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Henry Thornton - Contributors: A discussion of economic, social and political issues Blogs
Light on the hill?
Date: Wednesday, July 20, 2011
Author: Henry Thornton

Wall Street surged by 200 points overnight, mainly it seems because of a new US deficit reduction plan discussed here by the Wall Street Journal.

'WASHINGTON—President Barack Obama on Tuesday backed a $3.7 trillion deficit-reduction plan as "a very significant step" after it gained fresh momentum from a bipartisan group in the Senate.

'Mr. Obama said the proposal, designed by a group of lawmakers known as the "Gang of Six," represents a balanced approach to cutting the deficit that he has pushed for all along.

"The framework that they put forward is broadly consistent with what we've been working on here in the White House," Mr. Obama said.

Compelling television is was (yawn!) but the 'we knew nothing' stonewall by Messrs Murdoch Snr and Jnr left us little the wiser. News Corporation shares recovered some ground, and Wendy Deng illustrated her martial arts expertise in dealing with a pie chucker who attempted to bespatter Mr Murdoch snr.

Apple Inc.'s third-quarter earnings more than doubled as the company reported surging sales of the iPhone and iPad device, another factor no doubt helping create the market surge.

The Eurozone crisis for a change took a lower profile, but will resurface with regularity until this problem is solved, most likely by partition into Big-Euro and Little-Euro country blocs - see yesterday's blog (below) for more on this matter.

RBA monetary policy

The biggest gamble of the career of Westpac chief economist, Bill Evans, has moved the markets, which are now betting that the next rate move will be down.  Most of Mr Evans' fellow bank economists, however, have stuck with the view that the next rate move will be upward, thought perhaps taking longer to occur.

The June quarter consumer price result, available shortly, will decide the immediate outcome and if it exceeds expectations will leave Mr Evans deeply regretting his 15 minutes of fame.

The minutes of the previous Reserve Bank board meeting included the following gem: 'The extent to which these forces would strain the economy's productive capacity over time would be a key determinant of inflation. Members noted, however, that the flow of recent information suggested both that there was more time to assess the likely strength of inflationary pressures in Australia and that it would be prudent to use that time. Members noted that the CPI outcome for the June quarter, to be published later in the month, would be important in helping to shape views about inflation, and therefore the future path of interest rates. Accordingly, members considered that the current mildly restrictive setting of monetary policy remained appropriate'.

Michael Stutchbury of the Oz yesterday accurately reflected Henry's view, for what that is worth.

'Australia needs to maintain a tight ship and concentrate on lifting our economic game while all this is playing out'.

But, as we said in early June, while there is the mother of mining booms underway, most of the rest of the economy is mired in recession. Collins Street opinion leaders are inclined to be in the rate cut school, and Henry has had to offer some modest bets on the matter, some of which have been accepted.

And one should at least mention Mark Bouris and his Yellow Brick Road initiative.

'Time for the RBA to get real' is the headline, and the theme is confusion.

'I talk to a lot of business owners and I can't recall a time when there has been so much confusion. In the early 1990s, when unemployment was high and banks wouldn't lend to small businesses, the landscape was very clear. The pain was spread evenly.

'Today it's a different story'. Here is a link to my advice in the early 1990s. Mark, some more substance would be useful if you really want to change the game.

The Unknown Universe
Date: Thursday, February 04, 2016
Author: Henry Thornton

Astronomers believe that the Sun and other stars are nuclear furnaces. The Sun experiences times of great sunspot activity, solar flares that have fried the world’s electronic systems and times of relatively quiescent activity. This are the arresting facts summarised by one Stewart Clark in one of the ten chapters a fine book titled The Unknown Universe.

The book is a treasure trove of facts about the development of astronomy and physics. It is well written, engaging and tells its tales in a thinking person’s version of an exciting sci-fi novel.  Quite suddenly, I was captivated by a dip into the world’s climate cycles and understated advice on vital context for the debate on global warming.

I shall quote freely. ‘The only visible marks on the solar surface are sunspots’. Sometimes there are many and occasionally there are none. A German chemist named Heinrich Schwabe was encouraged to begin a study of the matter. He sold his business, purchased and set up a fine telescope and on every fine day he recorded the number of sunspots. (How Herr Schwabe lived is not recorded by Mr Clark.)

After around 15 years of patient and diligent recording he found a pattern of increasing numbers of sunspots from a low base, reaching a peak and then falling rapidly toward zero, the full ‘cycle’ taking around 11 years.  (At university in the 1960s, proto-economists learned that there was a school of economics that linked sunspots to the so-called ‘trade cycle’).

Sunspots are apparently magnetic, and in years of their greatest number, compasses on earth deviate significantly from true north, a fact known by mariners. Large numbers of sunspots ‘forewarn of gigantic solar flares that can unleash a billion times more energy that an atomic bomb’. Such an event happened in 1859 and is known as the ‘Carrington event’. The electronic technology of the time was the telegraph, which ‘stopped working in spectacular fashion as the aurorae spread across the sky’. Telegraph operators were electrocuted, offices burst into flames, global communication and navigation stopped.

At the start of the twentieth century, a pair of astronomers, Walter Maunder and his wife Annie, began to study a different type of event way back in the second half of the seventeenth century.  At this time, there was a long period (from 1645 to 1715) when there were virtually no sunspots. ‘This grand minimum coincides with the worst years of the so-called Little Ice Age.’ This catchy name is misleading, says Clark, because it was not a time of continuous frost, though Northern Europe was ‘beset by a greater-than-average number of savagely cold winters’.

Apart from northern Europe, Iceland became locked in miles of sea ice and many people died or left for warmer climes. New York harbour froze over and people could walk from Manhattan to Staten Island.

And it was not the first such event people could recall, or at least read about. Between 1420 and 1570, the Viking colonies on Greenland were turned ‘from fertile farmlands to arctic wastelands'. And, it turned out, this was a time of a plunge in the number of sunspots – though for economists it seems the so-called ‘cycles’ were shorter.

