Strangling the golden goose
Date: Tuesday, March 16, 2010
Author: Henry Thornton
Boom and bust is a feature of capitalism.
We have had the Dutch tulip mania, the Mississippi bubble, the South Sea speculation, the Railway booms, property booms, share booms and new economy booms. All these booms and others caused great disturbance and almost all ended badly.
We tend to assume booms and busts are undesirable, worthy of 'reforms' that dampen booms and therefore decrease the busts.
Henry is coming to the view that the 'reform' process is strangling the golden goose that is capitalism.
The benefits of booms are many and varied.
Great things get achieved, whose benefits sit beside the costs of idiotic projects started.
Melbourne became a great city in the property boom of the 1880s. The Railway booms opened new territories and greatly increased the efficiency of existing industries.
People of an innovative mindset get their best chance in a boom, even though some innovative villains get away with other people's money.
Some poor people of talent, or merely lucky, rise during booms, just as some foolish, or merely unlucky, wealthy people miss out.
The busts weed out the seriously incompetent, some of the crooks and unlucky people generally.
The busts break up the entrenched oligopolies, as Schumpeter's gale of creative destruction breaks over the previous boomtown.
Cautious, sensible people usually survive the downturn and find serious bargains when the bust has run its course.
The calculus is far from certain, but history shows that boom and bust is an inherent part of capitalism. Inherent features of any system tend to have some beneficial role.
It is clear that there are many benefits of boom and bust to offset the costs. More work is needed to document and if possible to quantify the costs and benefits. Henry has a strong intuition that the benefits outweigh the costs, with one important caveat.
The chief cost of the busts may be increasingly intrusive and restrictive regulation of business. This may eventually outweigh the net benefits, if indeed it has not already done so.
'Let the buyer beware' has long been forgotten as a catch cry of capitalism. Globalised and harmonised accounting standards failed to stop Lehman Brothers from rorting this intrusive and clumsy set of standards. Friends say that the revamped Sarbanes-Oxley Act is an absolute nightmare.
Existing regulations failed to stop the boom of the noughties.
As the salarymen and women of global governance strive to 'reform' the rules of capitalism, this stark fact should not be forgotten.
The demise of Lehman Brothers, lamented as a mistake due to the trouble it caused, may have been a blessing in disguise. At least it disposed of the myth that bad banks would always be bailed out.
One hopes the re-regulators will put in place a system that does not let such enterprises become too big to fail, and has real costs for crooked, incompetent or merely unlucky managers.
'WHEN a 2200-page legal report on the collapse of Lehman Brothers landed with a thud in New York last week, exposing the grand deception the firm used for years to mask its perilous financial situation, many were left wondering how so many of its top executives could have been so bloody stupid. What made them think they were so special that the normal rules of the market, of the law and of common sense did not apply to them?'
Sunday Sanity Break, 13 September 2015
Date: Sunday, September 13, 2015
Author: Henry Thornton
Greetings dear readers from Broome, pearl fishing capital of the great North-Western frontier, glorious Cable beach and much, much more. He remembers an awkward moment on Cable beach involving a German visitor with the curious name of Max Danglemeyer. If you are reading this in a cool/wet German autumn day, Max, it is over 30 degrees here with a gentle breeze and lots of lovely girls like those we gazed at with longing all those years ago. Said dusky beauties were sunbaking as naked as the day they were born, sadly each flanked on both sides by a large and presumably savage dog.
Getting here was easy enough. Qantas to Perth, a 50 minute break and then the Qantas regional 717 to Broome, all done with frequent flyer points plus the $30 tax collected by Brother Joyce to help restore the company's profits and his bonus. Cabin staff working navvies but mostly pleasent, though Heney was barked at by one old dear for not knowing exactly where to stand so the old dear could pass with the drinks trolley.
Broome is just how Henry remembers it, except there are far more police out and about and the Mercure is guarded by high walls and a gate requiring a room key to open. Ideally even cars need to be parked behind the wall and clearly law'n'order is a big issue here.
Another good employment number, and some improvement in some confidence surveys, supports the official view that our economy may be improving, albeit a low productivity recovery. This provides some hope that our income recession may be bottoming. Fingers should be crossed as often as possible, dear readers. Henry's editor has just finished a year of (unpaid) hard yakka to get a new Innovative Manufacturing Cooperative Research Centre (CRC) off the ground. The set-up has created a new record for speed and the potential is immense. Sadly, this entity was created by smashing two competing bids together and the Interim board, selected to deal with the factions left over from the initial big bang, fought the factions and advised participants that promises made by one or other faction were just not viable.
In an atmosphere reminiscent of an old-fashioned Labor Party preselection, with attempted branch stacking, lies, slanders and general misinformation being spread by one or other faction, Henry and two other members of the Interim board, who got the beast off the ground, received too few votes to become members of the ongoing board. Fair enough, I hear you say, Australia is a healthy democracy.The problem is members elected a board with strong factional elements, providing real risks of failure. What fun!
National politics is no better. Today's storm in a teacup concerns an admittedly poor joke by the Minister for Immigration. Mr Shorten is thundering on national media, 'This minister must be sacked'. The lefties that mostly populate our universities no doubt model their behaviours on the Labor opposition, an opposition that has achieved new lows of dishonest and divisive behaviour. Mr Abbott has had one of his best weeks in government, joining the crusade to eliminate the head-lopping, child-raping, women-supressing Islamists (IRs) and also declaring that Australia will take 12,000 Syrian refugee kids, women and families from the minority groups that are most targeted by the IRs. But even his friends in the Conservative press say he has to do far better, a brilliant insight that seems to have some support from the polls.
