Date: Thursday, September 22, 2011
Author: Henry Thornton
'Asian stocks were mostly higher after a choppy session on Wednesday, with a U.S. monetary-policy meeting on tap for later in the global trading day and with European sovereign-debt woes never far from the spotlight'.
The Wall Street Journal reported late yesterday that Hong Kong's Hang Seng Index fell 1% to 18824.17, while the more volatile Shanghai Composite Index jumped 2.7% to 2512.96.
The Nikkei Stock Average rose 0.2% to 8741.16 in Tokyo, the S&P/ASX 200 index advanced 0.8% to 4071.80 in Sydney, India's Sensex fell 0.2% to 17065.15 and the Kospi climbed 1% to 1854.28 in Seoul after seesawing earlier in the day.
"Investors are waiting for more news on Europe and for the Federal Open Market Committee meeting," said Ben Kwong, chief operating officer at KGI Asia. "The trend remains uncertain, and sentiment remains cautious."
Sadly, however, Wall Street reversed this trend overnight, despite rumours of the US Fed introducing 'operation twist' for the first time since 1961.
Robert Gottliebsen reports that CCB International Securities managing director Paul Schulte, publisher of the CCBIS-China Credit Monitor, has agreed to keep him updated on changes in China banking.
'Last night', Gottliebsen said, perhaps helping explain Shanghai's market surge, 'he sent me important news saying that it looks as if China may now be joining the growing number of non-Western countries that are loosening in the face of Western economic stagnation.
“After 16 months of tightening, we are seeing an easing in the lending attitudes of the banks. More banks are expecting an increase in loan approvals. Demand for loans remains strong”.
Northern hemisphere eyes are mostly switching nervously between the Euro debt mess and the US Fed's meeting, where the smarties are hoping Ben Bernanke finds yet another way to spread global inflation.
Henry is leaving early today (Thursday) to travel to Sydney to the conference of the NSW branch of the Economic Society.
Stay tuned, there is sure to be interesting gobbets of fresh analysis to report.
And please consider booking for the launch by the Hon Andrew Robb of Henry's e-book version of Great Crises of Capitalism. Apart from a rattlin' good time, you will be sure to better understand the lessons of history as the world grapples with the biggest economic and financial crisis this generation will face, if we are lucky.
BHP Billiton Chair Jac Nassar and RBA Deputy Chair Ric Battellino gave relatively cheerful accounts of the future of the company and Australia respectively.
And well they might, so long as China powers on.
Saturday Sanity Break, 16 May 2015
Date: Saturday, May 16, 2015
Author: Henry Thornton
Terrible situation with Asylum Seekers to Australia's north. Much worse than that for the Asylum seekers who try to get to Australia - we pick them up, feed them and house them, provide medical attention, etc, and find them a new home or send them back to their old home. Surely now the time is right for a regional solution in which the Australian approach is adopted by all and there is similar treatment including serious attempts to put the people trading on human misery out of business.
The budget seems to have been well received though alleged descriptions of 'double dippers' for parental leave schemes as 'rorters' or 'fraudsters' was a welcome diversion for the opposition. The underlying issue here is whether one as a minister is entitled to obey 'the rules' or do what is morally preferable. But as Henry's grandad used say, people in glass houses should forebare to throw stones, obviously.
The government's budget seems based on two propositions, one unstated. Unstated is the possibility that commodity prices might recover, although there is also the possibility that they fall further. Assuming the tougher elements of budget 2014 do not get through the Senate, and any new attempts to remove goodies this time around are blocked, the hope of a return to budget balance is based on 'bracket creep', the automatic tendency of taxes to rise as inflation raises incomes.
Labor, however, in the dulcet tones of Bill Shorten, propose vast new spending plans without saying how these plans will be consistent with a return to budget balance, let alone surplus. One is forced to conclude that Labor's big spending on the national credit card is unaltered and that the opposition is uncaring about any solution but 'soak the rich', meaning anyone (not a politician or a senior public official) who has accumulated sufficient assets to enjoy a decent retirement. This would be easier to cop if Labor promised it would tax pensions of Pollies and public servants at the same rate as folk not in the receipt of pensions funded by taxpayers.
We also present this week a lovely article on 'Family Tax Equity' by Henry's political correspondant Gary Scarrabelotti.
'Think equity. If a middle class member of a two-income family that already benefits from two tax-free thresholds (or $36,000 tax free income per annum) gets paid welfare to go to work, then why can’t a single-income family split its income and have the same tax-free income while saving the state the cost of childcare?
'I mean, you’d have to be dim not to get the point. And I don’t think that dim people lead the government. Oh, sure, they made some almighty blues in 2014, but they want to be re-elected. That’s why I’m confident that, in 2016, Tony Abbott, Joe Hockey and Scott Morrison will deliver on a fairer tax treatment for single-income families'.
But Graham Richardson has taken the prize this week, with his brilliant satire on the 'double dipping' issue and the 'entitlement' mindset.
'How could I have been so bitterly critical day after day, week after week, column after column of such a good and decent man?
'God bless the Treasurer, who not only has a deep, firm commitment to middle-class welfare but a fundamental acceptance of the need for upper-class welfare as well.
... 'As a sole trader, with a turnover of less than $2 million a year, unincorporated but having an ABN, I am a big winner. Until June 2017 I can deduct assets that cost less than $20,000. I can replace the family’s nine-year-old Toyota Aurion with a three-year-old version as long as it is used in the business. A new computer and a range of new office equipment also beckon. No wonder Gerry Harvey has a spring in his step.