This is a controversial matter. Now the party line is that ‘man-made pollution is creating a greenhouse effect that is catastrophically warming the planet’.  And ‘to suggest the Sun is in any way responsible for what is happening in Earth’s atmosphere lays one open to be branded a “climate sceptic”.’ 

Models are all we have to try to sort out cause and effect and we all know, or should know, that models models can be horribly incomplete or just plain wrong. A case in point is the plausible claim that it is ‘Animal Spirits’ that has most to do with the ups and down of economies, yet such influences are (so it is said) impossible to measure and hard to understand or to put into models. (This author will have more to say on this specific matter in due course.)

The bald fact is that before the industrial revolution, and the subsequent rise of man-made greenhouse gas emissions, the planet had large variations in it’s climate. So any reasonably accurate modelling must take this fact into account along with the current (partial) models of the green-house gas issue.

As if providing an experiment, in 2007, the sunspots disappeared. No-one expected much sunspot activity for a bit but then there would be a large upswing. Then NASA scientists suggested – based on their models - that the upswing might be an especially violent one. With an obvious risk of another Carrington event imposed on a world that is far more dependent on electronics generally.

But the Sun remained quiescent, to an extent that was ‘extreme even for a minimum’. 2009 failed to deliver a strong upswing until December, when there was a large group of sunspots. The winters of 2008-09 and particularly 2009-10 were ‘unusually cold in Europe’, an ‘eerily familiar’ event. One Mike Lockwood led an investigation of average winter temperatures using a beaut British database that covers the time since 1659. Low solar activity were correlated with low winter temperatures, and when the hypothesis effect of greenhouse gasses were removed from the data, the effect was stronger.

But what are the mechanisms that are at work?  Spacecraft measurement show ‘beyond doubt’ that the Sun’s output of energy is ‘remarkably constant’, with only a relatively small (1%) variation between years of strong and weak sunspot activity. (I sense the Animal Spirits of climate sceptics waning.)  However, ultraviolet light is strongly linked to solar activity, and more UV light means more ozone is created in the Earth’s upper atmosphere, which in turn leads to more UV being absorbed. The stratosphere heats up, ‘driving faster winds up there’.

The most famous high level wind is the Jet Stream, which does respond to temperatures on high. When solar activity is strong, the Jet Stream blows hard.  When solar activity is low, the stream turns into a meander and distributes the weather differently, with a particular cooling effect on Northern Europe.

Mr Clark then moves to discuss the (repeating, if not strictly cyclical) model of how the Sun works. There is an emerging theory that the Sun in its early days was less luminous, meaning if the Earth was where it is now we all be in the deep freeze. But ancient rocks show that water flowed freely when the Earth was young, and quite possibly that was because Earth was closer to the cooler Sun. A keen planetary scientist has worked out that early planetary collisions might have moved the Earth slowly away from the Sun as it (the Sun) warmed up.  Clearly this is a theory in search of a Lord of the Universe, or at least a Boss of our solar system.)

Obviously the full story is far from settled. What is for certain is that the partial models of the ‘bed-wetter’ climate worriers are far from fully validated. I remain of the view that we’d do our descendents a possibly large favour by acting as if there was a problem, and in the process reversing the trend to a grimmer environment generally. But we should also fund really good science so these vital matters can be nutted out properly.

Meanwhile, we must salute Stuart Clark for his brilliant book.  The climate story is only one of many that he chases down the scientific burrows with flair and deep knowledge.

In the dark hours
Date: Tuesday, February 02, 2016
Author: Henry Thornton

The RBA board meets today and is widely expected to keep its powder dry, perhaps with some hints of a bias for further easing.  The US Fed, meanwhile has indicated there may be three or four small rate hikes in the land of the free as the start of a gradual return to normality. Little to disagree with, but despite this questions keep surfacing, mostly at 3 AM when the world is dark and quiet.

The capitalist world has suffered great depressions, mad booms and serious busts, wars to end wars,  widespread environmental degradation  and extreme poverty in the midst of plenty. We cannot blame economists or economics for all these maladies, but it is certainly true that economics has been unable to reach a consensus about the causes of gross dysfunction in the economic system.

Nor can we blame central banks as their mandates are narrow. Central banks, however, failed to  prevent, or even it seems to moderate, mad booms, though in the wake of the recent Global Financial Crisis they acted in concert in ways that probably prevented the onset of the Great Depression of the 2010s.

Here are some of the questions that come unbidden in the dark hours before dawn. Why do modern capitalist nations fail to save? Common sense says people should all be willing to save in their years of peak earnings so they can accumulate assets to provide a sensible living in their twilight years. And in some cases to leave money to children and also some worthy philanthropic cause.  Yet most people in modern consumerist nations find far more pleasure in competing to accumulate things.

Can this go on? One doubts it at 3 am, and thinks modern society is living as if most people think there is no tomorrow.

Why are modern economies prone to booms and busts?  And does this matter? One famous economist wrote of the value of what he called the 'gale of creative destruction' created by the busts. Others have pointed out that great things happen in the booms. But readers of history know that mad booms create rubbish as well as great things, and often lead to busts that damage ordinary battlers as well as middling kind of people who get carried away during the booms.

Unravelling the causes of global or national challenges would be worthy occupations with those whose normal working life has run its course. Or helping with practical work on real projects. Or developing creative instincts suppressed in a normal working life.

Yet most people in modern consumerist nations apparently find far more pleasure in competing to accumulate things. With aging populations and entrenched systems of public charity, increasing numbers of people rely on help from declining numbers of taxpayers.

Can this go on? One doubts it at 3 am, and sees in these trends more evidence that most people think there is no tomorrow.

The history of capitalism has many examples of what one writer called the 'madness of crowds' and what is clear is that governments, central bankers and other financial system regulators have not yet learned how to limit the excesses of booms so as to more readily contain the damage of subsequent downturns. Nor it seems do governments (or markets) have the ability to limit the loss of species that signals serious environmental damage.  Nor to devise systems of taxation, welfare and education that give every child opportunity, encourages all people to improve their lot (and become self-sufficient) and allows a decent life for those who fail in the economic race.

At 3 AM come visions of various processes - financial, political, environmental - running out of control.

