What was your thesis topic?

Theories of speculation in asset markets. These days you would probably call it something about behavioural finance and speculative bubbles. Back then there wasn’t as much interest or research in those areas.

Sounds like a prescient topic for the late 1980s.

The prevailing view, at least up until 1987, was the efficient market hypothesis². A lot of the research economists were doing was about whether you can use technical information to predict the share market.

The work of people like (Nobel prize winning economist) Robert Schiller and others showed that the bigger issue was whether share markets diverged from underlying fundamentals. The ‘87 share market crash highlighted that. It’s hard to argue a market can be efficient at one level on one day and a day later, be at a substantially lower level. Support for the efficient market hypothesis went out the window and people did a lot more work on asset bubbles and market inefficiencies.

This was the beginning of the Greenspan period. Alan Greenspan was chairman of the Federal Reserve and was tough on inflation like his predecessor Paul Volker. Debate raged about how to deal with speculative bubbles.

Yeah. Greenspan was around for the ‘87 crash. He was the chairman of the Fed at the time, though it was many years later in 1996 when he used the term ‘irrational exuberance’³. I think he got that from Shiller.

Who are the great economists that you admire?

The greatest economists would be Keynes and Friedman⁴. I don’t think you can rely on just one or the other. You’ve got to have both. Both provide insights on what went wrong in the 1930s. And both have influenced the policy response to macro economic threats ever since.

Contemporaneously, I’d call out Robert Shiller. Also, Larry Summers when he was an economist and Paul Krugman. (Both are US based economists, turned academics, turned bureaucrats, turned high-profile media performers). There’s a tendency nowadays for economists to go off and become pop stars.

What about central bankers?

(Former Fed governor) Ben Bernanke would probably be up there as my all-time hero. Then I’d say (former president of the European Central Bank) Mario Draghi. I think Draghi saved the Eurozone, not quite but almost single-handedly. And (Bernanke’s successor) Janet Yellen would be up there too.

You need to think about these central bankers from a macro point of view. Say whatever you like about quantitative easing, and it might have exacerbated inequality, but if it wasn’t done then the globe would have had much higher unemployment rates. It would have taken a lot longer to get out of the global financial crisis given the eurozone debt crisis. It would have been a lot more painful for ordinary people.

Monetary policy is a blunt instrument. It can be helpful in terms of macro stability, but it can also do things in a way which is unfair. If you don’t do it, the economy could collapse or implode, and then unemployment goes to 20 per cent. Usually the lower-to-middle income earners pay the price of that, not the high-income earners.

So you are all for proactive monetary policy?

Yes. I think (former Reserve Bank of Australia governor) Ian Macfarlane referred to assessing what do on the basis of the path of least regret. Janet Yellen has spoken about it on several occasions. The Fed is motivated by a desire for economic stability to avoid the mayhem and the horrible impact that severe economic downturns can have on ordinary people. If you let it go on like the 1930s, the human cost is immense.

You have been at this for a long time. Why do you keep doing what you do?

I enjoy it. I think I’ve got one of the best jobs because I’m combining something I love, which is economics, with investing. I don’t have to sit at a desk all day. I can meet ordinary people, institutional investors and financial planners.

Why did you stay at AMP all these years?

I have been offered jobs along the way. Invariably, they were when AMP was down. The bulk of the organisations that offered me jobs no longer exist. I started at AMP and the organisation has a noble purpose. It’s written on the side of the building in Latin – ‘a sure friend in uncertain times.

That sort of inspired me. Needless to say, the events of the last 18 months have made it a lot tougher. But I feel I’m working for an organisation that’s aim is to help make people’s financial situation more secure and it’s critical the focus is on that.

You are one of a handful of prominent economists. Do you all know each other?

We all know each other but we see each other to varying degrees. I used to see a lot more economists because many would come in to present to us via stock brokers or banks. But as time has gone on, there’s fewer of those meetings. Now I read all their material, but I rarely see them.