Fiona Prior visits one of the hottest tickets in Sydney last week, Sydney Contemporary Art; an exhibition that has taken over Sydney’s Carriageworks and is presenting the art of over 300 artists and 90 galleries, both domestic and international. Please visit: http://henrythornton.com/article.asp?article_id=6830
It's looking like a corker final season in the AFL. West Coast accounted for Hawthorn on Friday night, meaning the chances of a 'Threepeat' for the Hawks is now small. Freo held off Sydney (minus Buddy) by a goal and change. Adelaide beat the Bulldogs by about the same margin, thanks to a 5 goal blitz by former Caaaarlton! superstar, you got it, Eddie Betts. Today Richmond meets the Kangaroos at the 'G' and should win. We shall be watching the rest of the season with keen anticipation.
Henry's reraders report that the Rugby League finals were equally exciting. Well done to our Futball team, beating teams from countries with unpronounceable names. Soon the Rugby World Cup will provide exciting diversion.
Ms Panetta, the gal who put Australia's Sam Stouser out of the US Open, won the title, her first at grand slam level, and with great good sense immediately announced her retirement. Pity that Serena did not set another record for 4 Slams in one year, but she's a rold-gold superstar and will presumably try again next year. Henry's favourite tennis bloke, Roger Federer,is reported to be sleeping more and thus regaining the speed and agility of his youth. Good thinking, Roger, and good luck tonight - or do I mean last night?
Image of the week
Saturday Sanity Break. 5 September 2015
Date: Saturday, September 05, 2015
Author: Henry Thornton
IMF again warns of slower global growth, with worries about China's performance well to the fore. The eminent consulting group McKinsey says: 'At the National People’s Congress in Beijing in March 2015, China’s Premier Li Keqiang announced a growth target of 7 percent, acknowledging that “deep-seated problems in the country’s economy are becoming more obvious.” Three months later and thousands of miles away in Washington, the World Bank lowered its growth forecasts across the board and asked the US Federal Reserve Bank to delay any contemplated rate hikes. The World Bank’s chief economist said that it had “just switched on the seat belt sign. We are advising nations, especially emerging economies, to fasten their seat belts.” So it’s going to be a bumpy ride? How bumpy? And for how long?'
Read on here for a private sector view of the many complex, difficult-to-understand currents afflicting the global economy. Henry's view is simple. After the heady days of double-digit growth in China and the debt-fuelled asset price boom in developed nations, both decades long, a major reaction was inevitable. Massive monetary and fiscal stimulus postponed the inevitable and may mean adjustment may be a long period of dismal growth rather than global depression. Either way life will be much tougher for battlers and far less euphoric by former masters of the universe. Governments, like ours, will be lambasted for consistently saying 'It's all good punters; borrow and spend'.
The sad state of the labor market, especially for young people, is becoming clearer almost by the day. Roy Morgan Research's measure of 'True Unemployment' has been falling, admittedly from double-digit levels. Now 'Australian August real unemployment 9.2% – up for first time in 6 months'. Here is the link, and check the the image of the week below.
Gary Morgan said: “Roy Morgan unemployment data shows that as the number of jobs increases more people begin looking for work. This clearly shows the pent-up demand for employment and the extent to which Australia’s labour market is under-estimated by the ABS.
“Today’s estimates mean total Australian unemployment and under-employment has increased to 2.12 million (16.6% of the workforce). Australian unemployment and under-employment has now been above 2 million Australians for 45 straight months – nearly four years!'
Europe's refugee crisis
Refugees have caused a massive political ruckus in Australia. But with ocean all round us, and cooperation from some if not all nations of South-East Asia, we have just about stopped the flow. Pity the citizens of the Eurozone who face a far larger problem and the far greater misery of most regugees. Ironically, Germany seems to be the most compassionate and constructive.
'ANGELA MERKEL may be the most powerful politician in Europe, but she has rarely shown much inclination for bold leadership. Both in domestic politics and, especially, during the euro crisis, the German chancellor’s style has been one of cautious incrementalism. She has eschewed sweeping visions, put off decisions whenever possible and usually reflected, rather than shaped, public opinion. The European Union has paid a heavy price for her small-bore instincts, not least because they made the euro-zone crisis deeper and more protracted than it needed to be.
'Against that background, Mrs Merkel’s approach to Europe’s migrant crisis is remarkable. As throngs of Africans and Arabs turn Italian and Greek islands, and eastern European railway stations, into refugee camps (and are found dead in Austrian lorries), the chancellor has taken a brave stand. She has denounced xenophobes, signalled Germany’s readiness to take more Syrian refugees and set out a European solution to a politically explosive problem'.
This week Australia, Henry Thornton and TP Maher celebrate the life of Bart Cummings, a master of his chosen sport and a wonderful horse whisperer. May he rest in peace. More here from Terry Maher. You will find also some engaging history, some reporting on the form of a horse named Boban and even some discussion of Heisenberg's uncertainty principle.
Its the fag end of the (winter) cricket season.
The Aussie sheilas won their Ashes series of games of different length, while the blokes lost a T20 game and won a one day game. Who cares - better to give the blokes a few weeks off to recover from what seems like an endless season.
Its coming to the business end of the footy season. the Tiges disposed of the North Melbourne seconds, who it must be said fought well for three quarters. If the Kangas do not want him, Caaaarlton! would take Majik Daws to be a big marking forward asnd occasional ruck relief for Kruezer, if indeed our best player is still at Optus Oval next year.
Caaaarlton! play Hawthorn tonight and should be blown away. Henry's brother offered a bet at 200 to one, enticing odds but not acceptable.