'I will have no trouble in providing the tax man with invoices for $40,000-$60,000 in that period. For the next two years I will get an extra $20,000-$30,000 in the hand — but wait, there’s more. I am eligible as well for a tax offset capped at $1000 a year for the next couple of years.
'While I earn less than $2m, I would be less than truthful if I didn’t concede that I earn a little more than the average citizen.
'Upper-class welfare does not end with me, though. There are well to do couples earning up to $400,000 a year out there who will happily accept government handouts for childcare'.
Gor blimey, comrades, maybe Henry can get his snout in this trough.
Image: Courtesy of the photographer and Sydney Theatre Company - Boys will be Boys
Image of the week.
Courtesy The Oz
Saturday Sanity Break, 9 May 2015
Date: Saturday, May 09, 2015
Author: Henry Thornton
RBA drops forecasts, what a shock! Australia's budget is in the danger zone and our cost structures are way over any sustainable level. Australian peoples' greatest economic concern is becoming unemployed and there is great apprehension about next week's budget. Most people are fearful it will remove some benefit, while a few of us are worried a compelling path to surplus will not be demonstrated. Failure to drop forecasts, now that would have been a real shock.
Peter Costello has reminded us that he produced ten surplusses in a row. His budgets were helped by the biggest mining bonanza the world has ever seen. The only other Australian treasurer to produce a budget surplus since the war, Paul Keating, produced his surpluses because he was especially well advised and had the force of personality to do something about it.
Joe Hockey has identified the 'Age of entitlement'. Grace Collier today sums up the attitude of a prototypical Aussie battler so well. 'Oops, I have found myself with no job, no money, 15 children, an ice habit and three of my teenagers are involved with Islamic State, what is the government going to do about it?'
Collier continues: 'I wish our leaders had some sense of how people outside the Canberra bubble feel. Our small population has to support three layers of expensive government. Substandard people are able to enter politics or the public service and suck huge amounts of money out of the system for themselves at levels they’d never earn in the real world.
'Politicians can retire early and live out their days on a pension that requires between $5 million and $6m apiece, an amount even an extraordinary achiever would struggle to amass in a lifetime. Our Prime Minister earns significantly more than the US President. An affluent public service is addicted to annual wage increases of 4 per cent.
The big economic news this week was a global bond market rout which sent money market yields sharply higher and equities prices lower. Global oil prices have lifted. Signs of long awaited increases of US wage inflation seem to have allayed fears of extreme deflation. Sharemarkets were propped up by so-called 'Quantitative easing' (QE), near zero cash rates and low bond yields. The US Fed has yet to test the waters of a gradual return to sensible cash rates. The RBA is participating in the 'currency wars', spending ammunition (rate cut opportunity) and credibility. US Federal Reserve chair Janet Yellen said this week, 'there are potential dangers in all this'.
The editor-in-chief of the AFR, Michael Stutchbury, yesterday in a long article in his newspaper's Review section looked at our post-1970 booms and busts. His sobering conclusions should be the BBQ stopper of the year.
'The history of Australia's great prosperity is also the story of how this commodity-exporting and capital-importing economy at the foot of Asia has ridden the two great industrialisations of the past half-century, Japan and then China, now our two biggest export markets. Both booms helped make us rich. But they also politically overinflated our expectations before running into global crises - the stagflation of the 1970s and the extended financial crisis from 2008. Once again, Australia's economy is underperforming our closest developed-world peers. Our jobless rate is back above America's; our budget deficit is bigger than New Zealand's, our economic growth last year was below Britain's'.
Clearly what is needed is some far-reaching economic reform. Every responsible economist, notably this week ANU's Warwick McKibbin, has pointed out that continued falls of Australian cash interest rates are not the answer to the heavy headwinds our economy is battling. The only sustainable approach is a combination of a credible approach to return the budget to surplus and widespread economic reform.
We hope that Tuesday's budget will deliver a credible budget and we offer a plan for economic reform here. We sincerely hope that our government can somehow muster the courage and communication skill to pull off this difficult double. For all our sakes, we fervently hope that we do not have to wait for a nasty crisis to get on with highly desirable economic reforms.
And did Smokin' Joe really tell us to borrow money and spend? Has nobody told him that household debt is 150 % of household income and when interest rates rise many households will be in deep doo doo? Not to mention the massive government deficit. We are a country already deep in debt, and global interest rates must begin to rise soon.
Mad Max is back! And opens soon on a big screen near you. Here is a trailer. Henry's reviewer, Bert Thornton, rated this movie highly - 'road rage in the outback; not to be missed'
The surprise win by the Conservatives in the UK has shown that the polls can be horribly wrong. Just maybe this is happening here. Say you're voting Labor to keep the fire to the feet of the gummint.
A weekend of surprises in the footy, especially GWS toppling Hawthorn, but also the Saints beating the Bullies after the greatest turnaround in living memory. Most of the rest went as expected and Henry will not be watching on Sunday when the Blues take on Brissie.
And did Smokin' Joe really tell us to borrow money and spend? Has nobody told him that household debt is 150 % of household income and when interest rates rise many households will be in deep doo doo?
Image of the week
Courtesy The Oz
Date: Thursday, May 07, 2015
Author: Henry Thornton
Henry's favourite fund manager (FFM) concluded a fine presentation two days ago by saying: 'We are still in a sweet spot for equities'. This was despite a conclusion that it is too soon to load up again with resource stocks and banks were still ok despite Westpac's slight fall from grace as Mr Hartzer settles in. And the possibility of Australia slipping into recession.
