re not just technicians. They’re also going to speak about the emotional resilience that we need in times of a recession, because we got to control what’s within our control, and how you respond is within your control. And that’s part of your mindset, how you think, your talk track, all of that. It starts from within you.
And I wanted people who knew Australia, who’d been to Australia, who’d spoken in Australia, who knew Aussies, basically our market, our economy. We’re different from the rest of the world. And you don’t want someone from America telling you about their economy or what works there when it doesn’t work here. So, they had to have some affinity and love of Australia.
That’s just the start of it, and that’s why I missed last Thursday. So, big lineup. This week I’m going to put the link, actually in the comments and description section for this State of Play, so that you can register and join us on Saturday for the Gary V. event.
But [inaudible] Robert Kiyosaki’s message on Saturday, he ended by saying, “You are the luckiest country in the world, luckiest country in the whole world.” And to give us some perspective of how we’re positioned with what lies ahead, we can see the OECD came out last week with some figures. And what they basically told us was that our economy will contract 5% and consumption will plunge seven-odd percent, 7.5%.
But our government spending and our stimulus package, which accounts for 6.9% of GDP, is one of the highest in the world. So, if you can see here, we’re going to come through this. We’re the fourth top country in the world when it comes to the impact of COVID and the recession.
So, the blue line is what’s going to happen if everything goes okay from now and there’s no second wave. The red line is in the event of a second wave and the impact or effect that would have. So, our government debt wasn’t as great as other countries in the world. So, our government started with a debt of 60%, which is probably only half of other OECD countries. So, we’ve revised our figures, and if all goes according to plan, we should be golden. Well, not golden, but we’re going to fare better in a really bad situation than many other countries in the world. We’re going to come out fourth place when it comes to riding this out, which is good news.
We have had outbreaks in Victoria, like over the weekend and continuing. But as Scott Morrison says, they are localized in certain areas, in communities. We expected this. We knew that it was a balancing act. We flattened the curve. And the idea was to come out knowing there’d be outbreaks, knowing that, and these were apparently just confined to certain suburbs, certain family groups. Obviously, once they lifted restrictions and people got together, we knew there were going to be outbreaks, but far more controllable and no need to shut down the economy or anything just to deal with that sort of collateral damage.
In terms of unemployment, even though we’ve had a massive spike in unemployment in Australia, 835,000 jobs lost and more to come, but JobKeeper is obviously keeping jobs in place and keeping us on life support in that respect. But Australia is pretty low down in the scheme of things, compared to other countries in the world.
So, the black is the unemployment, that black dot, that we had in the GFC, so it’s going to be worse than the GFC, and the red is in a second-wave scenario. You’ll see our red is not that bad, it’s a tiny bit of red in the scheme of things. And apparently, they say our risk isn’t as great as other countries that share borders and linked by land. We’re an island, we’re isolated from the rest of the world, and so in that sense we’ve got a better chance of protecting ourselves and avoiding a second wave. So, well-positioned to ride it out is the good news.
The bad news is, in our private sector, whilst our government wasn’t that indebted and they’ve ramped up their debt, like 6.9% of GDP, 16.9% went into the economy, what we have in our private sector, though, moms and dads have a lot of debt. So, we are spending nearly 200% of what we earn. And these figures from Digital Finance Analytics [inaudible] surveys people. And mortgage stress is going off the charts, already is up to the high 30%, and by August we’ll hit 40%. So, mortgage stress is when the money coming in is less than the money needed to go out to service debt.
And obviously, we’ve carried a lot of debt because you can see green here flat-lining, that’s our earnings, our wages, in real terms. We haven’t earned any more for the last 20 years. We’ve gone nowhere. And yet the cost of houses and everything else that we spend, inflation has meant that everything else has doubled-tripled, but we’re earning the same. And we’ve funded that difference with debt, and debt is going to have a day of reckoning. And that’s what we’re going to see now.
