The World As We Knew It No Longer Exists

The WRR, the Netherlands' own scientific council advising government on economic policy, has now said publicly what we have been saying for two years: the world has changed. This is not a fringe view anymore. It is showing up in the advice governments are getting from their own institutions, and it will have a substantial impact on how, and where, we invest from here.

The United States has already turned away from the global trading system it built after the war. Now Europe has to decide how it deals with a Chinese export machine running at full tilt, the same machine that has already hollowed out other industries and is now doing it to European car manufacturing. The real question is whether Europe has learned anything from watching the US make the opposite mistake: giving China a free run destroys your own manufacturing base and your capacity to defend yourself. That leaves Europe badly exposed on a second front too, a Russia that has made no secret of where its allegiances sit. This is one we will be watching and reporting on for months to come.

Nassim Taleb's minority rule describes how a small, determined minority can end up dictating outcomes for the majority, because the majority is flexible and the minority is not. It is a useful lens for what is happening with immigration right now. Tension is rising across Europe, Asia and here in Australia, and the political system is starting to respond. Germany's Saxony-Anhalt state election this week is a live data point: the AfD took 44.2% of the vote, more than double the CDU's share, a result its leadership called an unambiguous mandate. Whatever your read on the politics, it is a real signal of how fast sentiment is shifting.

Underneath the politics sits a demographic fact worth sitting with: the world now has more people over 65 than children under 5, a first in recorded history. Combine ageing populations with tightening immigration policy in country after country, and the honest expectation is higher prices and higher inflation as labour gets scarcer. Technology may help offset some of that, but we are in genuinely uncharted territory here. One consequence worth watching: as labour shortages bite, companies have every incentive to become structurally more capital intensive and less labour intensive, leaning harder into automation and technology simply to keep functioning.

Here is the argument in its simplest form. For house prices to keep outrunning wages, the money to fund that gap has to come from somewhere, and that somewhere is debt. But debt cannot grow endlessly, especially when it is funding an unproductive asset purchase rather than something that generates its own return. At some point the numbers simply stop making sense. There is a hard ceiling on how much can be repaid out of total wages, and once repayments climb high enough, they start dragging on economic growth and employment, unless business or government step in to replace that demand. Japan shows what the alternative looks like: large, sustained government deficits while the private sector spends decades paying down the debt built up during its own bubble.

None of that is sustainable indefinitely, and the RBA's own trust survey shows how the public is processing it. People broadly trust the RBA, and trust runs higher among those with more economic knowledge. But three things stand out. Inflation is the number one economic concern by a large margin, well ahead of housing, interest rates and everything else. Higher trust in the RBA correlates with lower inflation expectations, which suggests people who trust the institution are confident it can hold inflation inside its 2 to 3% target. And there are real, fundamental gaps in how people understand monetary policy, particularly the mechanics of how interest rates are supposed to affect inflation. Quite a few survey respondents believe higher rates lead to higher inflation.

Our own view is that inflation is best understood as a supply, or cost-push, problem rather than a demand, or demand-pull, one, and that the standard rate-hike playbook does not always work the way it is assumed to. Think about older Australians holding cash and bonds. When the RBA lifts rates, their income from that cash and those bonds rises, and a good portion of that extra income gets spent, which is itself inflationary. It is a genuine gap in the transmission mechanism the textbook version of monetary policy tends to gloss over.

This week's podcast What's Your Edge segment walked through a Crestmont Research piece by Ed Easterling called Half and Half: Why Rowing Works. It compares a buy-and-hold investor in the S&P 500 from January 2000 to December 2025 against a hypothetical portfolio that only captures half of every move up and half of every move down.

This week's podcast, Grey Swans, builds directly on this. The Shiller CAPE currently sits at 39.5, in the top fifth of all readings since 1870 and 76% above its own regression line, second only to the 1999 to 2000 peak of 44.2. The point of tracking the CAPE is not to call the exact top. It is to turn an unpredictable Black Swan into a Grey Swan, an event you cannot time but can see coming, so you are never forced to be all in or all out. A 50% loss wipes out 100% of a prior gain and then demands a full doubling just to get back to even. That asymmetry is the entire reason the geometric return, not the average, is the number that actually matters.

On property, we have a timely excerpt from US-based property analyst Melody Wright's recent newsletter, written on the back of the Bathla Group collapse and what it signals for Australian property. Bathla has entered voluntary administration, stood down two thirds of its staff, and left dozens of customers in limbo across 45 active projects. As one construction industry analyst put it to the ABC this week, it may be the first sign of something bigger.

Remember, there is never just one cockroach. When a highly indebted developer of this size goes under, it rarely stays an isolated event, and it is exactly the kind of stress the private credit warnings from recent weeks were pointing toward.

This week's full show notes cover the Middle East turning more dangerous by the week, why Canadian and New Zealand property are showing Australia its own future two years early, and the full breakdown of the geometric return, the number that actually decides whether you compound wealth or just watch it round-trip.

We will continue to update the sector scorecards, momentum indicators and macro notes as these themes unfold. If conditions shift, you will see it reflected in the Wells calls, Signals and Noise Premium updates and portfolio insights.