That is the summary, dear readers, and it supports Mrs Thornton's relative optimism rather than Henry's relative pessimism. There is a very interesting question that came at the end of the meeting that I shall leave until the end, but it deserves to be answered, or at least pondered.
Henry's FFM divided his presentation into five themes, and my report follows that format. There was what Henry regards as a proper focus on measures of optimism and pessimism, including some measures Henry had not seen before.
1. The Millenials.
These are young people who became adults at the start of the new century and who so far have had a poor suck of the sauce bottle. A story was told of a member of the FFM's firm who once attended a reunion at his old school of Eton. Peole were in tents according to their year of attendance by decade. Those in the 1920s were partying like there was no tomorrow. Those from the 1930s wore somber suits and frowned a lot. Etc, etc,
Given the ages of all concerned, this story was apocryphal but it struck a chord with the largely baby boomer audience.
Millenials in the USA went from a 79 % employment rate in 2007 to below 74 % in 2009 and recovery has been slow, to only 76 % in 2014. Student loan delinquencies have risen sharply since the GFC and are now hovering at 55 %. Millenials who are employed are clinging to their low-paid jobs and keep most of their modest assets in cash .Net household formation fell sharply in 2007 but has just shot up - a sign of better times ahead perhaps.
The 'Economic Surprise' Diffusion Index (below) showed positive surprises in 2014 in the USA and negative surprises in Europe. This pattern has been reversed in 2015 as the US economy slows seemingly almost to a halt and the Eurozone shows some recovery.
The bottom line? 'Households are not responding in the traditional fashion to jobs, oil price, low interest rates. This means the Fed in on hold (possibly for longer than anyone thinks.
2. Australia living beyond its means.
The FFM asked if anyone present could remember very high interest rates in Australia. Only the baby boomers could - 1992/3 when even the trams in melbourne were touting for business, which Henry felt was of sufficient interest to so inform Bernie Fraser.)
We were shown a graph in which debt as a ratio to household disposable income had flattened at 150 %. A similar statistic for the USA had also reached this fuigure but had fallen to around 100 % since its peak. We were invited to imagine what would happen if interest rates doubled from current levels.
Another storm warning was the ratio of dwelling prices to household income, a monsterous 10x in Sydney compared to London and New York at 6x. Another graph showed Real Median house prices in Melbourne twice the level of Melbourne prices in 1890, which was followed by the great depression of the 1890s.
We were then shown a few graphs from the Intergenerational Report (IRG) that quite blunted appetites for the fine lunch provided.
We were presented with a list of 'Which promises will be broken' by governments'. This had ten items on it, starting with 'Aged and Service pensions' and ending with 'Infrastructure Spend'. Henry refused a second glass of Shiraz.
The bottom line? 'Tough times ahead structurally as well as cyclically', or 'Recession likely'. This means interest rates and government bond yields likely to head lower and possibly for an extended period of time.
3. Oils aint oils.
The price of crude oil has returned almost to its level in late 2008. Crude oil in storage has been rising since 2004 and recently took a massive leap upwards. A measure of speculative long position was rising from 2003 but has just plunged, suggesting perhaps that the oil bulls have just rolled over.
Bottom line? The very best oil companies may be worth buying soon, but not yet.
We were told there were some 'green shoots' emerging. Greek risk is so far contained and there is a '$1.2 trillion liquidity pump from the ECB.
Bottom line? The Eurozone situation is 'supportative of risk asset generally', and the USA QE material in the next section will show why this is a supportable conclusion.
Our host had a lot of fun with a photo of the Greek Finance Minister as Mr Spock.
5. The search for yield.
We first looked at some horrendous graphs of government bond yields from the 1700s until now. In the USA and the UK these yields peaked at around 16 % in the early 1970s and are now not much above zero. In Japan and Switzerland, current bond yields are around zero, in the latter case negative. 'how can they be negative?' asked a participant. 'You pay the government to mind your money for a decade, say, and there is a chance you will get most of it back', said an old reptile. 'Tell that to the Greeks' was the obvious reposte.
A nice graph showed how the USA Fed Funds rate has led the bond rate down from the early 1990s but showed just how abberant is the 6 year near zero rate. Another dramatic graph (below) showed how the series of 'Quantitative easings (QEs) have been strongly correlated with successive surges in the US S&P index.
Whether stocks will continue to rise if the US Fed merely delays rate rises is one of the great questions for investment managers and their (nervous) baby boomer clients.
Bottom line? 'Quality high income producing securities remain attractive relative to alternatives and inflation'.
Readers must draw their own conclusion from this and similar presentations. Henry's FFM made no recommendations and neither does Henry. Seek independant advice from a licenced financial planner, provided he is not using your money to play churn and burn.
Henry shall remain nervously long equities - mainly in stocks with good yields - while thanking his lucky stars that the Thornton family put a fair proportion of equities offshore when the Aussie dollar was $US 1.05.
But a final question remains unanswered. 'The Future Fund has over $100 billion of investments and holds only 10 % or so in australian equities. What does Peter Costello know that we do not?
Low wages - blessing or curse?