Jarryd Hayne has now played brilliantly in his fourth NFL trial game and has, it seems, attracted a small but loyal fan base all on his own. He possibly cemented his place in the final team with a classic shoulder charge. If his NFL team turn him down, Optus Oval beckons.
Little LLeyton Hewitt bowed out of the US open in five hard fought sets, beaten by superbrat Bernard Tomic. Lleyton has had plaudits piled on him from the tennis world, including his one-time doubles partner, Roger Federer. Hear is a link that brought tears to Henry's eyes.
Image of the week
Animal Spirits, Competitiveness
Date: Monday, August 31, 2015
Author: Henry Thornton
'Economists unsure why growth is stuck in the slow lane' reports David Uren. Well, glory be, comrades, economists 'unsure'? At least this beats the usual mindset which is best described by the old crack about Treasury: 'Often wrong but never in doubt'.
What is wrong, dear readers, with this summary from our weekend epistle of 22 August?
'Supposedly "weakness of the Chinese economy" is the precipitating factor, but there are plenty of other reasons for gloomy global Animal Spirits. Here is a list: sluggish Eurozone activity, evidence of slowing US activity, clear signs of global deflation, caution due to unsustainable levels of household, business and government debt everywhere, deep uncertainty about the eventual outcome of global currency wars and when and how the US Fed will begin to raise interest rates'.
In Australia's case, slowing of population growth is an additional factor, but this is as much a consequence of more basic matters as an independent initiating factor. But of course all the initiating factors listed in the paragraph above are interdependent. 'Poor Animal Spirits' is not a bad overall summary, but economists have achieved no basic agreement about determinants of Animal spirits. But clearly sluggish economic activity, unsustainably high debt levels, global currency wars, concern at mooted interest rate hikes are all factors likely to make people and companies bunker down. When leaders are saying 'borrow and spend', as has been the case in Australia recently, then people and companies are likely to add 'confusion about government policies' to their list of things to keep them in the bunker.
Here is a call to economists. Construct a credible index of 'Animal Spirits' and then systematically relate changes in this index to the factors noted above as well as wars, terrorist attacks, global climate change (however caused) and other geopolitical developments. Fame and fortune may come your way.
We thank David Uren for raising this vital question, and indeed much of his stimulating article discusses the interaction among the various factors that indicate poor Animal Spirits. These factors will make up what will be labelled the 'Animal Spirits multiplier' when the analysis outlined above is finally nailed.
Competitiveness and Innovation
Highly competitive nations will find strong innovation helps overcome entrenched depression. Successful innovation is a positive factor for the 'Animal spirits multiplier'.
Minister for Industry and Science, Ian Macfarlane, has today explained his government's focus on innovation and competitiveness.
'A key priority of the government is to boost Australia’s success in innovation and in transforming its great ideas into a commercial reality.
'Like other advanced nations, our economy is undergoing a significant transition in which traditional industries are evolving and new opportunities are emerging.
'It’s essential Australia embraces these opportunities to improve our global competitiveness. Through our Industry Innovation and Competitiveness Agenda we are working to revitalise Australia’s business and entrepreneurial drive to equip our economy for the challenges ahead. We understand that business is the backbone of our economy, and in the 21st century we must continue to be innovative to strengthen our competitiveness — which is the key to our future prosperity'.
'The path to this goal requires collaboration across industries and stronger links between industry and science, to better harness leading-edge research and ensure scientific breakthroughs are commercialised.
'By tapping into the expertise of our Co-operative Research Centres (CRCs), Australian businesses can build and develop through innovative research in areas as diverse as hearing, healthcare, pest management, bushfire and natural hazards management, financial markets security and the aerospace industry.
'As well as commercialising leading-edge research that takes place in our universities and research institutions, CRCs are producing graduates with hands-on industry experience. This is helping to create a highly skilled and innovative workforce.
'We are investing more than $731m in CRCs over five years to ensure small and medium enterprises have the support to overcome the initial barriers and risks associated with introducing new concepts and technologies, leading to improved competitive advantage'.
Disclosure; Henry has had a long association with Australia's CRCs, including 5 years as head of the committee overseeing the Commonwealth government's CRC program
Saturday Sanity Break, 29 August 2015
Date: Saturday, August 29, 2015
Author: Henry Thornton
By week's end the global markets had rallied, though in Australia equity markets were still well below the previous peak. Overnight, however, US markets suffered another downturn and the Chinese central bank reportedly threw a lot of money into equity markets. So we can expect another week of turbulance and volatility. In times such as this one needs the comfort of trusted advisors, and Henry's favourite fund manager has come through with the view, appropriately hedged, that current events add up to a correction, not a bear market.
'There is a sense that we have been overdue for a correction in equity markets and we know that corrections are both a necessary and healthy phenomenon that washes out the weak holders of shares and presents opportunity for those with the nerve to commit.
'This correction, which we define as a decline in the index of more than 10%, has been a long time coming. In the US, for example it has been nearly 4 years since the S & P 500 has declined more than 10%. This correction was well overdue……….
'Yet we live in the moment, not in the text books of history. And no matter how hard we strive to remain objective thinkers, no matter how overdue a correction was, we cannot but help let that subjective part of our minds wander into the realm of fear and ask “This is just a correction right?”
Despite Henry's faith in the team that manages his Australian equities, (thankfully a lot fewer than they were at the onset of the GFC, that's the equities, not the managers), readers may follow the logic here. Of course we must advise you not to act on these views unless you are a fully adult person who takes advice from an ASIC-approved financial planner.