Do our leaders really understand what is going on in our economies and in the global financial system in particular? President Nixon gave the coup de grace to the gold standard in 1971. This standard was a semi-automatic stabilising part of global capitalism, far from ideal but better than what has replaced it.  The well-understood global monetary regulator instead became replaced by compliant money printers who encouraged growth of credit and created serious inflation, encouraged successive oil price bubbles, then asset bubbles more generally as real estate, great art and shares all boomed and in turn 'corrected'.

Systems with individually floating currencies,  'monetary' targets, 'check lists' and then (goods and service) inflation targets  were introduced in individual capitalist nations and all showed some promise for a time.  (This writer confesses to have championed each of these in turn, it must be said.)

The rise of China and other 'emerging' economies introduced a new age of deflation.  For a while the influence of new sources of highly competitive 'things' offset capitalist nation inflationism to make inflation targets look good. 

In the dark hours, one wonders what new 'policy rule' will be needed next.

As part of the development of 'improved' modern financial management, President Clinton abolished the Glass Steagall legislation of 1933 that ruled out commercial banks and investment banks being in one entity. There was a global rush to 'deregulate' financial systems (advocated by many people in Australia, including this writer). Regulatory frameworks were supposedly improved to contain stupidity and malfeasance by the new superbanks. Watch The Big Short if you doubt the failure of deregulated finance.

The true effect of these reforms was seen in the near meltdown of global financial system in 2007 and 2008.

In the dark hours one sees globally a heady confluence of continued new economy deflation, continued easy money, asset inflation volatility tending to asset inflation, extremely cautious monetary tightening in the USA, in Europe and Japan further easing and perhaps a bias to ease further in Australia.    In our case so far a distinct lack of required fiscal discipline and a distinct lack of energetic economic reform.

Global capitalism is still in deep trouble and there is a lot to disturb the dark hours.

Saturday Sanity 30 January 2016
Date: Saturday, January 30, 2016
Author: Henry Thornton

Gor Blimey, Comrades, 'Treasury secretary John Fraser has warned the Turnbull government its prized AAA-credit rating is in jeopardy unless urgent efforts are made to cut spending, raising the spectre of a federal interest bill of more than $2 billion a month within a decade'. This truth-telling is a commodity in short supply, but John Fraser is a wealthy bloke in his last full-time job so has nothing to prove but his reputation.

Adam Creighton continues: 'In a [recent] landmark speech in Sydney ..., the government’s top economic adviser sounded the alarm about Australia chronic fiscal malaise, arguing that weaker-than-expected revenues, falling commodity prices and forecasting errors were no excuse for not taking tough decisions about the nation’s budget deficit.

'Mr Fraser called for further cuts to the government’s ballooning welfare bill and spending promises to be offset with new savings. He also signalled that federal government spending of more than 25 per cent of national income was unacceptable'. Read on here.

Mr Fraser will no doubt receive the AC when he retires as have his predecessors brave or craven or incompetent, and good luck to him.  Doubt he'll be Australian of the year, however, as doing a real job (or jobs) especially well is no qualification. As  Greg Sheridan put it yesterday: 'The Australian of the Year is meant to have been outstanding in their career and then done something extra. The something extra now apparently is entirely advocacy for any approved social cause. How about an Australian of the Year who doesn’t support the republic and has spent his or her life advocating fiscal discipline? Representative and useful at the same time'.


'What’s wrong with Australia?  After 228 years, the only thing we can think of to celebrate this nation’s great achievements, and the liberation of its native inhabitants from the Stone Age, is the appointment of a tin soldier who excoriates us for sexism, family violence and lack of patriotism'.

This splendid sentence from Geoffrey Luck in (on?) Quadrant Online is a powerful comment on Australia's evolving culture.

Mr Luck continues: 'It seems David Morrison is now to be turned loose on the country, licensed to lecture and hector all and sundry for their failure to conform to his barrack-room discipline on social standards. As a lieutenant-general, Morrison might have passed unnoticed onto the retired list but for his 2013 outburst in a video clip applauded by the usual coterie of feminists, left-wing ideologues and the campaigning broadcasters of the ABC.

'What we don’t hear often are the voices saying that Morrison demoralised the army with his “feminisation” of the service, which scandalously included taxpayer-funded sex-change operations. Or that his concerns about gender-bashing came very late in his career. The enthusiasm for his YouTube clip effectively snuffed out any analysis of the Morrison style: the fierce, almost jihadist fanaticism in his eyes, the tightened facial muscles, what might be taken by some to be a self-righteous vindictiveness lurking in his delivery'.

Read on here. dear readers, and consider if the trendy committee that oversees recommendations about Australia's awards is helping or hindering cultural development suitable for a difficult and dangerous world with many social and economic challenges.

While we contemplate committees, Fiona Prior enjoys the sharp wit of Meow Meow. Read on here.


Novak Djokavic dismissed Roger Federer imperiously in four sets and now plays Andy Murray in the final tomorrow night. Serena Williams proceeds even more imperially toward yet another grand slam victory. It is amazing just how politically correct are the top sportsmen and women these days. 'X is a really good player and I had to play at my very best to flog (correction 'narrowly defeat') him/her.  And thanks a million (literally) to all the spectators who have come here to support me, yer really bonza'. (Cheers from the stands).

Much better than YouTube moving images of a footballer apparently pleasuring a dog, it has to be said.  Still, who cares? Was it an Aussie spectator who accused Ray Lindwall of pleasuring himself while innocently shining the ball? Where has that old Aussie humour gone, Comrades? Lost in the ocean of political correctness that apparently bedevils current Australia's 'gongs'.

The cricket season is descending to the populist depths with the T20 bash-a-thon and Australia's form batsman Usman Khawaja cannot get a look in. (Correction, Mr Khawaja has been called up for the dead rubber, India having out-bashed our boys twice, and because Mr Finch apparently tore his hamstring.] Good on 'Watto' for pointing out just how well this bloke is batting, without of course pointing a finger or even a bone at the selectors who in Henry's view failed to give him a fair go.  It's got to be 'form' that decides these matters, or what are the great men about?

Image of the week

Courtesy The Oz.