Date: Tuesday, May 05, 2015
Author: Henry Thornton
Australia's budget deficit keeps rising as commodity prices fall, previous spending commitments keep on rising and wage inflation keep on falling. Canada shares with us the first challenge, most countries share the spending blowout and just about everyone has falling wage inflation. It is some time since we lauded ourselves as the 'miracle economy'; hubris has turned to nemsis.
It is probably cold comfort, but many other nations are suffering with low wages growth, in important cases, negative in 'real' (after inflation) wages growth.
The Economist has investigated this matter, and the resulting article is worthy of being publicised. Quotes are from the venerable mag. The dramatic first set of facts are: * 'Despite five years of growth American real wages are still 1.2% below what they were at the beginning of 2009. * 'In Britain, real wages fell every year between 2009 and 2014, the longest decline since the mid-1800s. In 2014 median pay was 10% below its 2008 high. " * 'Germany, a haven during the euro-zone crisis, has done better, but wages are still 2.4% below their 2008 level'.
The graph is worthy of careful study.
Many advanced economies have shared America's experience. From the second world war until 1960, wages rose in line with productivity and from 1947 to 1960 both rose by 51 %. Since 1960 productivity in America has risen by almost 220%, but real wages by less than 100%. This is a major contributor, on top of rampant asset inflation, for the dramatic rise of inequality that concerns some economists and most merely human people.
'Scholars seeking to explain this decline in the labour share reckon a number of big forces are at work. One is that the income from capital—especially from housing—has been increasing more than the income from labour. Another is that, in many industries, capital goods have become a lot cheaper and/or better. Bosses can choose whether to spend money on machinery or people, and declines in the price of the kit required for a given amount of output—which can come about either because existing machines get cheaper or because new ones can do more—reduce demand for labour.
'Globalisation can reduce the demand for rich-country labour, too. Michael Elsby of the University of Edinburgh and Bart Hobijn and Aysegul Sahin of the Federal Reserve have shown that in industries where imports became a more important part of the supply chain between 1993 and 2010 the labour share fell the most. And the decline of trade unions reduces labour’s bargaining power. The share of the American workforce unions represent has fallen in every decade since the 1960s, and similar declines have been seen across the G7'.
Another important factor beloved of economists is the old 'Phillips curve'. 'The usual assumption is that once unemployment gets below a certain rate, idle labour becomes scarce and competition to hire already employed workers heats up'. Australia's unemployment is still rising, and one survey says people's greatest economic concern is fear of unemployment. But in many developed nations, unemployment is now falling, in some cases below the so-called 'natural' rate of unemployment that used to signal rising wages.
'There is evidence' says the venerable organ, that wages might now be shaking off their sloth. 'In late February IG Metall, Germany’s largest union, brokered a 3.4% raise for its members, well above the current inflation rate, 0.3%. The latest British data show average salaries up by 1.7% in a year; with inflation close to zero this is a decent real-terms rise. In America, average real pay is up by 2.2% over the past year. If this continues as unemployment falls it would mean a return to pre-crash normality, with sustained wage inflation eventually triggering central-bank interest-rate hikes'.
But there is another possibility. 'It may be that the damage this recession did to the labour market—the loss of skills and the mismatch between industries where workers have experience and those where there are vacancies—is being expressed not in the form of long-term unemployment but as lasting low pay'. If this turns out to be the case, it will help lock in low inflation. I would be very surprised if the RBA board did not consider this possibility at its meeting today.
If lasting low pay keeps inflation and interest rates low, it may come to be seen as a blessing. If it merely allow capitalists, and highly skilled workers, to grind the faces of unskilled workers, it will be a curse and there will be retribution
The full article discuss several related issues that will delight the specialist. Many economists, including Henry, see 'more flexible wages and prices' as a desirable way to achieve optimal economic outcomes. The Economist has a final warning in conclusion: 'Work must be a route out of poverty, not a way to stay stuck in it. To that extent new political interest in stagnant and falling pay is welcome if it really boosts what poorly paid workers take home while not deterring job creation. But although the new world of ultra-flexible labour markets has its flaws, those on the left looking for a restored rigidity are playing a dangerous game: the unemployment that could result would help neither those rendered jobless nor those scraping by'.
Saturday Sanity Break, 2 May 2015
Date: Saturday, May 02, 2015
Author: Henry Thornton
The RBA board meets next Tuesday and seems poised uncertainly between another rate cut and leaving monetary policy unchanged. The brutal fact is that further cuts in interest rates will penalise retirees, add further fuel to housing markets and fail to ignite a broad-based economic recovery. All that can really help the Australian economy is a dose of far-reaching economic reform. Here is Henry's prescription, with several colleagues, a submission to the Newman committee.
'How much do you need to retire?' asks the AFR. 'More than you might have thought a decade ago' and 'much more than most Australians are going to have accumulated' are the general answers. Imposing a modest tax on pensions for the 'rich folk' - those who have worked hard and saved a lot, despite horribly high marginal tax rates - will simply force effots to become self-sufficient into other channels, such as negative gearing.
The Abbott government is going to revive 'Rewards for elderly to stay at work'. As an elderly person still at work, Henry applauds this idea in principle, without any expectation that he will receive any of the tax-payer-funded-lolly himself. Of course, taxing those still at work in order to subsidise the employment of other elderly persons is the sort of tax'n'welfare scam that bedevils the western world's economic system, and helps to explain why we can expect slower growth in future. Especially if real reform is not forthcoming.