(Some people believe that sacrificing a virgin sheep under the light of a full moon would be more useful, but we cannot possibly comment on that.).
The Great and the Good have spoken about the need for thorough-going economic reform. The newspapers that sponsored the talkfest provided a blitz of fact and opinion,
Today's Image of the week provides a fair comment on the effectiveness of the flow of (highly sensible) advice. The only new thought comes from Judith Sloan under the enticing headline of 'Why the economy is going to hell in as handbasket'.
'It’s easy to blame shortsighted, feckless politicians whose main experiences in life have been school, university, a short stint in legal practice, working as a trade union official (Labor only) and the inside of a politician’s office working as a staff member. This is the “real” world experience of far too many politicians.
'The process of setting up a business, negotiating the regulatory maze, selling to willing customers to make a profit, making payroll: this is simply foreign territory to all but a handful of politicians.
'It’s also too easy to blame an obstructive Senate ...
'The reality is that the quality of the advice our gormless politicians receive from our key economic institutions has declined dramatically during the past decade or so. ...
'It’s not because bureaucrats are unwilling to speak the truth to their political masters. It’s rather that far too many of them share the delusions of their political masters; indeed, some of them are only too willing to join the political game, admittedly from the protected precinct of the public service. Take Treasury. The rot really started when the so-called Wellbeing Framework was adopted as an organising principle to be followed by all Treasury staff. Apart from the fact many Treasury officials never understood the purpose of the framework — this much has been acknowledged by Treasury itself — the real impact has been to downplay the importance of (per capita) economic growth and to emphasise issues such as fairness and sustainability'.
Henry's opinion was provided two years ago when we spoke of the coming 'grim recession' and powerbrokers 'walking unknowingly into a new economic crisis'.
'Warnings have been sounded, and not just by this writer, and the only excuse for the steady tramp into recession is the insularity and self-congratulatory hubris of successive ministers and officials, especially those in Treasury.
'Where is the Westminster tradition of strong, independent advice? Treasury (and the Reserve Bank) has many excellent and dedicated economists. Have relevant warnings been ignored, or have the fine economists effectively been nobbled? Fear that the messenger will be shot is a powerful nobbling device'.
Shared delusions or nobbled officials, perhaps it is a bit of both. Whatever the cause, Australia's compromised 'Washminster' system is in urgent need of reform. We need to go back to the Westminster tradition of strong independent officials, perhaps poorly paid but showered with honours when they retire. Or move onto the Washington tradition that each new administration fires the last lot and appoints its ideological friends. To work properly, five year terms for parliament and a new tradition of negotiating with the upper house when necessary would be desirable, but being far clearer about the position of advisors would be highly desirable also. And there is the side benefit of advisors from the previous administration giving honest, hard-hitting advice from the think tanks, all of which would become far more effective than they are at present.
Fiona Prior bids farewell to the ballet superstar Sylvie Guillem who is up there is the world of dance legends with Anna Pavlova, Margot Fonteyn, Vaslav Nijinsky and Rudolph Nureyev. Guillem is hanging up her leotard after almost 40 years of dance. Please see here.
the magnificent Sylvie Guillem
Usain Bolt has given global athletics a welcome boost by beating his convicted drug-enhanced rival in the 100 and 200 metres world title races. The world's fastest man has revealed his ambition to break 19 seconds from his favourite race, the 200 metres, equivalent perhaps to running the marathon in two hours. An Aussie long jumper surprised the world with a silver medal in the long-jump, and a young bloke called Starc (brother to the cricketer) has jumped a best height of 2.1 metres to win a place in the high-jump final.
Could Australian athletics be making a comeback?
Footy approaches the finals. How did that Hawthorn star get only 2 weeks off for driving an opponant into a goal post is a mannr that seemed deliberate to this viewer? And how did the Brownlow medal favourite get off after sliding into an opponant? Could it be possible that the mighty AFL money machine is protecting its profits from the finals and Brownlow awards?
Caaaarlton! provided cheer in the Thornton household with an upset win over Melbourne. Our main trouble has been 1. Lack of confidence (thanks Mick); 2. Lack of a power forward and a ruthless centre half back, and ditching some players who have flourished mightily elsewhere (thank you, recruiting team); and 3. The lingerly effects of the cruel penalties applied by the AFL for salary cap rorting all those years ago (thank you big bad John.)
Not much cricket news, but Henry did spot Watto playing one day cricket against Ireland. Glad to see that this fine cricketer has not been fully sent to the cricket knakery.
We come now to a subject usually unnoticed by Henry, ... SEX. Betina Arndt has tackled the apparent loss of libido by women, noting in passing that blokes retain their demanding, animalistic habits, meaning growing malesunhappiness in the bedrooms, couches and back seats of cars in our overworked, stressful, boozing, child molestering nation.
Soon the ABC will take up this theme, in the process blaming Tony Abbott and Joe Hockey. Wht fun it will be on Q&A in a week or two.
Establishment gets it, at last
Date: Thursday, August 27, 2015
Author: Henry Thornton
The Great and the Good have spoken - Australia needs economic reform, there are plenty of good ideas and the government needs to get on with it, helped by the opposition. The AFR and The Australian have provided excellent summaries and Henry's favourite quote was from Dr Martin Parkinson - 'We are 'sleepwalking into a real mess'. This is great rhetoric, especially as it echoes Henry's comment published in The Australian in August 2013. 'Now the nation's leaders are walking unknowingly into a new economic crisis'. The the now free-to-speak former Secretary of the Treasury also spoke of "Recession". As Henry said two years ago: 'Why is Australia headed for a grim recession, and why will it be seen by historians as a recession we did not need to have?'