The unfairness of being young
Date: Wednesday, January 27, 2016
Author: Henry Thornton

'Young, gifted and held back' proclaims a leader in this week's Economist. Everywhere young people are facing a struggle to find fulfilling jobs, and in some cases any paying job. As the venerable mag puts it: 'Roughly a quarter of the world’s people—some 1.8 billion—have turned 15 but not yet reached 30. In many ways, they are the luckiest group of young adults ever to have existed. They are richer than any previous generation, and live in a world without smallpox or Mao Zedong. They are the best-educated generation ever ... And they can look forward to improvements in technology that will, say, enable many of them to live well past 100. So what, exactly, are they complaining about?'

'Around the world, young people gripe that it is too hard to find a job and a place to live, and that the path to adulthood has grown longer and more complicated'. IR laws insist on 'copious benefits' and make it hard to fire people, a situation that favours older, established workers. In countries that Henry knows a fair bit about one regular path to paid employment is to work as an unpaid 'intern'. And there is strong use of family networks to get young people a foot in this door, or if the candidate is really lucky, a paid job right off the bat.

Labor markets are often heavily constrained and the biggest constraint is the fairly standard barriers to free international movement of people, including 'footloose' young people. Many economists rail against particular taxes or other impediments to the free market, but even free market warriors often, even usually oppose free movement of people. Yet, as the Economist claims: 'By one estimate, global GDP would double if people could move about freely', but that is 'politically impossible'. Look at Europe's confused response to the tide of refugees from the Middle East, or the attitude of relatively stable Middle Eastern nations to taking in their dispossessed brethren, or Donald Trump's plans to make Mexico build a wall along its border with the land of the free.

Regulation of housing is in many cities far more expensive than it needs to be, which makes life harder for young people than for generally wealthier older people. 'The old have always subsidised their juniors. Within families, they still do. But many governments favour the old: an ever greater share of public spending goes on pensions and health care for them.

'This is partly the natural result of societies ageing, but it is also because the elderly ensure that policies work in their favour. By one calculation, the net flow of resources (public plus private) is now from young to old in at least five countries, including Germany and Hungary. This is unprecedented and unjust—the old are much richer'.

In short: 'The young are an oppressed minority—albeit an unusual one—in the straightforward sense that governments are systematically preventing them from reaching their potential.

'That is a cruel waste of talent. Today’s under-30s will one day dominate the labour force. If their skills are not developed, they will be less productive than they could be'.

Read on here to see the Economist's suggestions to reform this situation. Specific remedies apart, young people need to vote, as they often do not.  And parents and grandparents might consider agitating for a better deal for their young descendants.

Investment ideas

If you need a second opinion on your investment portfolio, here is a view about Aussie equities from Henry's favourite fund manager.  The summary seems to be:  Avoid the banks and resource stocks and look to stocks developing or managing solid infrastructure projects or portfolios.

In the wider world of asset allocation, Henry advocates being long real estate (excluding flats in Melbourne which are soon to be a drug on the market), around neutral with prime  international equities and short the Aussie dollar. And remain aware that cash is king and if there are further substantial falls in equity values there will be glorious buying opportunities.

Above all, if you feel nervous find a sensible advisor to discuss these matters with, and if you are highly risk averse seek out a registered financial planner. Even such people are sometimes in thrall to particular managers or sectors, or even conmen. Your response to this risk, above all, should be to apply robust common sense to your financial decisions.

For reasons hinted at in the following graph showing the record indebtedness of Australian households, repay debt if you can and avoid new debt like the plague. (Further hint - what happens when interest rates double or even triple?)

If you are young, Henry's advice on the vexed question of becoming financially self-sufficient is here. Point 1 is 'Earn well', which has to start with getting a paying job.

Saturday Sanity Break, 23 Jan 2016
Date: Saturday, January 23, 2016
Author: Henry Thornton

Equity market carnage continues, albeit with Friday's relief rally which may soon be seen as a 'Dead cat rally'. There is an apparently growing sense that the Chinese economy is in serious trouble, the US economy may be headed for recession and there is not a lot of fiscal or monetary policy firepower around to provide stimulus. It's beginning to look as if the Icelandic PM who advised his people to learn to go fishing again during the GFC was on the money.

Henry's Raff Report is a start-of-the-year blockbuster, appropriately so given the sharpest decline in share prices in recorded history - but presumably not in 1929 - 1933. The Raff's focus is the price of oil, but here is a more general thought.

'Thanks largely due to the market’s fear concerning China’s economic stability 2016 has got off to a rotten start. If you think it’s bad now, wait and see what happens when the US economy looks like sliding into a recession, perhaps not a recession under the technical definition of three quarters of negative growth but a significant slump is due.

And: 'If the US is going gang busters it is difficult to account for the decline in net business investment in fixed assets that in nominal terms in 2015 was 10% below the start of this century, and in real terms down nearly 20%. And let’s not the mention the 102 million souls or 41% of the adult population that are not gainfully employed'.

After dissecting statistics on US jobs growth - very low in not-seasonally adjusted terms - and a look at China and several once booming 'BRICS' plus Roy Morgan's realistic Aussie unemployment rate - high and rising - the Raff summarises: '2016 is shaping up to be perhaps the toughest year in the Raff’s [long]working career'. Read on here.

But wait, it could be worse. What if, asks Thomas Friedman:
*  'We’re at the end of the 30-plus-year era of high growth in China,...
*  'The $100-a-barrel oil price era is over ...
*  'Average is over for countries? ...
*  'The rise of robots, software and automation mean that ['average'] countries can’t rely on manufacturing to create mass labor anymore, that the products they can make and sell can’t compete with Chinese goods, that climate change is pressuring their ecosystems and that neither Russia nor America wants to have anything to do with them because all either wins is a bill?
*  'The E.U. era is over? ...
*  'The era of Iranian isolation is over, just as the Arab system is collapsing and the two-state solution between Israelis and Palestinians is history?
*  'All this is happening when the two-party system in America seems to be getting most of its energy from the far left and the far right?
*.. 'What if the era of Iranian isolation is over, just as the Arab system is collapsing and the two-state solution between Israelis and Palestinians is history? How will all those molecules interact? ...
*  'All this is happening when the two-party system in America seems to be getting most of its energy from the far left and the far right? ...
*  'All of this is happening at a time when our government’s ability to stimulate the economy through either monetary or fiscal policy is constrained? And
*  'We’re having a presidential election but no one is even asking these questions, let alone “what if” all of these tectonic plates move at once? How will we generate growth, jobs, security and resilience?'

