The national problem we should take personally

We learned an important lesson from COVID. But we didn’t do anything about it.

The lesson: redundancy and resilience matter as much as efficiency and profitability.

Or, in investing terms, ‘In good times, people focus on the profit and loss statement. In bad times, they focus on the balance sheet’.

We have, over decades, optimised for efficiency. And that has made us more fragile.

‘Just in time’ supply chains work only if the last two words remain true. ‘Just late’ means things start to break.

We see it across all facets of life, too: the finer and more precise an instrument, the more impressive the results… but the more easily it tends to break.

And so that’s the too-often undiscussed balance that we need to strike: keeping costs down (which improves living standards), while making sure we have sufficient ability to roll with whatever punches life throws at us.

If it feels like I’m talking about fuel, I absolutely am. 

But it’s fuel this time. It was PPE during COVID.

It’ll be something else next time.

Now, I’m absolutely not suggesting Australia should be fully self-sufficient, even if we wanted to.

I mean, full self-sufficiency is a pipe dream. Just look around you. Look at the materials, products and services you own and consume. Now imagine if every one of them had to be sourced, made and/or provided here.

Phones. Computers. Cars. And every component therein. The full supply chain. Including how those things are supported (think networks, satellites, the internet itself). 

Now, let’s say you wanted to do all of that. Just imagine how much it would cost, given Australia’s wage levels (being a high wage country is a wonderful thing, by the way), and the tiny size of our market, which would mean economies of scale would be equally tiny, compared to the rest of the world.

I haven’t done the numbers, but it would be catastrophic for our living standards. We’d be paying multiples of the current price of almost anything made overseas.

With what? Tax? We’d have to get used to paying a lot more of that. So we’d have much less to spend, which would decimate our own living standards, as well as costing truckloads of jobs.

What about no extra tax, but just paying more for everything? At a national level, the result would be identical – we’d buy many fewer things, and everything we did buy would cost a motza… decimating our living standards and costing jobs!

But at least we’d be self-sufficient, right?

Ask yourself whether you want to go back to the 1800s. Early 1900s, if we’re lucky. Including all of the technology and devices we’d have to give up because they’re made overseas, only some of which would be made here instead, at hugely more expensive prices.

Plus there’d be less choice. A lot less choice. Not only between items, but some things wouldn’t be available at all, because the people who currently provide them here would be doing other jobs, because of the requirement of self-sufficiency.

If you think productivity growth is poor now (it is!), just wait until you see it plummet as we lose all of the advantages of international trade.

No, it wouldn’t be North Korea. But Cuba might be close.

Which… might feel somehow romantic or nostalgic. But there are more Cubans going to America on fishing boats than the other way around.

And don’t get me wrong… I’m not fetishising hyper-capitalism or the United States.

I’m just making the point that it’s easy, and seductive, to want to ‘make things here’.

We just need to recognise it’s also… what’s that technical term, again?… bloody expensive to do so, and at a significant national cost.

But hang on… didn’t I start this piece by talking about redundancy and resilience?

Am I not trying to have my cake and eat it too?

Yes… and no.

The answer to a brittle and fragile ‘efficient’ supply chain isn’t to replace it with much more expensive (and often unsuitable) local supply.

It’s to hold a constructive tension between efficiency and redundancy.

Regular readers will know my family tends to take a mid-year road trip holiday, usually somewhere north and west of here.

We don’t go hyper-remote, usually, so we’re not doing Bush Tucker Man stuff, and I don’t need to be MacGyver (kids, ask your parents about both… and do yourself a favour and look it up on YouTube). 

But I always try to make sure I’m prepared, in case of emergency.

Extra fuel, just in case. A well-stocked first aid kit. A basic toolkit. A personal locator beacon, in case of medical emergency. Maps. Enough food for an extended, unplanned stop.

There’s more than that, but you get the idea.

What I don’t take is an entire second vehicle, weeks and weeks of food. I haven’t done a medical degree, and I can’t make a helicopter out of paper clips and palm fronds, as MacGyver might.

My point? I’m not entirely self-sufficient for every possible emergency. But I have enough to be resilient, either to get myself out of trouble or to be comfortable and safe for as long as it might take for help to arrive.

Oh, and we almost always travel with others.

Back to Australia: my point is that I think self-sufficiency is an expensive vanity project. I don’t think it’s truly possible other than at massive cost… and if it’s not possible, being partly self-sufficient is like being half-pregnant.