While agreeing that keeping the elderly in work is a good idea, the rate of unemployment among the young is at least 20 % and rising. (In addition, some of the best young folk are working for nothing as 'Interns'.) Again we must insist that thorough-going economic reform is the only way for Australia to avoid the low growth future that major 'developed' nations are facing.
Another weekend announcement is that there is to be a 'Hit on foreigh property buyers'. Henry has half a cheer for this. It is in fact a large but clumsy tax on a particular form of capital inflow. Far better would be a broad-based tax on all capital inflow, at a much lower rate, as advocated by Henry over two years ago - link here.
The new large but clumsy tax on capital inflow to buy property will of course inhibit property development, at a time when rapid house price inflation in Sydney and Melbourne is worrying all who think hard about their children's future, and that of their children's children.
Tony Abbott has said taxes should be simple, fair and as low as possible. He will eventually see the point of his new property tax, but far better that had happened before the latest bright idea was announced. There is an emerging pattern of bold announcements followed by sad backflips that should be overcome by serious thinking in advance of announcements.
Fiona Prior visits Beckett’s tragi-comedy masterpiece Endgame. You will laugh while you look for the razor blades! Read more here ...
The liquidation of two Australian drug dealers in Indonesia has excited Australians more than most judicial events in recent weeks. Three things upset Henry in particular, apart from the final barbaric act. The disrespect to the family, especially on the last day. The official refusal to let Messrs Chan and Sukumaran be comforted by their own choice of religious advisors immediately before their executions. And (if it is true) that Indonesian law allows clemancy for those who are genuinely rehabilitated, as these men appear to have been.
The massive earthquake in Nepal shows just how uncertain life can be. One hopes Australians are especially generous in their donations and even that perhaps a fair bit of our assistance to Indonesia could for this year at least be channelled to help the Nepalese recovery.
This said, our difference of opinion in the matter of execution of people who have committed horrendous crimes was handled well by Tony Abbott and Julie Bishop.
There are also some sensible post-execution comments from Indonesia, and it looks possible that mutual damage will not be the ongoing result of the cultural fault-line revealed by this tragic matter.
To move to far more trivial matters, last night Caaarlton! was absolutely flogged by old enemy Collingwood. Watching the game on TV, even Henry's Collingwood-supporting mate was sympathetic. Unless and until Caaaarlton! shows some fight, Henry shall refer them as 'the blues' to represent the feelings that they arouse in loyhal supporters' minds.
The week leading up to this flogging Caaaarlton!'s supercoach Mick the Merciless has been filled with conjections that he is about to quit, or be fired by an even more ruthless board.
So far this AFL season has confirmed the power clubs - Fremantle, Port Adelaide, Hawthorn, Essendon, plus several others (compared to the blues).
The Bombers have been cleared due to lack of concrete evidence that banned substances were injected into their players but face another hurdle. Totally logical when thought about, WorkSafe Victoria is investigating. There is no doubt that a variety of substances were ingested by, or injected in, the players.
Lack of evidence of what "pharmacologically experimental" substances were given to which players was a key point that frustrated ASADA in its attempts to prove banned substances were provided. Henry is no lawyer, but the fact that there is no record of which players got what substances might be construed as a violation of practices in a safe work environment.
It's going to be a bleak winter in the Thornton household.
Image of the week.
Courtesy The Oz
Storm warning and protective policies
Date: Wednesday, April 29, 2015
Author: Henry Thornton
'Reserve Bank of Australia governor Glenn Stevens has warned financial markets are at risk of a major shock linked to a capital flight from emerging markets that could take off just as assumptions about global liquidity are tested.
'The governor highlighted two potential scenarios that could combine to "heighten fragility" after years of yield-seeking by investors coinciding with the rise of the giant asset manager and monetary stimulus.
"From the vantage point of most central banks, the world could hardly, in some respects, look more unusual," he said in an address to the American Australian Association in New York on Monday. "That central banks have had to take such extraordinary measures speaks both to the severity of the crisis that these countries faced and the limited capacity of other policies to support growth."
'Investors were accepting only a small return for taking risks, he argued, and long-term bondholders in most cases were getting very little reward for term and inflation risk. This was not limited to the major economies of the United States or euro area and, naturally, emerging-market economies were benefiting too, boasting ultra-low sovereign bond yields'.
Mr Stevens also lays out a research agenda with clarity.
'The possibility that, de facto, the risk premium being required by those who make decisions about real capital investment has risen by the same amount that the riskless rates affected by central banks have fallen may help to explain why we observe a pick-up in financial risk-taking, but considerably less effect, so far, on ‘real economy’ risk-taking.
'Whether this is best seen as a temporary increase in risk aversion, a genuine dearth of investment opportunities, evidence of monetary policy ‘pushing on a string’, a portent of secular stagnation, or just unusually long lags in the effects of policy, will probably be debated for some time yet. I don't pretend to know what that debate may conclude'.
Peter Costello has weighed in to say the stability of super rules is vital.
'Future Fund chairman Peter Costello ... argued that the most important superannuation reform would be to stop changing the rules'. "We've had contribution rule changed, taxes rule changed. Every time there is a budget shortfall of revenue there are proposals to change the taxation of super. I think its affected confidence".
This is the latest contrition to our 'Superannuation 2015' column, linked here.
Radical economic reform - a libertarian approach
'Fire public servants, cut welfare, stop funding research; David Leyonhjelm's libertarian budget'.
If you thought Henry is radical, read the linked feature article in today's AFR. Pp 44-45.