Wow! Thomas Friedman, you are the 'What if' thinker of the decade, even the century. Mark this report, dear readers, it will provide endless admiration for many decades to come. Read the full article here.

Climate Change

Seven eminant scientists have given permission for Henry to repost an article on the fallacies, as they see them, of conventional climate change science.  They conclude:

'In the context of the analysis in this submission of psychological research and new revelations of how bias can affect decision making, the Authors of this submission recommend the case for reduction of CO2 emissions is not well founded and certainly no Australian post-2020 emissions reduction target could be justified'.

The full article is available here.


Adam Creighton enjoyed The Big Short, or at least that is my impression. Henry saw the movie last week also and enjoyed it, so there are two expert judgments to consider.

Adam Creighton said: The Big Short, a film released in Australia last week, is an entertaining drama about the unravelling of the US mortgage market in 2007. But it is also, more subtly, an economic tragedy, a rolling catalogue of entrenched, insidious incentives that were bound to elicit disaster.

'Hollywood’s take on Michael Lewis’s book of the same title, about a handful of swashbuckling Wall Street traders who cotton on to the maleficent underbelly of global finance before most, is a must-see for anyone interested in what caused the greatest economic crisis in a century and how to avoid another.

'The traders’ multi-year quest to bet big on the implosion of the US mortgage market against the conventional wisdom revealed a hopelessly conflicted set of structures within banks, among banks, between banks and regulators, and between banks and other financial vehicles'.

I'd add two points.  The first is the block-headed attitudes of everyone, including Alan Greenspan, to warnings about the looming disaster. The second is the fact that when the massive bet against the US housing market began to pay off, the owners of the 'big shorts' had to battle and it seems accept a discounted value for their bold investment to get anything from the ashes of the financial sector.

Fiona Prior enjoys the musical magic of Joanna Newsom at Sydney Festival.

Image: Joanna Newsom on stage courtesy  of Prudence Upton/Sydney Festival


What a farewell it was for Little Lleyton Hewitt.  As is his nature he played his heart out and was beaten, but not bowed, by a high rated player.  Current superstars lauded him with praise, his kids came into the centre court to be with him, the crowd applauded enthusiastically following their massive applause, including several standing ovations, during the game. We wish him well for his new job as Captain of Australia's David Cup team.  His success will be Australia's success.

The other highlight of the Australian Open was Fernando Vadasco's (info here) massive first round victory over Rafael Nadel, reversing the opposite result in a 2009 final of some sort.  Both matches were games for the ages, as of course were Lleyton's grand slam performances and Davis Cup triumphs.

Australia's latest tennis hero, Daria Gavrilova, formerly of Russia, beat Kristina-Mladenovic in three hard fought sets, the final set ending only at 11-9. More here.

And tonight we see Bernard Tomic tackle John 'Gypsey' Millman. Do take in the article in the Oz on Mr Millman's 'long hard road to Rod Laver Arena'.  Millman's story reminds me of a cousin, named Hewitt (a relative of the superstar), who used to phone from Heathrow to ask if he could stay with Henry and would Henry pay the cab fare.  'Yes and yes', was the reply, and Coz Hewitt would trun up and sleep for 24 hours, then head off into the cbd to cadge shirts, shoes and on one memorable occasion a raquet, and work casually to rebuild his war chest.  When he was again financial he'd head off to India or some equally strange (to Henry) place to play tennis - and, incidentally, he always refunded the cab fare.

The Aussie ODI cricket team continues to flog the Indians who presumably are beginning to think the umpires are on the home team's side.  Maxwell's match-winning 90 plus innings saved the third game, and a sensational bowling performance saved the forth after the India's top order batters threatened to chase down 350 odd runs. Wow!  It is not the big bash but the mighty slog-fest.

The early week revelations by former Essendon coach James Heard did little to improve most people's views about the great AFL supplements debacle. Threats of class actions by the players are understandable and are likely to cost the club many, many millions. A friend of Henry, a previously loyal Essendon supporter, opined that the club was doomed, and indeed should have an administrator in place already. Guess there is no-one on the current board who even knows what that means.  ('Think Clive Palmer' gentlemen.) But they will in due course.

We are delighted to bring to our dear readers a short educational video.  This will be of special interest to foreigh people thinking of emigrating to the big brown land downunder.

Image of the week.

Courtesy: http://www.henrythornton.com/article.asp?article_id=6870

Sluggish growth - economics or politics?
Date: Monday, January 18, 2016
Author: Henry Thornton

'Income growth lowest in 50 years' screams the front page of the Oz. Today's press, at least at the quality end of the spectrum, expresses and disseminates considerable gloom. This is as it should be, and was warned about in the Oz, and on this site two-and-a-half years ago.  Now the vultures are coming home to roost.

Fortunately, a note of contemporary realism has come from an unlikely source, which we shall come to shortly. Why the government is not spruiking similar sober realism is uncertain to this humble scribe, but I guess that's the nature of modern politics - smile cheerfully, bag the opposition and hope something good turns up.

Sluggish Chinese growth is the main cause for concern, though some also fret about the US economy despite massive (low productivity) jobs growth. The state of the Chinese economy is as enigmatic as usual, with official estimates for 7 % growth in the year just ended widely mistrusted. Overinvestment, heavily indebted State Owned Enterprises, and therefore banks at risk, and an at best slow 'pivot to consumerism' seem to be the major causes.
Australian incomes are cut by cost cutting in most sectors, due in turn to still-falling commodity prices and chronic absence of wage flexibility. To the credit of those still employed, as well as worried employers, wage growth is very low. With the government's 'softly, softly' approach to budget correction and IR reform, Australia is effectively trying to maintain an unsustainable lifestyle. 