Here is where the current grim economic situation was predicted before it happened, and why.
The master writer about the political economy of Australia is Paul Kelly. His column today starts as follows: 'The National Reform Summit has sent a singular message to the political system: Australia is a better country than you think, it is more ready to debate reform than you think and it is past time to tell the economic truth about our future.
'The agreement from the summit is that reform is now urgent, our economic and social position is slipping, unemployment is too high, poverty is rising and growth combined with equity is the priority objective.
'The summit stakeholders — if true to their word, and this is a hefty proviso — have drawn the line against the “rule in, rule out” political culture that is wrecking policy progress and driving the decline in living standards growth. The widespread coverage of the summit constitutes a threshold of sorts — public recognition the political system is failing.
'This perception imposes fresh obligations upon Tony Abbott, Bill Shorten, the parliament, the Senate and the states to lift their game'.
Do not miss Louis Hissink's latest diatribe. The summary is the 'Establishment economists have wholescale embraced Keynesianism and contributed to the death of the free market in the Western world'. sort of consistent with what the great and the good were saying at the latest economic Summit.
Read on here. Those with a mistaken view of causation in economics are destined to repeat the mistakes of the past.
Date: Monday, August 24, 2015
Author: Henry Thornton
'The Australian sharemarket has plummeted today amid a global sell-off sparked by fears of deflation and standstill economic growth, with a plunge on the Chinese markets making matters worse.
'At 3.15pm (AEST) the S&P/ASX200 index was down 4 per cent cent to 5007, the biggest intraday drop since 2007.
“Today has all the hallmarks of being one of the worst trading days of the past five years,” IG market strategist Evan Lucas said.
“Fear-selling is now stronger, faster and harder than ever before, and now there’s another pressure to it — are central banks out of tricks.”
'China’s main stockmarket gauge, the Shanghai Composite index, tumbled 6 per cent in the first minutes of trade, despite Beijing authorising the state pension fund to invest in stocks to shore up the markets'.
Whether this is part of a 'correction' (a 20 % fall), a 'crash' (up to 40 % fall) or a catastrophe (name your own figure) is impossible to say. Henry said in his 2011 book Great Crises of Capitalism (signed off in late 2010) that he had no confidence that the Global crisis was over. Since then 'Quantitative Easing' and near zero interest rates have boosted global share prices and there have been rapid recovery from downturns in global indices.
Factors that are worrying experts, and should be worrying us all, include: continued near-zero interest rate and uncertainty about how that situation can be normalised; the apparent severe slowdown in the Chinese economy - with non-official sources suggesting this problem is far worse that official numbers; continued uncertainty about economic recovery in the Eurozone and how very weak Eurozone countries like Greece can recover with continued, much disliked austerity imposed by creditors; the signs of slowing in the US economy; fears of global deflation; and poor 'Animal Spirits' among many global investors; businesses and households.
The link to Australian superannuation is that the market meltdown has already hacked into incomes of retirees with self-managed funds, and will decimate returns several times more in a wost case. Most if not all global decision makers, like Australian politicians and officials, have defined benefit retirement schemes that are backed by tens of millions of assets. This illustrates the ridiculous nature of those who argue, while sitting on a guaranteed pension backed by millions of dollars of assets, that a person who has accumulated a one, or two or three million super fund is 'rich'.
The only way to minimise the fallout from the market meltdown and all the current uncertain but mainly bleak prospects, is to embark on thorough-going economic reform, after the government carefully and honestly explains things are not 'she'll be good mate!' as weekend propaganda put it.
Superannuation and tax reform
Superannuation tax has raised its ugly head again, thanks to Henry Ergas. The rhetoric is wonderful, and the warning (front page of The Oz) is chilling: 'It seems only a matter of time before super savers are slugged'. But try as he might, Henry (Thornton) cannot see how Henry (Ergas) justifies his argument that super savers are already being slugged any amount between 40 % of income and 465 %. We suspect it involves calculations that depend on humanity's defective way of discounting the future, but we cannot be sure. Please Mr Ergas, explain so even a man close to entering his eighth decade can understand.
The big front page headline, of course, says Smokin' Joe Hockey is going to raise thresholds for income tax bands and (possibly) cut rates of income tax. Great for future earners of salaries, but not so good for people entering their eighth decade whose future income is (ahem) limited. Smokin' Joe may not survive to introduce these essential reforms, although Henry dearly hopes he will. “At the moment, 2.7 per cent of Australian taxpayers [including both Henrys presumably] fall into the top income tax bracket, and they are paying more than 28 per cent of all income tax,” [Joe Hockey said].
Smokin' Joe will promise to reform income tax without introducing a higher GST tax rate, but rather cutting spending. This is going to be part of the current government's pitch to voters at the next Federal election. Recall Smokin' Joe's first budget, dear readers. Fat chance of spending cuts even if the coalition wins the next election, currently not something to bet the house on. The possibility of super being slugged while income tax is being cut, in both cases when Henry (Thornton not Ergas) is no longer earning much by way of fresh income, is deeply disturbing.
Thorough-going economic reform includes tax reform. In the modern global economy, rates of tax in various catagories need to be near the that of competitor nations or there will be massive local disincentives. But there are plenty of non-tax reforms that are needed if Australia is to become a dynamic, entrepreneurial nation that is as fire-proofed as possible in a dynamic, unstable world economy.
Saturday Sanity Break, 22 August 2015.