Libertarian senator David Leyonhjelm wants lower taxes, fewer public servants and a balanced budget. This is his alternative budget for 2015'.
In what follows is a series of paras and sentances straight from Mr Leyonhjelm's policy agenda, which we at HenryThornton.com find immensely attractive. Careful
Readers may wish to compare Mr Leyonhjelm's agenda with our's.
But to go to Mr Leyonhjelm's arguably more radical agenda.
'Last year I proposed an immediate return to surplus, achieved solely through spending cuts. These included: a 10 per cent reduction in the salaries of public servants and politicians; abolishing Family Tax Benefit Part B and the Schoolkids Bonus; freezing other welfare payments; withdrawing the age pension for those with million-dollar-houses; means-testing Medicare; halving higher education subsidies (while retaining higher education loans); and abolishing corporate welfare including funding for the ABC and SBS.
'I also proposed a freeze to the minimum wage to promote jobs and growth, which would boost the budget through additional taxation revenue and fewer dole payments'.
Mr L says the government's previous budget was directionarily similar to his proposed budget, but more 'timid'.
He provides some interesting political advice: 'Some may say the government's timidity was justified because even its timid spending cuts were blocked in the Senate through the opposition of Labor, the Greens and various crossbenchers (but not me, I hasten to add).
'But if your bills are going to be blocked, they may as well comprise coherent and consistent legislation that you can take to the next election. And if you're going to lose the votes of those who believe in the age of entitlement, you may as well take an axe to their entitlements rather than a butter knife'.
We now move to the list of particular proposals. Please note the care with which reasons are offered. There can be no doubt that Mr L is a serious libertarian.
'To begin with, I would not allow any spending on new policies or capital equipment (other than defence equipment) in the annual appropriation bills. Typically, more than $5 billion of such spending is unveiled each year. New policies should be thought of as a luxury only available to governments that can live within their means. We don't have such a government. And capital spending, other than on defence equipment, ought to be the responsibility of state and local government anyway.
'I would then cut various existing programs that are not protected by an enduring appropriation.
'A good number of these may actually be unconstitutional, given that the Commonwealth has no explicit authority in section 51 of the Constitution. In recent times, whenever the High Court has had to rule on the constitutionality of such a program, it has struck it down. But many continue because it is difficult to get the High Court to consider each one and governments have been content to preserve them in the meantime.
'A long line of programs should face the chop.
'I would cut foreign aid. Aid is a poor diplomatic tool, as indicated by Indonesia's rejection of Australian government pleas for clemency for the Bali 9 ringleaders. Apart from the commitment of military and public health resources in response to natural disasters, the government does not need to be philanthropic on our behalf. Individual Australians who care about conditions in other countries can and should be encouraged to make donations from their own wallets.
'I would cut Commonwealth spending on the health bureaucracy, because healthcare is a state responsibility and government support is best provided directly to individuals rather than to health departments and institutions.
'I would also cut spending that promotes healthy lifestyles, as how we live is none of the government's business. I would nonetheless retain spending on immunisation, which provides benefits beyond the individuals who receive the vaccine.
'I would cut industry assistance, including for exporters, agriculture, the sports industry, the arts industry, and that part of the broadcasting industry we call the ABC and SBS. This is just corporate welfare for the favoured few.
'I would cut government spending on research. It crowds out philanthropic and business support, which would provide greater discipline to the direction of research.
'And I would cut indigenous programs, because race should not determine access to government services.
'Commonwealth grants for regions, infrastructure and schools that are in annual appropriations bills would be cut, because they are areas of state responsibility. I would cut spending on climate change programs because, among other things, I see the reality of global inaction. And I would cut other areas of symbolic spending such as the Human Rights Commission, family studies, and gender equality.
Employing fewer Canberra public servants and paying them less.
'My spending cuts would mean at least 15,000 public servants lost their jobs, mostly in Canberra. While those affected obviously wouldn't appreciate such cuts, it is in everyone's long-term interest to get people out of the unproductive public service and into the private sector where they produce things that people want.
'The government has a mandate for significant public service job cuts, given its election commitment to cut 12,000 public service jobs (rather than the 2000 cuts it decided to pursue after the election). And there would still be more than 200,000 Commonwealth public servants after these cuts took effect.
'For the public servants that remain, I propose to cut their pay by 10 per cent. After a decade in which pay and employment grew faster in the public sector than the private sector, this is a reasonable option. And yes, politicians' pay should be cut by the same amount.
'Overall, my approach would deliver a surplus in the coming financial year, based on available numbers, without resorting to tax hikes.
'No tax hikes.
'There is no justification for tax increases of any kind. Real (ie after inflation) Commonwealth tax per person has increased by more than 13 per cent since the introduction of the GST. As a result, our tax-to-GDP ratio is higher than in many countries with which we compete, like South Korea and the United States.
'Tax hikes may not even succeed in sustainably raising revenue because they discourage Australians from working, saving and starting a business, encourage mobile Australians to leave the country, and discourage foreign investment and migration'.
This bold contribution is worthy of careful thought, dear readers. Here is the link if you do not have easy access to the AFR.
And in conclusion, Glenn Stevens' final throughts from that speech in New York.
'This is probably a moment to recall the commitments we all made in the G20 meetings in Australia last year, as we agreed on the goal of an additional rise in global GDP of 2 per cent over five years.