Henry's advice as to causes of the coming recession was simple: 'Put crudely, Australia has pissed the proceeds of the mining boom up against a wall of gullible voter expectation.  In the process, mining companies allowed their cost bases to expand to unsustainable levels. Cost bases expanded in sympathy in the non-mining parts of the economy in a climate of easier than desirable monetary policy and encouraged by those vainglorious spending programs of the Rudd and Gillard Governments'.

The cure was described also; acceptance of the fragile state of our economy and sober realism in government; leading to budget repair, cost reduction generally and reducing an uncompetitive exchange rate by introducing a tax on capital inflow. The market slowly but surely has got the exchange rate to a level that restores a degree of international competitiveness, but what will never be known is how many businesses went to the wall during the low, slow sinking. The Abbot government failed to sell a soberly realistic outlook and its attempted rapid budget repair in 2014 was rejected by the voters. Mr Turnbull's approach has included cheerful talk about the virtues of being an Australian at this particular time and a policy of 'softly, slowly, sustainably' about budget repair and IR reform and (the third 's') political success.

Henry's theorum is as follows: if fixing economic policy is needed, sell the concept and then move fast. Provided there is a generous welfare system in place, (as in Australia), fast adjustment will create less pain than the long, drawn-out recovery current policy seems to be aiming to produce.

The unlikely source of commonsense comes from Cardinal George Pell in Rome, courtesy of Tess Livingstone in an article headed 'Pell calls on rich to pay debt to future'.  What follows are quotes from Tess Livingstone (with single indicators) or Cardinal Pell himself (with double quotation marks.)

* 'Societies such as Australia were unwilling to admit they were living beyond their means and that immense national debts had to be contained'.
* “Naturally enough, political constituencies do not like sacrifices and this imposes severe ­restrictions on democratic governments, especially when they have to address the irresponsibilities of their predecessors".
* “The willingness to make sacrifices for future generations is even lower, although rarely articulated, and helps to explain the largely unfunded liabilities of many or most government pension funds.".
* 'The future belonged to those with children, he said. “And a final teaser: is there a link between economic stagnation and a declin­ing population, where there are too few taxpayers to finance welfare and pensions?".'
* "It is sobering to realise that someone around the US poverty level of $11,000 a year is in the top 15 per cent of world income distrib­ution and that the bottom 20 per cent of the world’s popul­ation earns less than $550 a year, despite the fact that the World Bank recently stated that the percentage of people across the globe now living in extreme poverty has fallen below 10 per cent for the first time," he said.
* “We no longer make a distinction between the deserving and the undeserving poor, but it might be useful to introduce a category distinction between the deserving and undeserving rich".
* “Big bonuses for executives who have presided over big losses seem incongruous — just as incongruous as having the same marginal tax rate for a doctor on £160,000 ($332,000) a year and a CEO on £5 million a year".

Do read the whole report, dear readers, and the full speech, which we have so far failed to find. (If anyone finds it, please send it to Henry here.)

To answer the question posed at the start: Sluggish growth is inevitable unless and until (1) the budget is on a clear road to surplus; (2) tax, welfare and industrial policies are reformed to encourage growth over complacency; and (3) there is clear articulation of the need for these changes and broad exceptance by the voters. Points 1 and 2 are economics. Point 3 is politics.


Saturday Sanity Break, 16 January 2016
Date: Saturday, January 16, 2016
Author: Henry Thornton

The hard-heads are coming out to play on economic reform.  Judy Sloan has pointed out that for all the talk of tax reform, there is no plan to cut the budget deficit. Today the estimable Grace Collier discusses the appearance of schemes to help Australians, especially those of us from minority groups (she includes males), get money to innovate and/or create businesses.

''Budget crisis? Forget it. That was a figment of someone’s imagination back in 2013, the pre-election Stone Age. It is 2016 now; we are in the post-election glory days. If your New Year’s resolution was to improve your finances, be pleased, because there has never been a more exciting time to be a rent-seeker. Cast your worry about public finances aside and put your personal pride in your back pocket. Get excited and put your hand out.

Our Grace adds: ''This is going to make you rich and save the economy. Happily, we can all do this the Australian way — with a hefty sense of entitlement to everyone else’s money. Various governments have helpfully collected it and are flinging it about with gay abandon. To get some, all anyone has to do is be good at filling out forms'.

Read on here. 

'Bring back Fightback' says Peter Van Onselen. ' Hewson’s package went a lot deeper than tax reform. It included far-reaching industrial relations changes, a complete rewriting of the welfare system and a doubling of the pension by way of compensation for older Australians. Hewson also sought to adjust (I might be being too kind here) Medicare. Universal healthcare got a major shake-up in Fightback. The point is that the document was designed to fundamentally redraw tax, social and industrial policies after a decade of Labor government. It was seeking to do so in a climate of recession, off the back of a period of record interest rates that had shocked the ¬economy.

'The time was right for Fightback, but it was defeated on the politics. Fear trumped hope.'

Pollies are used to heading for the hills whenever the 'F' word is uttered. Peter Van O appeals to the policy ambitions of the young turks in the government. 'With the likes of Christian Porter, Kelly O’Dwyer, Josh Frydenberg and Simon Birmingham moving into cabinet we are soon going to find out whether or not this next generation of Liberals are as good as they claim to be. Scott Ryan, too, as deputy cabinet secretary, gets to sit in on Cabinet.

Plus the odd hardened political warrior. 'And let’s not forget, with Arthur Sinodinos back on the frontbench and in cabinet as Cabinet Secretary, we are going to find out if he’s as good as he’s long been touted to be, from his time working for Howard'.

A colleague recently suggested debates on policy need to go back to Adam Smith.  His approach was to sort out the economics and then analyse the politics - hence policy analysis is always about 'political economy'.

Political ephemera

Take a walk down memory lane. Here is a link to the sayings of Treasurer/Prime minister Paul Keating. 

Not on the list is one from Henry's personal memory banks: 'Old jellyback's halfway between a shit and a shiver on this one'.