So, the mortgage stress is greatest in states with the greatest property prices, obviously. So, Victoria, New South Wales, then followed by Queensland, and WA because they had a massive boom in the mining period. So, that’s where people can’t afford to pay their mortgage. And [inaudible] also scoped it out by postcodes there, so there are the postcodes where there’s the greatest risk of default. He looks at the cost of housing, the cost of servicing a mortgage, the levels of employment there, and the average wage in those suburbs to calculate mortgage stress.
And there will be a day of reckoning, we know, come September, because the Australian Banking Association have said, “Look, the banks have deferred $236 billion worth of loan repayments.” So, 779 [inaudible] 780,000 loans have been deferred, most of them in the mortgage space, more in the business space as well. So, all of those loans will have to be repaid come September.
So, the banks know this as well. So, Morgan Stanley have looked into the health of our banks and they’ve said they have $640 billion worth of exposure to COVID-affected industry. That’s 16% of total exposure. So, if you look at all of the loans that have been deferred and look at where the people who have deferred work, $640 billion will be in hospitality and travel and industries that are affected, where people are more likely to have lost jobs. They’ve also said that over the next few years, next three years, that the loan impairments will increase, both in those industries affected as well as in general. So, by 2022, there’s going to be $231 billion of impaired loans. Out of all those, like Martin North predicted, at the moment it’s about 37% of loans are stressed. Of those, it’s predicted, and the forecasting says, 12% of those will just go bust. The banks will have to foreclose.
The banks know this. They’re putting capital aside to cover themselves for those defaults. So, the blue lines there are what they put aside at the moment, and the red lines are what they’re going to have to put aside when we reach critical mass. So, come September, when they stopped giving people loan holidays, then that is going to be the level of impairment. And so they’ve divided into total exposures and troublesome ones where it’s already stressed, maybe there’s already default. And they can predict by looking at industries affected, they can get down to a very granular level. And they already know this. As businesses, they know, “Okay, there’s going to be some casualties of war here.”
So, CBA, they’ve had a spokesman come out, Angus Sullivan was his name, and he said, “Look, before, when COVID hit, anybody who asked for a deferral we didn’t really question, we just gave it.” “Now,” he said, “we are going back to them all [inaudible] and we’re assessing where they’re up to.” So, they’ve doubled their collections team from, they say, 700 to 1400 and they’re ringing people up to say, “Where are you looking?” Or, “How’s it going?” asking for more information. They’re wanting to proactively help people [inaudible] But by the same token, they don’t want to prolong people who aren’t going to make it, so they’re deep diving. And they’re indicative of all the banks, I’m quoting them because they’re the biggest bank, but the same approach. We’re seeing it in our debt management section.
What they’re doing now is they’re saying, “Okay, you’re deferred. How are you looking? Have you lost your job? Fill out a form, give us an update.” And they’ve said, “Look, it’s in our interest and the customer’s interest if we can find a way to work together going forward.” But it’s not just a blanket of [inaudible] COVID, it’s deferred.” They’re asking more, they’re coming up with more bespoke, tailored solutions for customers. It’s not one size fits all.
And what Mr. Sullivan said is, there are some people who can’t be helped and it’s not in anyone’s interest. His exact words were, “It’s inevitable that there will be some defaults after September.” So, some properties are going to be sold to repay loans, and especially amongst investors. That will sort of be the low-hanging fruit there. There’ll be times when it’s not in someone’s interest because of the issues, they don’t have a job, they don’t have income. There’s no light at the end of the tunnel, it’s silly to just keep them on a hook of debt forever and just say, “Pay us back later,” because it’s just unfair to all parties.
So, that’s the landscape at the moment. Listen in tomorrow night if you missed Saturday. I’ll talk more about that and opportunities around distressed properties. But just remember, we’re looking in these sessions, and we have been for the last few weeks, at a lot of graphs, a lot of data, a lot of charts, a lot of predictions. Often, predictions can be wrong. So, it’s good to know the facts as they lay, it’s good to know the data, but that’s not necessarily predictive.