Date: Saturday, August 22, 2015
Author: Henry Thornton
The by-election for the seat of Canning is the next moment of truth for Tony Abbott and his government. Polls are unpropitious and the money-pinching scandal in the Victorian branch cannot help. The battle over the Royal Commission into Trade Union Governance and Corruption into should help, especially if Mr Abbott can persuade commissioner Heydon Dyson to tough it out and finish his report.
But Labor will run hard both to discredit the commissioner and get the commission closed down. Kelly again: 'Whatever happens, Abbott won’t close this commission. The political story of the week was the Abbott government’s resort to an aggressive campaign against Labor and unions over jobs, suggesting that Abbott has found a powerful script'.
Mrs T wonders what all the fuss is about. The terrorists of the Middle East cut live people's heads off on camera, while a brave Australian soldier is persecuted for cutting off the hand of a dead terrorist so the body can he identified. 'Where is there any sense in the carryon' she asks. The Thornton household hopes Mr Hastie gets elected in Canning with an increased margin.
The dark clouds overhanging the Australian economy are ignored, with power brokers whistling happy tunes and telling us 'punters' 'she'll be good, mates', an attitude Henry emphatically objects to. The sustained examination of the global economy in Henry's Raff Report, whose latest edition is available here, suggests she won't be right. In contrast, the Raff reports: 'Figure 2 shows USA production of agricultural, construction and mining machinery. There is clearly no joy here and the rates of deterioration are accelerating. This is not the picture of an economy going gangbusters. Rather of one in a tad of difficulty. It’s rather interesting but considering all the charts the Raff has published over the past 6 to 7 years, none of them show a hike that might reasonably have been expected given the trillions of stimulus'.
This burst of cold, hard reality comes just when we discover Australian share prices are now below levels at the start of the year. Supposedly 'weakness of the Chinese economy' is the precipitating factor, but there are plenty of other reasons for gloomy global Animal Spirits. Here is a list: sluggish Eurozone activity, evidence of slowing US activity (as systematically documented by Nick Raffan here), caution due to unsustainable levels of household, business and government debt everywhere, clear signs of global deflation and deep uncertainty about the eventual outcome of global currency wars and when and how the US Fed will begin to raise interest rates.
Go carefully, dear readers.
Bill Leak is a serious painter as well as an esteemed cartoonist.
He presents a hard hitting review of 'the Archibald' whose custodians for many years hung his fine portraits but never awarded him the prize. (Henry knows a fine Victorian portrait painter whose offerings were not even opened, like an elderly spinster, returned unopened.) Bill Leak is not bitter, but perhaps a bit battered. Here are a few snippets.
'... things are crook, but nothing will change because art is different. It exists in a sort of mysterious realm protected by an impenetrable barrier of spin, written in arcane but deeply politically correct language. And no one dares question it for fear of revealing they don’t know what it means.
'The spin doctors of art have been very successful at making the world of art an inhospitable place, inhabited only by the cognoscenti and shut off to everyone else'.
But there is also a heartfelt tribute to real Great Art. 'Standing in the middle of the Simpson Desert and looking into the clear night sky is the sort of visual experience that can give you a sense of the numinous, to put you in direct contact with something too awe-inspiring to even begin to understand.
'Standing in front of great paintings can be overwhelming, too. Looking at great works of art and wondering how they were created is like looking at the night sky and wondering how all the stars got there.
'The difference, of course, is you know what you’re looking at was not created by an unimaginable God but by an almost — but perhaps not quite — imaginable human being'.
Australia's netballers won the world title for the third time in a row. 'Go guuurls!' as we said last week, no doubt serious uplifting advice the shielas were delighted to hear.
The much maligned Aussie (men's) cricket team is well on the way to winning the dead fifth rubber after an embarrassing batting collapse by the pestiferous Poms. Poor Cap'n Clarke, still his 15 runs eclipsed Bradman's final innings of zip. Leaving the Don's average a tad below 100 and the Pup's a bit below 50. Both a lot better than Henry's average of 2.5,with some redemption after a final inninings for Mont Albert Fourths of zip not out while fighting (successfully) for an improbable draw.
The big footy news was the sacking of James Hird because of Essendon's dismal on-field performance. If only he'd fessed up when the initial charges were laid and stood down he'd be seen now as an unreasonably persecuted here rather than, how shall we put it, a whipped dog. Caaaarlton! of course in another proud footy club still recovering from punishment after behaving badly, in its case salary cap rorting rather than 'substance abuse'.
Almost as dramatic as Hird's departure from Essendon was Port Adelaide's beating of Hawthorn overnight, again showing signs that their early signs of infallability were simply too good to be true. And Australia's previously infallable Rugby coach, Michael Cheika, fell to earth when our boys were belted by the All Blacks at Eden Part, where no Aussie team has won since the heady days if the Banana Republic, a state peeping out of the data again, though, of course, 'she'll be good, mates'.
The cricket team has finally come good. Batters have batted like it is a test match, and Peter Siddle has reminded us all what a good bowler he is. One wicket for no runs after 5 overs it was at one stage. So absent monsoon rain for 2 days the series should end 3/2, but with many questions to be answered by both teams.
Image of the week
Saturday Sanity Break, 15 August 2015
Date: Saturday, August 15, 2015
Author: Henry Thornton
China's market meltdown will not influence Australia, says Treasurer Joe Hockey. The Chinese are learning about modern capitalism and have intervened to devalue their currency. China will also 'do what it takes' with fiscal and monetary policy to maintain growth. We certainly hope so, Mr Hockey, because failure of China's stimulus would make the RBA's recent forecast downgrade look like a gentle overture to a dramatic symphony. Wait, there's more - jobs growth is strong, retail sales have picked up and Australia is surfing its way to renewed prosperity. We hope so, Mr Hockey, because many of those people Henry talks to are far more skeptical about the state of Australia's economy. Maybe its because those people travel in crowded cars, trains and trams rather than in comfy Comm cars and at the front of aeroplanes, and pay for those uncomfortable trips out of their own pocket.