It is the silly season for footy (unless you follow 'futball', caller 'soccer' in this wide brown land). The Essendon 'supplements' saga has been well to the fore, with the banning of 34 players, threats of legal action against the AFL, the Essendon Club and who knows who, and ex-coach Hird writing at length in the Herald-Sun on how unfair it all is and why he personally needs share little or none of the blame - it was 'the system' that seems to have been most at fault, plus several other staff members who failed to follow orders.

The Indians are playing Australia in an ODI series and, despite the permanent loss of Warnie, Mitch, the Rhino,  the temporary loss of other top rated quicks and failure to pick Australia's  ruling off-spin maestro, a GOAT it seems, batting records have been set chasing down the India's two 300 plus totals.

Soon we shall be able to switch our attention to the tennis. Salt is likely to be added by bad behaviour from young potential superstars. Henry's fantasy is that due to a glorious late career flowering, and if necessary earthquake, mysterious injury or lack of normal form by the superstars, little Lleyton takes his third and Grand Slam final. 'Dream on Henry' chorus the younguns, 'He'll be lucky to make it to the second round'.


Fiona Prior has been to the movies and reports on Peggy Guggenheim: Art Addict.  Not to be missed, it seems, and we thank Ms Prior for giving readers the opportunity to keep up with the more innovative offerings.

Henry of course is on the side of his seat watching for the Oscars. Mad Max Fury Road has received 10 nominations, a record for an Aussie production.  The Revenant has 12 nominations, but in Henry's view, having seen it, tighter editing to remove hard-to-follow subplots would have turned it from a good movie to a great movie.

Still, most of the voters are Americans, so don't hold your breaths, possums.

Image of the week.

Courtesy The Oz

Supplements: sport, academia and corporate culture
Date: Wednesday, January 13, 2016
Author: Henry Thornton

Very sad really. Thirty-four elite footballers banned for playing for the 2016 season. According to today's press, one senior player protested and a junior player and his Mum checked the relevant supplement on the Internet and believed it was ok. Football, of course, is a TEAM game. Players follow the advice of the coach or get the chop. In this case neither the coach nor the administration of the once great Club accepts any responsibility for the debacle.

There are plenty of equivalent issues in the academic and corporate worlds. Staff at many universities privately protest that academic standards have fallen. Henry receives regular grumbles at the prevalence of overseas students who can apparently barely speak English, and/or have made plaigarism into an art form.  Yet their seniors insist that most of the relevant students receive a passing grade because, you guessed it, the university relies on the full fees that the young people pay for the privilege of gaining an apparently respectable Australian education.  'Easy passes' = Academic addiction.

Of course, this is not the practice everywhere in this wide brown land but anecdotal evidence suggests it is quite widespread. Is there no state or Federal body conducting audits of this matter?  Or do we accept that 'the market will prevail' in this vital area of training and accreditation.

In corporate life, a similar cone of silence is maintained. 'Cut costs by 10 %' orders an incoming CEO. 'I already cut costs in my division by 10 %' says the slightly earlier arrived divisional Managing director. 'Cut them by another 10 %' demands the new CEO.  The clear message is do it or face the sack, so the job is done, no matter at what cost to morale, ability to grow the business or otherwise run an efficient enterprise. 'Mindless cost cutting = corporate addiction.

Neither a university nor a corporation is a democratic institution. Both sorts of enterprises are more like an AFL football club.  The signs have all long been there about the AFL's drug problem. Henry as a 15 year old was regularly given a shot of whisky before the game, and in finals also at three quarter time. There was the young star whose drug of choice was cocaine, which perhaps explained why he could run harder for longer than other players. Now we have the supplement's saga and one presumes a similar approach has been followed at other clubs that employed the now infamous Supplement's Meister.

In 2006, Henry's assistant, Luke Griffith, entered the fray. Here is Luke's final article on the issue, written in March 2007 and headed, 'AFL up a murky Creek'.  The signs were clearly there, and Luke demonstrated just how weak was the AFL's early attempt to address the issue.

As in football clubs, Corporate culture vests great authority in the CEO. Corporations Law has cleaned up much of the wild west corporate culture that one can learn about in histories of corporate life, but within the strict limits of the law much oppressive and often damaging behaviour is sanctioned, even demanded. Indeed, one can ask how the inherently despotic corporate culture can allow diversity to flower, and is it just a matter of allowing short-term profit maximising to sort out good behaviour from stupid corporate behaviour. Like that in the once-great Essendon Football club.

Related articles.

David Kemp, 'Good goverance and Liberalism'

Gary Morgan, 'Truth, democrcy and the Commonwealth'.

Henry Thornton, 'Democracy and global business'.

Saturday Sanity Break, 9 January 2016
Date: Saturday, January 09, 2016
Author: Henry Thornton

The week has raised the thought, by the slower thinkers, that the Chinese economy may be in more trouble than so far expected. As a result, China's share index and exchange rate is taking a beating. Other major share markets have followed, and the silver lining for China must be the evidence that their nation is undoubtedly globally significant. The leadership group will be focussing on the clouds, of course, and all one can say is 'Welcome to Capitalism 101, gentlemen'.

North Korea has made its play to be globally significant and in its case as a pest.  Exploding an H-bomb, or an A-bomb masquerading as an H-bomb, either way it is no way to make friends.  One assumes China may be the best country to sort out the lunatic that runs the joint but what a pity for the loyal subjects.  Like the citizens of East Germany, one hopes when the borders are finally abolished the people of North Korea will realise they have been lied to for decades.

Here we have been affronted by the foolish antics of that cricket player who thinks it is clever to have fun with young female journalists. Kudelka showed us just how lucky we all are.

Of course we have larger problems than Mr Gayle. House prices in Sydney and Melbourne seem to have slowed and may even be falling. Commodity prices are still falling and global asset prices, especially prices of shares, are taking a beating. Australia's income recession will continue and owners of self-managed superannuation funds are getting poorer every day the rout continues.   The silver lining is that there will be less wealth for the lefties to rip out if Labor ever gets to form a government again.

