Not really. Inflation has been low for the last decade, wage growth has been higher, discretionary income increases have exceeded both.
I think you and I are saying the same thing here, since I believe the underlying driver of movement in discretionary income is GDP movements measured at a household level (ie that wage growth gap over CPI is partially funded by GDP movements, the discretionary income increase over AWE is partially funded by GDP movements, etc).
Sounds like an interesting view.... I'm not sure I fully understand... can you elaborate ?
I'll try by example in terms of funding.
I'm a wealthy property investor 100 years ago. I own freehold properties in Brisbane. To fund these, I've approached local banks. They've sourced their funding by local deposits. Lending margins are relatively high corresponding to the localised pool of deposit funds that each bank has access to.
Whilst lending margins are high (profit margins are low), my financial performance (from funding only) is correlated to a small group of counterparties (ie, my local banks and their depositors).
Furthermore, I can diversify this exposure by investing in other markets (Sydney, Melbourne, etc) since I'm therefore exposed to other groups of depositors and other banks who are only minimally exposed to the ones I'm currently exposed to.
The same property investor 30 years ago will again approach local banks for funding. But now they've sourced a proportion of funds locally and the remainder from other depositors elsewhere in Australia. This drives down the lending margins (ie increases my profit margins), but banks now have access to greater volumes - they trade off high margins for higher volumes.
From my perspective, my financial performance is correlated now with a larger group of counterparties (my local banks and their depositors and the other Australian banks that they interbank lend to and their customers). So I might have a lower rate, but now a collapse in another player will have some small impact on my borrowing rate.
Now by diversifying to other Australian markets (Sydney, Melbourne, etc) I'm only diversifying away part of the risk since the funding risk for me in the Brisbane market is more correlated with the funding risk for me in the Sydney/Melbourne market. But I can diversify by purchasing overseas. The mean has increased, but the volatility has also increased.
Move to 15 years ago. The same investor now goes to any Australian bank for funding. This competition has driven down lending margins further (increased my margins). Now funding is sourced from both local deposits, interbank lending within Australia and overseas lending. I'm now exposed to changes in funding conditions both locally and internationally. But also my bank's more exposed to its counterparties since most of them are also exposed to each other. By diversifying to other Australian markets I'm only diversifying away part of the funding risk. Furthermore, by diversifying to overseas markets I'm still only diversifying away part of the funding risk. Again, both mean and volatility have increased.
3 years ago the same investor can go to any Australian bank, NBL or even overseas lender (in some cases) to fund the purchase of his Brisbane properties. Securitisation has driven down the lending margins further (increased my margins), but again increases the correlation between funding costs in all markets. This further reduces the value of diversification.
My assertion here is that this reduced diversification is not properly understood and has been underpriced. Investors are happy to consider the benefits of increased correlation (which is increased competition and, on average, reduced rates), but ignore (or more likely simply don't understand) that rates are now set more globally then in the past. In a market facing the pressures of new entrants banks may understand it but are unable to properly price for it since if they do they'll lose large swags of market share to competitors who don't understand it.
RHG customers are a prime example of this - their prices have significantly increased relative to the rest of the market, not because they themselves are necessarily poor risks, but because the source of funding accessed by RHG completely evaporated when certain foreign markets collapsed. This is a risk that similar investors a generation ago simply were not exposed to. Did the average RHG customer understand this risk when they took out their loan? I'd hazard a guess, not very likely! And hence, this information asymmetry led to an underestimation in the level of volatility with this product.
There are other reductions in diversification present through a range of other factors that have influenced means. But the point is, they don't just impact the mean, they also increase the volatility.
My point was that the mean changes for good reasons.
I agree that the mean will change, but the drivers that change the mean are simultaneously causing the volatility to increase.