I have been offered jobs along the way. Invariably, they were when AMP was down. The bulk of the organisations that offered me jobs no longer exist. I started at AMP and the organisation has a noble purpose. It’s written on the side of the building in Latin – ‘a sure friend in uncertain times."

What competitor do you admire?

I have a lot to time for (Westpac chief economist) Bill (Evans). I think he’s a good, outside the box thinker in terms of what the Reserve Bank of Australia is going to do. A lot of economists have a background at the RBA and will go along with whatever the central bank’s latest statement says. Sometimes that works, but a lot of time it doesn’t.

What’s the biggest change to the economy during your tenure?

Technology is the big change. Things used to move much more slowly. You would come in to work, there’d be some data come out and there was not much point writing a note unless you were going to physically take the note around to people.

Now it’s sped up. When I get up in the morning, I can see exactly what is happening by turning on a gadget. It’s good that you’ve got real-time information when you are assessing the markets. But the downside is it’s easy to become focused on the short term and that isn’t always good for investing.

The other change is politics. When I started, we were coming into what I would call a rational period of politics and economics.

The Ronald Reagan, Margaret Thatcher, Bob Hawke and Paul Keating era was a counter reaction to the leftish swing of the pendulum that occurred through the 1960s and 1970s. It was a response to the Great Society agenda with respect to welfare spending of President Lyndon Johnson⁵. In the 1980s there was a realisation that the economics didn’t work because it led to poor productivity and we ended up with stagflation.

In Australia we had Gough Whitlam (who was prime Minister from 1972-75). I have a lot of time for Whitlam culturally, but economically he didn’t do a very good job.

So from the 1980s economies set off on the path of focusing on productivity and deregulation, privatisation and globalisation. There was a much greater focus on shareholder value and return on capital. Australia in the 1980s, 90s and early 2000s had Hawke and Keating and then (John) Howard and (Peter) Costello. They had their own issues, but it was generally seen as a period of fairly sensible policy making motivated by sensible economics.

But perhaps you could argue the pendulum went too far to the right.

You now have issues with inequality and imbalances in the financial system. The perceptions of unfairness have led to a backlash against free markets and market friendly policies.

We went through a long period where we didn’t have to worry too much about what the politicians were saying because they were generally moving in a pro-market direction. Now politicians can be all over that place. Donald Trump comes along and is very different to Reagan. That first year of his administration was focused on deregulation and tax cuts which investment markets loved. The next year was focussed on trade wars which investment markets hated.

Europe is different. France never really had a Thatcher revolution. Maybe it’s having one now with (President Emmanuel) Macron. You’ve got parts of the world going in different directions.

I think Australia is a little bit lucky because its inequality issue is not quite as great as it is in the United States or the United Kingdom. Also, compulsory voting here navigates us towards the centre.

One of my favourite sayings is let’s turn down the noise. I was trying to stop looking at Twitter and find ways to relax. My children said I should watch The Bachelor, so I started watching. I thought, this is actually quite interesting.”

What is the global outlook for the next decade?

Well, you can provide a negative narrative, which always wins out in the media, or a positive narrative. We’ve got high levels of debt globally. We’ve got perceptions of rising levels of inequality that’s leading to support for populist leaders and a backlash against market friendly economic policies, as evidenced by Trump and the trade war.

The counter-argument is that you’ve got rapid growth of the middle class in Asia and that’s continuing. You’ve got rapid technological innovation, which even though it might not be showing up in the measures of productivity, is helping. People benefit from that. A decade ago, we drove down to the local store to get a video. Now we stream them at home. We can easily work from home. Of course, some of these can be negatives too.

We have very low inflation and very low interest rates, which has helped boost investment markets, but which also has its downside. Low inflation was something we’d been aiming for most of my career and now we are finally there, we don’t like it and want it to go back up.

In recent times there have been all these sorts of mini upswings and downswings. Think back to just over a year ago. The US share market from its high in September (2018) to its low on Christmas Eve fell 19.8 per cent. You could call that a bear market. That was the third time this decade we’ve had a circa 20 per cent fall in markets.