Malcolm Turnbull and the coalition he leads still ride high in the opinion polls.  Good work is being done to foster a debate about tax reform, but there is still no focus on reining in the debt and deficit. Critics are emerging, such as Judith Sloan who earlier this week started a column as follows: 'I’m calling it here: the Turnbull government is a big spending, big taxing government with no real intention to pare back the growth of government spending, let alone cut it.

On the ever-widening debate about inter-gender skirmishing, Bettina Arndt said: 'It was great seeing McLaughlin so clearly able to handle Gayle’s banter — it’s a fine example for younger women to see such a confident professional woman able to bat off this type of flirtatious nonsense.

'Equally, last year many people enjoyed watching Maria Sharapova flirting with a male reporter, telling him: “I was just admiring your form.”

'Such harmless flirtation is not sexual harassment and luckily there are many in our community who resent the constant intrusion into enjoyable male-female interaction by thought police determined to stamp out any hint of what Helen Garner famously described as “Eros — the spark that ignites and connects”.' Read on here.

Henry hastens to present his own credentials in gender politics.  In the 1980s he appointed the first woman to head a section in the RBA's Research Department.  In the 1990s, as CEO of Norwich Union's Australian business, he persuaded the parent entity to appoint the first woman to the local board. As a professional director he has presided over companies with female CEOs, almost always appointing female directors, and in one case blessing the CEO's decision to appoint a majority of female staff.  Most recently as Chair of the Interim board of the Innovative Manufacturing CRC he arranged the nomination of three splendid lady directors but sadly only one (out of seven) was elected by the mostly academic members. (This venerable mob did not elect Henry either, so being socially aware cut no ice with the relevant voters.)


Fiona Prior has seen a nice movie called Youth.  She opens her review as follows:  'If you’d enjoy a hypnotically languid and blackly amusing film to begin 2016 you could do a lot worse than director Paolo Sorrentino’s Youth which conjures a similar spell to his Oscar winning film The Great Beauty (2013)'.  Continued here.

Henry greatly enjoyed the new Star Wars blockbuster, reviewed here by Fiona.

A book titled The Unknown Universe, by Stuart Clark provided much food for thought and again demonstrated how much more scientific is Physics and Cosmology than is economics. Here is a YouTube presentation by Mr Clark. https://www.youtube.com/watch?v=zvCWUkARnFA

If you are interested in the likely fate of the Eurozone, here is a summary of a discussion by another Clark, Professor Gordon Clark of Oxford.

With Mrs T Henry has been watching Deadwood, a TV series from the distant past about the even more distant past. If you like to read about gold 'camps' (proto towns) in the Wild West, and do not mind constant use of the 'F' word and the two 'C' words, you will greatly enjoy this series.

And, to prove Henry is not just a cowboy fan, here is an item from the archives, about a visit to (one of) the Getty Museums in LA, dug out to send to an offspring currently visiting that fine, if smoggy, city.

Cricket'n'cricket'n'cricket, etc.

It has been a great summer for cricket tragics, at least until the third test against the Windies was washed out last week, just as the Calypso kids began to show some real grit. Meanwhile the more senior Windies lads were enjoying the big bash, salted for one of the boys by crude attempts to haze female jounos, as already noted.

Now the Indians have arrived though Henry is uncertain if they are to play the long (test match) cricket, the short (T20) or the merely ugly (ODI) form of the game.

Roll on the tennis is Henry's view, and as soon as that is over it will be time for the footy. Caaaarlton! seems to have recruited well enough to begin the long march to top eight, the venerable club's only legitimate aspiration given the quality of stars given away in the time of Mick the Merciless.  It begins to look like Mick's arrival at the club was the first step in a long-planned, deeply considered plot to take the Blues out of the ranks of powerful AFL teams.

Image of the week


Courtesy The Oz (both images)

The Year of the Monkey
Date: Monday, January 04, 2016
Author: Henry Thornton

The Year of the Monkey (or is it the snail?) is likely to see volatile markets, low overall growth and continued low goods and services inflation. Tending perhaps to actual deflation, as has been the case for most commodities. We have already seen panic, and there is more to come.

Growth is predicted to increase in the USA, lead by consumers encouraged by strong jobs growth, some post-crisis debt repayment and the steady, apparently predictable, monetary policy followed by the US Fed. The Eurozone is still wrestling with how to create growth, and there is increasing discussion on whether or not the Eurozone currency union represents a serious design flaw. Japan, like the Eurozone, still flooding markets with liquidity, should also register modest growth.

Chinese growth should be higher than the global average (which is likely to have a 3 in front of the number for real GDP growth). India is now growing faster than China, while Brazil and Russia may at least stabilise economies whose production levels fell in 2015.

Optimists see some recovery in commodity prices in 2016. Pessimists, who have been defined as optimists with experience, generally expect further falls in commodity prices, which would further reduce incomes of commodity exporters like Australia, Canada and Brazil.

Excessive levels of debt provide a systematic handicap to growth, a risk that will grow as global interest rates normalise. On current indications the US Fed will take two years to get cash rates to a more normal 5 %. Whether global debt growth  is reined in by the end of 2017 must be doubted. It is possible to envisage a grand global agreement to write off (or write down) debt.  Creditors would resist such actions but with debt reduction improving ,prospects for global growth the debtor nations may have unusual bargaining power.

Australia is an interesting case study, with household debt around 160 % of household income. Despite this, the government's new year message is to hail households as a major engine of growth.  With commodity deflation reducing incomes, increased household spending will only be funded by additional borrowing. 'Que?' as they ask in Barcelona.

The Economist, an optimist about commodity prices, is skeptical about China's economic performance. 'The odds of a genuine crisis in China in 2016, triggered by some combination of soaring loan defaults, bust banks and collapsing investment, are at least one in three, the highest in a generation.  And a crisis for China would mean a crisis for the world'. (Leo Abruzzese, 'Submerging World', The World in 2016, The Economist.)

In such a world, can equities keep rising? Henry has been raising cash in expectation of a substantial equity market correction. This has involved some opportunity cost. But there is a mantra of the Rothschild dynasty overheard recently. 'Why are you so rich?' asked the interviewer, 'By selling too soon' responded the Rothschild.

References plus an extract on global economic policy from the BIS, available here.

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