The Finsider is our blog series providing insights into the Australian financial services landscape. We interview experts who will share their perspectives on ideas and issues facing the financial industry today and in the future.

Our special guest for this month is Stephen Miller. Stephen is a market strategist and regular media commentator with deep expertise in international economic and policy analysis, as well as domestic and global economic and financial market developments. He has decades of experience across fund management, fixed income, and economic research, including 14 years as head of Australian fixed income at BlackRock and six years with Treasury, including working with then Treasurer the Hon Paul Keating MP. Stephen is currently an investment strategy advisor at GSFM and an independent chair of the investment committee at QIC Liquid Markets Group (LMG).

What is the biggest lesson you've learned from markets?

The importance of the right balance between humility and confidence. And “balance” is the operative word.

Clearly, investors need a disciplined process in which they have sufficient confidence to drive decision-making.

At the same time, information sets that condition any investment decision is constantly changing, often in unexpected ways, and it is important to recognise that these developments can diminish the veracity of any pre-existing investment theses.   

When you’re wrong, change your mind.

What’s been the biggest change(s) in the financial services industry since you started your career?

Wow. That is a big one. At the dawn of the 1980s, the value of the $A was set by bureaucrats. There was no bond market as we know it now. The Australian economy had slowly atrophied behind a tariff wall that simply propped up inefficient industries and stifled innovation.

Sure, the economy has its challenges, particularly as the quality of economic policy diminished in the current century after flourishing for the two decades beginning in the early 1980s. Policy innovation through the 1980s, 1990s, and into the early 2000s wrought the most consequential changes.

What was different in that era was that a set of politicians were prepared to lead public debate. Keating, in particular, was willing to assess ideas, discern weaknesses and strengths of those ideas, make judgments about what was worthy, and then, once convinced, embark on a forceful prosecution of the case for those ideas. Hawke, with his “everyman” appeal, reached over Labor Party activists to a broader electorate and allowed Keating to advance what were at the time, innovative and beneficial policy reforms.

Howard (once liberated from Malcolm Fraser’s economic policy conservatism) and Costello, by and large, continued to lead.

It hasn’t really happened since.

You've worked across government, banking, and funds management. Which experience taught you the most?

All of them have taught me something. Indeed, I would say that the experience of working in those three areas is ‘greater than the sum of the parts”. They all inter-relate, but all have slightly different objective functions.

A knowledge of how those three areas operate and inter-relate (and others that I didn’t get the opportunity to experience) means that one is often in a position to make better judgments in the area that they might happen to be employed in at any given time.

The potential folly of limited consultation (in government) perhaps drove a little of the criticism of the current federal government’s recently announced tax package. At the same time, investors, bankers, and indeed all cohorts of the private economy need to be finely attuned to the implications of policy debates at the governmental level.

What is the biggest economic challenge facing Australia over the next decade?

Like many other economies, Australia faces some significant challenges in the coming years. A clear and present challenge revolves around the successful incorporation of AI into the Australian economic picture.

More generically, I think the most significant challenge for all governments (State and Federal) is to refocus on getting the economy’s structural settings right. In the aftermath of the Hawke, Keating, and Howard eras, governments have averted their eyes from meaningful structural reform. That is reflected in abject productivity growth.

This has consequences for inflation (making it higher and “stickier”) and living standards (stagnating).

In many instances, this involves ‘unintended consequences’ of regulatory creep in labour and goods markets. In many other instances, it just proved to be “too hard” (politically) to pursue.

Australia is not alone in facing this problem. Nearly all developed countries (excepting the US) face something similar. US productivity exceptionalism reflects its way more sophisticated technology sector, allowing it to reap the substantial benefits of the AI revolution at a greater pace.

Over the last four years, US productivity growth has averaged a little over two percent per annum. The equivalent Australian figure is -1.3 per cent. To put it more starkly, US productivity has grown by around eight per cent in that time; Australia’s productivity has fallen by a little over five per cent. So, the US has managed to obtain a premium of 13 per cent in terms of potential economic growth. That premium allows the US to maintain growth in living standards. At the same time, it should make the task of inflation containment a little easier, even if it hasn’t managed that particularly well (given policy flaws elsewhere – tariffs, budgets).

The lack of attention to structural / productivity issues has resulted in Australia developing a structural homegrown inflation proclivity.

Trimmed-mean consumer price index (CPI) inflation in Australia is currently running at 3.4per cent. That means we’re currently competing with Norway for the highest developed country inflation crown. That is not a (developed) World Cup we should want to win!

By way of comparison, the trimmed-mean measure in the US is 2.9 per cent, and that is with some tariff impact that doesn’t apply in the Australian context.

The aversion to any proper enunciation of structural economic reform is not just endemic to Australia.

The resultant stagnation of living standards and “sticky” inflation is perhaps reflected in the recent rise of left/right populism both here and abroad.  

What is one market consensus view today that you think is most likely to be wrong?

I’m not sure that it is a consensus view, but one that has been pervasive over the past year or two is that bond yields are “high”. Implicit in that view is a sense that yields will soon return to levels that prevailed in the 10 or 12 years prior to the onset of the pandemic.

In my view, the period book-ended by the GFC and the pandemic was a period of exceptionally low yields. That period was an “abnormality”. Through that period, US 10-year bond yields averaged 2.4 per cent. In the period from 2000 to the end of 2007, a period of low and relatively stable inflation, that figure was around 4.7 per cent. I suspect the latter is a better benchmark of “normality”.

What are the implications of that? Well maybe not much!

Higher bond yields might ordinarily imply ongoing headwinds to economic activity growth and equity market performance.

So why are US equity markets at close to record highs?

For one thing, the macro data is yet to show any substantial slowing in economic activity growth. Maybe there is some discernible fallout from the Iranian conflict, but the worst of that may be past, and Donald Trump seems to have decided the economic cost of the continuance of that conflict is too great a price to pay.

Anyway, equity markets reflect a whole lot more than the macroeconomy.

 I have canvassed the AI revolution and rapid technological advances in the comments above.

US equity markets have been boosted by companies harnessing important structural mega-trends that can propel ongoing strong equity performance despite the adverse macro environment (higher bond yields).

What advice would you give to those starting their careers in financial services?

That is also a difficult question. I didn’t plan a career in financial services when I left university. The roles I ended up in largely didn’t exist in the very early 1980s. What I’m saying is that one never knows how roles in financial services might evolve. I would counsel anyone thinking of a career in financial services to have a plan – a roadmap of how that career might unfold. But don’t be shy about changing the plan because you’ll almost certainly have to.