Politically, it was a heck of a week. The ridiculous debate about same sex 'marriage' - will it be a decision of parliament, will it be a decision by the people, will it be a plebisite or a referendum, most of us just don't give a toss. If gay people want to marry, let them do so. Traditional religous folk surely believe such people (and pedophile priests) will surely burn in hell forever, and surely that is punishment enough. Important that the legislation frees religous practitioners to say 'no thanks' to gay people asking them to marry them, but there will surely be gay religious willing to tie the knot.
How could a distinguished former eminant judge, now presiding over the Royal Commission into Trade Union Governance and Corruption, be conned into delivering a speech to a Liberal Party function? Henry hopes the Commissioner will be forgiven his misjudgment (or reveal how he was conned) and gets on with his job. Sadly, however, mud sticks and this may mean he has to stand down in a stunning victory for Bill Shorten.
Henry was dining with around 100 of his closest friends at a social event last night. No-one was willing to say the government was doing a good job and there was much gloom about prospects for the conservative side of politics, and indeed about Aussie politics in general.
The shape of things to come
Brilliant article today on one vital medical development.
'Amanda Gorvin began to think her life had become unbearable in the early hours of a November morning last year when she found herself crawling agonisingly down the hall from her bedroom to the darkened kitchen of her home on the NSW Central Coast. ...
'If Anatomics [a Melbourne Company] could custom-build an implant to fit snugly into Gorvin’s damaged vertebra, Coughlan [a surgeon] explained, it might straighten her spine and alleviate her pain. The technology was so new that few surgeons in the world had attempted the procedure, and therein lay the rub: Coughlan would be the first Australian surgeon to attempt it, and Amanda Gorvin the first patient in the country to agree to it'. ...
“I was back at work four weeks after the operation, back in the gym after six weeks,” says [Amanda Gorvin]. “I was breathing better, my mind was clearer, I felt lighter. It’s incredible how much influence the spine has on the rest of the body. I remember that pre-surgical pain and now I haven’t got one per cent of it. It’s nothing short of miraculous.” As she speaks, Gorvin becomes emotional and reaches for a tissue. “This has absolutely changed my life,” she says.
'For Coughlan, it’s an outcome beyond his expectations and a pointer to where medicine is headed. “The last time I saw Amanda before surgery, she was pretty stressed and quite desperate. As a doctor, you try to factor in the physical and the emotional coping mechanisms of your patient. Maybe this is the way medicine can go, customised more to the patient’s needs.”
Read more here. This is a vital part of modern medicine and shall solve many previously insoluble medical issues.
And if you are someone who takes a long view, try this article on our dying universe.
image: detail from Japanese Pavilion, Venice Biennale 2015
Following the stirring win in the Four Nations Competition, Australia's greatly improved Rugby team takes on the All Blacks tonight in Eden Park, where our last win was in the distant past. It will be a stern test and coach Cheika's bold selection calls seem to have injected new confidence and determination into a previously lacklustre mob. Tonight it is the inclusion of Quade Cooper that has the Rugby community abuzz and Henry will be cheering from his armchair in Marvellous Melbourne.
The Age has kindly provided an upbeat two page spread by Garry Lyon headed 'Carlton have foundations to build on'. The necessary renovation - yes Mr Lyon uses a nice extended metaphor about houses and streets - will require a lot of hard work and (Henry adds) better choice of the furnishings. This is a team that 'let go' Eddie Betts, Aaron Jacobs, Vin Waite and many others, and now Gary Lyon says has only 16 players worth perservering with. Tonight Carlton battles with Brisbane for the wooden spoon and a loss my open the door to a first round draft pick. 'So what' say the pundits, all the first round picks are good, or seem so, and there's a fair bit of luck involved.
The cricket sheilas are set to win indeed, if Henry can count, have already won the sheilas' Ashes. Great work Guuuurls, and an inspiration for the downcast and beaten Aussies. Looks like a wholesale renovaton is called for, borrowing from Garry Lyon, with perhaps 8 elderly players freed to make their fortune in the Indian or Big Bash competitions.
And if you are someone who takes the long view, try this article on our dying universe.
Image of the week
Saturday Sanity Break, 8 August 2015
Date: Saturday, August 08, 2015
Author: Henry Thornton
Bronnie has fallen on her sword, Tony Burke is revealed as a pillock (Defn: A man who has dropped a major bollock. Not nescessarily (sic) a stupid bloke, rather, one who has done a stupid act.), the RBA has reduced its forecasts of Australia's growth rate and two of the newish ventures Henry has been grappling with have achieved important milestones. It is some time since Henry's team has been doing better than the Australian average, but this is definately one of those golden moments. And this is not just because the Australian average is falling back, which it is in both politics and economics, but because Henry's team is winning.
Jack the Insider discusses Polly travelgate against the benchmark of Ben Chifley and the latest wonderful British political satire 'In the thick of it'.
Henry is aware of the dreaded word HUBRIS that afflicts Australian Treasurers in particular. Sensible people fix the roof while the sun is shining and have a plan B in case Plan A turns to custard. Henry's team awaits with stoic calm the next slap in the face with a wet fish dished out by a scary universe. But it could be worse, dear reader, Henry's team could be getting the sort of bollicking handed out lat week by the Oz to Australia's pollies (Wraaaak!) and, by implication, econocrats (Booooo!).