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YouTube LIVE. Tomorrow, Friday, April 10, 12pm AEST 

There’s a lot going on in the world – and the financial markets aren’t immune.

Inflation. Oil. Interest Rates. Artificial Intelligence and the SaaSpocalypse. 

And – most importantly of all – the way we bring our temperament to bear on all that.

So… I’m running a YouTube LIVE at 12pm AEST tomorrow (Friday, April 9) to chat about all of that. 

And, more importantly, I’ll be taking your questions, live, too!

Why not grab a sandwich and a coffee and join me?

Just click here to join (and if you do it now, you can set a reminder, so YouTube will alert you!).

See you tomorrow!

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Instead? Instead, we should plan to be resilient.

That would mean things like multiple sources of supply and multiple export markets.

It would mean sufficient stockpiles of critical supplies, calculated to allow us to minimise disruption, based on reasonably likely scenarios. 

Why not every scenario? Because, for example, a years-long nuclear winter is possible to prepare for, but we’re back to the 1800s at that point, and at some point there’s a trade-off between risk and reward (or in this case, risk and cost).

Again, we could choose to make those preparations if we wanted to… we just need to decide what cost we’re prepared to pay.

It strikes me that a sensible, wealthy country blessed with our benefits, but which can benefit even more from international trade, is best to use strategic stockpiles, rather than aim for absolute self-sufficiency, when it comes to vital or important goods. 

Yes, like fuel. And PPE. And more besides.

That would give us redundancy and resilience. And yes, it would cost a little more, but it would resemble a (relatively cheap) insurance policy, in keeping with a sensible assessment of risk and implications.

And importantly, it would give us very similar outcomes as attempting to be self-sufficient, other than in the extreme outlying cases, but at a tiny fraction of the cost.

One other thing, too, which is a little passe these days: just as our supply chains have become more fragile, so has our personal resilience.

We are – how do I put this nicely – just a little precious, aren’t we? Our ability to endure discomfort is not just a little questionable. That doesn’t excuse mismanagement or poor governance, but man… I’m not sure our forebears who lived through a couple of world wars would think particularly fondly of our sense of entitlement or expectation!

Everything is a drama, and we always want someone to blame. Have we lost just a little perspective? I suspect so.

Now, all of that is important from a national interest perspective. But just as it applies to our country, it might be worth applying it to our personal circumstances and finances, too.

Maybe the boy scout I once was is still deep inside me, but the creed ‘Be Prepared’ has always stuck with me.

I had an extra pack of toilet paper in the cupboard long before COVID made it fashionable. The freezer always has some extra food, as does the cupboard. No, not in a prepper ‘world is ending’ kinda way – if the zombies come, I’m woefully underprepared for that eventuality. 

Just in a ‘just in case’ kinda way.

Similarly, while I like to be fully invested at all times (rather than have cash ready to invest ‘opportunistically’), we have an amount of cash set aside for emergencies. 

It’s also why my portfolio is diversified – to make it more resilient in the face of specific geographic or industry risks.

I could make more money if I invested that emergency fund. I could make more money if I bet correctly on a single company, or theme, or trend, rather than being diversified… but I could lose a lot more if I’m wrong.

One of my favourite underquoted Warren Buffett lines is the one he used to describe a hedge fund that blew itself up: “To make money they didn’t have and didn’t need, they risked what they did have and did need. And that’s foolish.”

Rather than optimising my finances for the highest possible return, I’ve chosen to optimise for resilience. 

Not for disaster – if I was doing that, I’d be investing in baked beans and shotguns instead – but for resilience.

And that’s not unusual, when you think about it. The safest way to live life on a day-by-day basis is probably to stay in bed. But we walk, drive, climb ladders and clean our teeth – all things that have killed people – because we have learned to assess and manage risk.

We take sensible precautions and weigh risk and return instinctively in our personal lives.

Doing it at a national level, and in our individual financial lives, isn’t quite as instinctive – but it’s equally important.

By all means, we should optimise our outcomes. But we should be optimising for the best outcomes possible while balancing that against our ability to respond to less-than-ideal circumstances.

We should have built-in redundancy, and aim for national- and personal resilience.

And, as our grandparents might have told us, that should probably begin at home.

Fool on!

The post The national problem we should take personally appeared first on The Motley Fool Australia.

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Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.