'Those commitments were not actually about monetary policy; they were about other policies. It will be important this year, after one of the five years has passed, to see whether we are all making good on our various promises. More generally, actions which promote entrepreneurship, innovation, adaptation and skill-building, that reward ‘real’ risk-taking, while providing a stable macroeconomic environment and a well-functioning financial system, will best support our future wellbeing'.
Amen to all that, dear readers.
What we all know, or need to know, is that bold policies of economic reform are the best way to maximise economic growth and to protect people from inevitable economic storms.
We shall not forget
Date: Monday, April 27, 2015
Author: Henry Thornton
The one hundreth anniversary of ANZAC Day has been celebrated at Gallipoli, and with record crowds around New Zealand and Australia. This is Australia's most widely supported holy day, and it is amazing how a bloody battle can become a religous ceremony. Tears were shed quietly and Henry and Mrs T applauded as our son Bert marched for the first time as a cadet officer in the Army Reserve.
Paul Kelly's moving tribute, delivered today, stood out for this scribe: 'At this time and place 100 years before the scene was whistling bullets, confusion, blood and bravado. This time, the visiting Australians, young and old, rugged up tight against the cold and fortified during a long night, were patient, happy, united and, above all, dedicated to honouring their ancestors of four generations earlier.
'These gullies, peaks, ridges and beaches in this beautiful part of Turkey have become, by mutual consent, Australia’s spiritual property.
'Tony Abbott’s speech hailed the transformation of Anzac at its centenary. Our task, the Prime Minister says, is not merely to remember Anzac but to emulate its spirit. This is now the essence of being an Australian'.
Many Australians have saved at the expense of their ability to practice the gross consumerism that is the prevailing ethos in this wide brown land. Yes there were tax incentives to save but one foolishly believed these incentives were there to encourage people to save and thus to become self-sufficient in their twilight years. Yes some foolish people people rorted the plan by spending their super nest egg and applying for a pension or part pension.
It has been asserted that 80 % of Australians past the nominal retirement age of 65 and 60 receive some financial assistance from government. gor blimey comrade, can this be true?
Now superannuation balances have been noticed by the beady eyes of tax'n'spend politicians, especially the opposition Labor politicians and their supporters in the Federal Public Service.
A battle is coming, and we promise not to forget why (compulsory) superannuation was introduced and nurtured by tax concessions.
Henry has created a page to collect his thoughts and those of readers and influential opinion shapers. A link is here, and you are encouraged to send contributions.
Saturday Sanity Break, 25 April 2015
Date: Saturday, April 25, 2015
Author: Henry Thornton
Today many Australians paused to remember our debt to those of our forefathers who left Australia to help the mother country fight off the Hun, whose reckless expansionism had plunged the world into war. The specific target of remembrance for many is the failed campaign to take Gallipoli. In a wonderful speech this week, Professor Geoffrey Blainey outlined a new way to think about that campaign, as he so often does with any subject he addresses.
The invasion of Turkey, Blainey said, was designed to break the European deadlock, with vast armies facing each other in hellish trenches. The Gallipoli campaign is widely seen as a useless tragedy, but a very senior German General said at the time it was a brilliant idea badly executed. The main problem of execution was the many ways in which the invasion was signalled, so that the Turkish defenders were in place and fully prepared when the ANZACS came ashore.
Blainey pointed out that the lesson of Gallipoli was learned. The invasion at Normandy that marked the beginning of the end of the second war to end wars was conducted with the utmost secrecy, which meant the Allies went ashore at a place the Germans did not expect, leading to a fairly rapid end to hostilities.
So despite the awful, ultimately futile, struggle in 1915, its long shadow saved many lives in the 1940s.
We attended a moving dawn service at Melbourne U and then had an army breakfast that seems likely to linger longer than the usual porridge and raisons.
A champion for self-sufficient oldsters
'Hands off people's super: Morrison'. Thank goodness, a pollie who understands that "if you want to try and restrict the eligibility for welfare payments, then you don't go and slug people simply for drawing down an income from an asset they themselves have saved to create".
"[Labor is] saying that $75,000, if you're earning more than that off your own super then you're rich", ... the threshold had to go "way north".
At last, a pollie who thinks well and tells it as it is. Please consult the letters columns of our newspapers, dear readers. People are waking up to the fact the pollies and public servants get large pensions without ever contributing, based on pension balances created out of money raised by taxing people working in the private sector.
In another offering in the Oz yesterday, Chris Joye points out that with people living longer, there is a strong possibility that some, perhaps many, will end up with their superannuation balances exhausted, forced to rely on government pensions. In 30 or 40 years, pensions are likely to be impossible to live on, and people will reply on wealthier friends or grateful children, both unlikely sources of help.
Wake up Bill 'Tax'n'spend' Shorten or your slight chance of forming a government in 18 months or so will evaporate like a puddle in an outback summer.
Education Minister Chistopher Pyne has starred in a Starwars video that has, or will, as they say 'go viral'.
No time to watch today but Caaarlton! beat St Kilda in Wellington and Essendon and a 'gritty' Collingwood slogged to a fine victory over Essendon at a damp 'G'.
Next week, Caaarlton! will find out if its apparent improvement is real when we face collingwood, also at the 'G'.
Image of the week
Courtesy The Oz
The Raff Report – Late April 2015
Date: Friday, April 24, 2015
Author: Henry Thornton
In a recent note, David Stockman (of Contra Corner fame) cited the trend in US Industrial Production as further evidence that Keynesian money printing is not working. The March reading of IP fell 0.6% (Figure 1) but the reason touted from some pundits was the fall from February was because March was a much warmer month than February so the power utilities cut back on production. Demand for heating was lower and the Utilities IP Index plummeted 5.9%. Another notable fall in IP for March was mining (-4%), and it’s worth noting that production of coal was down 20% from a peak 3 years ago.