For example, on Saturday, Tim Lawless told us, and I’ll recap on this tomorrow night with details [inaudible] his slides, but basically what Tim said was, “Well, this is where the market’s at now, and it hasn’t really fallen.” And of course it hasn’t fallen yet because, when we look at it, loans have been deferred. People aren’t feeling pain. There’s no day of reckoning. What will happen come September is all predictive.
So, we should work off possibility, not probability, in times like this. We tend to look at the past to predict the future, and sometimes that can get warped. An example of that was what came to be known as “survivor bias” [inaudible] and it happened in World War II where, what happened was, they looked at planes that were “injured,” for want of a better word, planes that had been shot at. They looked at when they landed, they said, “Well, let’s investigate where they were shot, and let’s put extra resources into reinforcing those areas.” And what they didn’t realize, and later they got wrong and understood, was they weren’t the sections [inaudible] be studying.
So, if you look at this picture here, what they looked at was where these sorts of areas, they reinforced the edges of the wings and the middle of the fuselage and bits of the tail, what they should have really looked at was the planes sitting at the bottom of the ocean that had been shot down. Because what this really told you was where a plane could get hit and not be a casualty or a fatality. It was hit, but it could still fly and it could still land. The ones at the bottom of the ocean were here in the critical parts. These are the parts that needed the reinforcement, because it meant if you were hit there, you just went down.
So, studying survivors, and studying what we see in front of us, can sometimes mislead us. Another example is people say, “Oh, Bill Gates, Steve jobs, they dropped out of school, so it’s okay to drop out of school, you’ll do really well.” Now, what you’re looking at is the tip of the tip of the iceberg, the green up there, the 1% who defied the role, and the red is everybody else who dropped out of school and didn’t become a billionaire. And similarly, another example, we look at old buildings and we go, “Oh, all the old buildings are so beautiful. I wish buildings were like that.” No, they were just the best of the best that no one knocked down. There were probably lots of ugly buildings that just didn’t survive because they weren’t beautiful enough. So, we’re looking at different groups.
My point being that, don’t take figures as gospel. They’re indicative, yes, and it’s important to test the wind to know what’s going on to make informed decisions as best you can with the information you have. But it is not set in stone. It’s not gospel. Nothing is. As Scott Morrison said with all of this, “There is no playbook. We’re doing the best we can.”
So, what should we do? Go back to first principles. That’s a good hack. That’s a good rule. When you’re trying to make your own informed decisions for your situation and you’ve got all this data coming at you about unemployment, joblessness, everything, focus on you. So, if it’s the case that, okay, and it will be for all of us with the recession, with COVID, with this change, with “new normal,” we’ve had radical change and it’s going to be a reset for all of us. Many of us are asking ourselves questions because we’ve got this reset. “Am I in the right job?” “Am I in the right industry?” “Am I doing the right thing?” “Should I do what I’ve always done?” “Do I need to change things?”
So, start drilling down. Ask yourself, take all the data at first principles. Often, we never get the chance in life to ask ourselves questions. So, if you’re thinking, for example, “Do I like my career?” Or, “Do I like my job at the moment?” Instead of going, “I hate my job,” start to go, “Okay. Why don’t I like it?” What are the good bits about it? What are the bad bits? Okay. When I say that, “This is a bad bit. In my last job, I had that and I wasn’t as unhappy as I am now,” start drilling down. “First principles” means go down to the core elements. And it challenges traditional thinking.
So, if you look on the right side here, instead of starting with limitations, “I just hate my job,” start with possibilities, okay, “I could start looking for a new job.” Instead of reiterating and improving where you’re already at, which is what we do for traditional thinking, “How can I inch forward?” “How can I get a promotion in this industry?” Strip it bare. Reset. Define and explore a new pathway. First principles mean all bets are off; let’s go back to basics. Instead of exploring available solutions within your current paradigm, number three there, create a new recipe and start over, rebuild, look back in time is what we tend to do, and determine what to build for the future.