'Global disruption is unsettling for workers, companies and governments. Relentless economic forces, largely brought on by technological innovation and capital flows, are reshaping jobs, industries and the wealth of nations. Australia is not immune from political challenges and budgetary pressure, although we have had a buffer because of past policy design and luck. But our inheritance and time for contemplating the next move are running out. We need leadership and proper perspective on the issues but our political system is not up to the challenge. The nation’s politicians are being sidetracked by failed ideas, false debates and third-order issues. We need advocates for growth through leaps in productivity to show the way, not mendicants and class warriors obsessed with redistribution'.
An American doctor has said of the eurozone mess, as reported by the estimable John Maudlin: 'For such problems, there are no simple solutions. There aren't even complicated solutions. There are only best-guess measures with no guarantees of success. The currency union’s underlying flaws, like so many other modern problems, are far too intricate and perplexing for our minds and institutions to cope with. Failing to admit to our own overconfidence in dealing with the bloc’s problems will only perpetuate the crisis playing out across Europe.'
Fiona Prior has returned from Italy and is busily penning her Impressions of both Venice and the internationally influential 2015 Venice Biennale, a highlight of the world’s cultural calendar. See her preview for Henry’s readers of the work of Russian artist Irina Nakhova below.
Nakhova has filled one room of the Russian Pavilion with the installation of a giant head from which an enlarged projection of her eyes look out and scan the room. Fiona stands in front of the mask to give you a sense of scale but was overwhelmed by not just the size of this strangely monstrous military presence but also the sense of vulnerability contained in those giant eyes trapped inside.
If you have not already read Fiona’s impressions of Florence and Rome please do so. We will look forward to reading of Fiona's time in Venice next week.
Richmond, brave winners over mighty Hawthorn last week, were smashed by Adelaide on its shiny new stadiun overnight. Today Caaaarrlton! faces Collingwood which is
seeking its seventh straight loss. Given the historical feeling between these teams, if the blues cannot at least look like they are trying, If that cannot be said, what is needed is a clean out from the top, and in fact Henry hears that just such a cleansing is being plotted already.
Alas for Cap'n clark, most of the batters and at least one of the bowlers. Australia's dismal first session (not even first day!) has sounded the death knell for several aging former stars, including very likely Cap'n Clark. Always go while you are at your prime, dear reader, even if your pals want you to stay. The interesting question is whether our boys were on strike because what the cozy team members thought was the unfair sacking of Hard Hands Haddin. As it is, the best reports of Australia's dismal performance refer to the batters as having 'hard hands, soft heads'. The Mont Albert Forths would have batted with more discretion.
Australia's swimmers have fared will in the world swimmeet held somewhere in the Russian Federation. The shock of the week was to hear that modern tests suggest that one third of olympic medals were won by people with now suspicious drug tests. If the AFL had been on the case, as advised by Henry all those years ago - link here - we would today know which Premier teams had received help from banned 'substances'.
Image of the week
Date: Thursday, August 06, 2015
Author: John Mauldin
In this week’s Outside the Box we have a unique diagnosis of Europe’s ills from … a medical doctor. The author is Dr. Luc De Keyser, who currently serves as the chief medical information officer at Xperthis, the largest provider of hospital information systems solutions in Belgium. He has done pioneering work in multicenter clinical trials, medical ontologies, paleonutrition, and examining human conflict from an evolutionary perspective.
Dr. De Keyser (writing for Stratfor) is not sanguine about Europe’s future. There are times, he reminds us, when a doctor has to make the tough call and conclude that the patient’s case is simply without hope. It's a painful diagnosis and not one that the doctor enjoys sharing with the patient. But at some point the patient must be told.
The fundamental obstacle to solving Europe’s problems, he asserts, is that Europe is simply too complex to fix in any straightforward or dependable way: For such problems, there are no simple solutions. There aren't even complicated solutions. There are only best-guess measures with no guarantees of success. The currency union’s underlying flaws, like so many other modern problems, are far too intricate and perplexing for our minds and institutions to cope with. Failing to admit to our own overconfidence in dealing with the bloc’s problems will only perpetuate the crisis playing out across Europe.
Our poor human brains, the good doctor says, simply aren’t built to cope with a sociopolitical entity as big and complex as Europe. One thing we not-so-evolved apes like to do is interpret information in a way that confirms our preconceived notions. This is called confirmation bias, and in simpler times it kept us out of harm’s way by encouraging preferences for things we knew to be safe. This is a limitation that afflicts economists right along with the rest of us. And so we see, for example, Wolfgang Schäuble, finance minister of Germany, and Yanis Varofakis, former finance minister of Greece, obstinately pushing diametrically opposed economic programs. Which is OK, says Dr. De Keyser, until people on both sides start to claim that adherence to the other guy’s economic school of thought is going to ruin the livelihoods of millions of people.
We’re riddled with other sorts of biases, too – stuff that the field of behavioral economics is still trying to understand and help us all to cope with. Dr. De Keyser recommends humility: “[W]e must first accept that it is our fate to be overwhelmed by the problems of modern-day society.” Well, that’s a start, I guess; but maybe we should just bring the challenge closer to home and recognize that just as Europe’s (and the US’s and China’s) leaders struggle mightily and often futilely to manage their societies, we too should be keenly aware of our mental limitations in managing our investments and businesses. We all have a lot to learn.
All too often in our investment portfolios we want to make the investment world conform to our biases and opinions. More often than not we find out that reality is far more complex and that there is a plentitude of variables, many of which are unknown to us, that influence what we fervently wish to be a simple, straightforward solution.