This has occurred at a time of political noise around the Eurozone crisis and US-China tensions. To some degree all this has delayed the day of reckoning. There is a normal cycle in the future where inflation takes off. And that will surprise everybody because no one’s no one’s allowing for it. We have virtually given up on inflation rising. But it will. One day.

Today you have more populist leaders globally and the history of populism, whether it’s of the left or the right, tells you that eventually you will get inflation because they want to give the people what they want.

How likely is that?

It’s a medium-term worry as I can’t see much sign of an inflation surge for the next year or so. The other worry I think is the Thucydides Trap, which says every time there’s a global superpower in relative decline, and a challenger to that superpower, you get tensions that can spill over into war. Think about Sparta and Athens, Germany and the British Empire. You could argue that China and the US are falling into that trap right now. The “good news” is that they both have nuclear weapons, so it probably doesn’t turn into a hot war. But it could still lead to a period of further increasing tensions which will create volatility for investors.

You are known for your colourful shirts and ties. Any reason for that?

It has sort of become a trademark. It seems that economists sometimes end up with eccentricities and I have sort of evolved into this look. When I first did media training, I was told don’t wear a white shirt and don’t wear a striped shirt. So I went and got pastels. And then over the years, I thought most people’s ties were pretty boring, so I bought bright ties.

At some point I discovered Duchamp ties – they’re very bright. Unfortunately. Mr Duchamp passed away. Declic in Australia managed to get access to his designs or something and started making these really bright ties. It’s gotten to the point where if I don’t wear a tie, people will think an imposter has shown up.

You can be quite prolific on social media.

A colleague said to me, Facebook is for narcissists, so I stayed away from that. LinkedIn was something you do if you want to get a job and I wasn’t looking for a job. Twitter is just so easy to use. It forces you to be very brief and concise.

It’s like pop music. (Beach Boys co-founder) Brian Wilson once said that pop songs were like pocket symphonies. You create a song, which is worthy of Beethoven, but you’ve stuck it into a few minutes. You’ve condensed it.

The upside is that you can get feedback instantly on your views. The downside is that some people will take extreme offence to whatever you say, and you can find yourself in the middle of a constant battle. Providing adequate answers and still having time for yourself gets to be a challenge.

I’ve tried to cut back the amount of debating I get into. Sometimes you have to let things go through to the keeper. I believe Barack Obama said, when asked if he would have done anything different when President of the United States, said he would have spent less time trying to convert people to his way of thinking, especially the people who were never going to be converted.

And you are a fan of reality TV?

Well this came about because one of my favourite sayings is let’s turn down the noise. I was trying to stop looking at Twitter and find ways to relax. My children said I should watch The Bachelor, so I started watching. I thought this is actually quite interesting. It is relaxing. You don’t have to think about other stuff.

The (Australian) Bachelor was my favourite this year. The benefit of this year’s one was the guy in it was quite relatable because he had a PhD in astrophysics. Don’t suppose there’s a lot of jobs out there in astrophysics. There were also a good range of female contestants with all sorts of qualifications. It made it more interesting.  

¹ All figures quote period from 1 January to 27 November, 2019.
² The efficient market hypotheses says that asset prices, such as share prices, reflect all the available information. In practice, it means it is virtually impossible to outperform a market (or derive alpha).
³ Greenspan used the term irrational exuberance in 1996 to describe the surge in technology stock share prices; he was referring to the price of stocks moving beyond what the underlying fundamentals suggested they were worth.
⁴ John Meynard Keynes was a British economist who argued that aggregate demand underpinned growth and in downturns governments should act via higher spending and lower taxation. Milton Friedman, a US economist, was the foremost proponent of ‘monetarism’, whereby a steady increase in the money supply, alongside free trade and small government, would boost growth.
⁵ The Great Society speech, made in May 1964, was based on countering racism and poverty in the USA, and became the basis of the Presidents’ re-election bid later that year.