Instead, we should look into the future and [inaudible] lean in to possibility, not probability, from our knowledge of the past. And, number five question, the path taken to reach a goal is what we normally do. So, “Am I doing the right thing?” “Should I do A or B?” First of all, just decide where you’re going. We got a totally new roadmap, a blank canvas, we’re all sitting on the bus, you decide now where you’re going to drive that bus to.
So, first principles is a great new opportunity. And when you’re doing that, favor simplicity over complexity. So, William Ockham was a fourteenth-century monk and he said, look, “All things being equal, the simplest solution tends to be the best one.” Don’t over-complicate. They use this a lot in medicine. They say, “If you hear hoof beats, it’s more likely to be horses than zebras.” So, go for what’s more likely, what’s simpler. The simplest solution is often the best [inaudible] it “Ockham’s Razor” because it cuts through and simplifies. It’s a brain hack. Instead of going in all different directions, keep it simple.
Another mental model to help you through the maze of statistics and uncertainty that I love is what they call “Hanlon’s Razor.” And I love it because, when we’re highly stressed, we tend to misjudge other people. It’s all about interpersonal relationships right now. And in times of stress our nerves are raw, and we tend to bark at the people around us. Not because of them, it’s just reactionary. And what we tend to do is, we tend to get really, really suspicious and feel isolated.
So, for example, if you speed through a red light, in your mind, it’s justified, because you know that you’re on your way to the hospital, you had good reason. If someone else speeds through a red light, we automatically think, “What a selfish, irresponsible person,” We assume bad intent or malice. And what Hanlon’s Razor says is, “Look, there’s a myriad of other explanations.” So, go to those. Assume good intent before you just automatically write other people off and go to malice.
I’ve found that a really good model, “seek first,” as Stephen Covey said in Seven Habits of Highly Effective People, “Seek first to understand, and then later to be understood.” So, ask more questions about the other person. It’s human nature. A recipe for success is our interpersonal relationships. Our whole society is formed on being pack animals. We work with other humans, we live with other humans, we interact with them every single day. Our success depends on those around us. Our ability to integrate, negotiate, get outcomes, you need to work with people. Unless you’re some IT person in a basement that doesn’t even have human interaction, and even then you probably have to go to someone and ask for a loan or a grant or something, there will always be other human beings involved.
So, getting on with other people is paramount. And that’s emotional intelligence. I’ve found a really good solution in times of high stress is work on your emotional intelligence, your people skills, be kind to other people, and assume good intent. Otherwise, you just shrivel up into a ball of negativity.
That’s it for today. Don’t hang too much on statistics and data, because there is no playbook for what lies ahead. Will there be a second wave? Who knows? We can look at it for indicative data. We can look at it for where we think we’re heading. But, as I always say, the key to success is your flexible thinking. Remember, Darwin said it’s not the strongest or the smartest; it’s those who are most adaptive and responsive. And Anthony Robbins put it a different way, he said that your success is in direct proportion to your ability to comfortably handle uncertainty. So, we’ve got to just stay flexible. So, use models, use thinking patterns, use understanding, but statistical analysis is only a part of everything else that goes into melting pot and the sieve.
For those of you who are going to catch up with us tomorrow on our webinar, our special webinar that will recap the weekend, lots of opportunity out there right now, not a time for stress or panic. It’s a time to adjust our mindset, adjust our direction. Winds of change have blown; just adjust our sail. So, I’ll be sharing more tomorrow night.
And also on Saturday, don’t miss our live stream with Gary V. And feel free, this is all about sharing information, tag in friends and family who are going through change. And that’s all of us right now, and who just need a boost, a like-minded community who are going through the same thing, and we can all learn more together. I’m after that ripple effect and empowering people, hence bringing all experts. It’s like collective IQ in a melting pot. So, tag in friends and family in the comment section.
Don’t forget to like us to follow us on YouTube and to hit the bell and to subscribe so we can let you know about upcoming content, as well as any questions, type your questions. The idea is interactivity. And, of course, I answer those live in our Ask Dom at 1:00 on Thursdays. Until then, stay safe, take care, and we’ll talk soon.