Of course what is actually happening is that IP is peaking following peak levels of new orders for durable goods. It’s not the weather stupid but the economy. The auto sector boomed with cheap credit ensuring a strong contribution from the household sector to orders and production (Figure 2). Although recent years have seen a massive printing of money there has not been a dramatic increase in US production, it’s just business as usual.
On Wednesday night there was good news for the realtors. Whoopee, low interest rates and job stability were cited as reasons for releasing pent-up demand in the housing sector. Existing homes sales rose at the strongest pace in a year rising 6.3%, whilst prices for existing homes rose 7.8%. The market loved this and the DJIA rose 88.68 pts (0.49%) to 18,038.27, largely reversing the loss of the previous night.
The good news on the housing front savaged precious metals. Gold fell $16.60 to $1,186.50/oz and silver fell $0.23 to $15.81/oz (ouch). Copper also took a hit falling 2.9% to $2.67/lb; somewhat surprising when housing data is strong but then the outlook in China is not rosy. The reason for the fall in precious metal prices was the spectre of rising interest rates induced by good housing numbers. Precious metals don’t provide an income, just a holding cost. The end result downward pressure on gold and silver. Some long range forecasts for these metals are downright gloomy with one prediction that silver will downtrend to $8 per ounce.
Just for the record, on the previous night the DJIA fell 0.5% or 85.34 pts to 17,949.59. Cause of this aberration was disappointing earnings from several leading companies, including Travelers Companies Inc. and DuPont Co. IBM reported a 12% slump in sales. The strong USD is having an adverse effect on revenues of US multinational companies. FactSet analysts are predicting 1Q EPS to fall on average by 4.2% on a year ago. The FactSet universe of stocks is presumably most of the S&P 500.
Homes are only part of the construction story. Factories and infrastructure are also important and taken as a whole; US construction leaves much to be desired. The current cycle is fizzling out short of the 1990s cycle. A previous Raff Report showed new orders for construction materials close to or at a cyclical high. Now IP for Construction Supplies is peaking, and like other IP indexes the 12 month moving average is rolling over. Also note that in all three figures the second derivative is negative and in the case of Figure 1, the first derivative is on a downward course. Upward momentum is decelerating apace.
Thank goodness for the services sectors of the US economy. New orders for durable goods, in constant dollars, show a downward trend with each cycle lower than the previous going back to January 1969, the start of the Raff’s database. New orders going back further are available from the US Census Bureau. With lower orders comes lower total industrial production. When industrial production is examined across a range of industries, those affected by import replacement show declining output or very little growth in output; footwear and clothing are two examples.
What do the trends mean? As stated in previous Raff Reports it would be very strange if the Federal Reserve hiked interest rates this year or next. A hike in rates is usually used to cool an economy and should they be implemented be soon after a cyclical low is reached and the economy recovering strongly again. This is clearly not the case in the US.
Investors or would be investors must understand that period 2002-2008 was an abnormality with strong industrial growth in China, when heavy industrial output recorded average compound growth of 37% (more than doubling every 2 years) sparked the biggest spike in demand for raw materials since invention of the steam engine. Worryingly, there were boards of public companies and individuals that thought such strong growth rates would continue. We are now witnessing the end result of this folly with closure in Australia of small iron ore miners with a bigger collapse should not the iron ore price exhibit a marked recovery. Prices of metals indicate that markets are adequately supplied. When this might change is unknown.
Even the oil market is oversupplied thanks to unconventional sources, principally oil from shale. The decline production rate for oil from shale is around 80% within two years. Some conventional oil wells also have fast decline rates from peak production but the tail is sometimes measured in decades or until the water cut makes the well uneconomic. Secondary oil recovery is beyond the scope of the Raff Report. Oil is expected to retrace towards past highs before iron ore does. In a global sense there is abundant iron ore for many a decade.
At least one mid-tier Aussie iron ore producer is highly leveraged, and why not when interest rates are so low. Shale oil producers in the US also owe buckets of money to banks. Low interest rates are part of the problem. At the same time China’s economy was heading for the stratosphere, the Federal Reserve started the money printing process that roared away in 2009, continuing to this day. Other central banks followed suit. Despite these two great events, there seems to have been no significant lift in US industrial production. Money printing has been a failure, although we might all ponder what would have happened without it. Where has all the money gone? We know that money has gone into stocks as investors chase yield, companies have been active buying back their own shares using almost free money, and investment banks continue to pay large bonuses.
We live in crazy times. In Europe and Japan, real yields on 5 and 10-year paper are negative. In the US, the same government paper provides investors with a positive return in real terms. It’s no wonder that global money flows are flooding into the USD. However, a strong USD is distinctly negative for all commodities priced in USD. The headwinds faced by the resources sector are approaching gale force. The market has experienced falls in real terms for commodities for a 20-year period, most recently in the 1980s/1990s/early 2000s. History has a funny way of repeating so investors much take special care in these troubling times.
Four Corners expose
Date: Tuesday, April 21, 2015
Author: Henry Thornton
Members of the Thornton family rarely watch Four Corners. But with three children between them with five degrees, and one undertaking her third, and their parents with 6 degrees between them, the subject was irristible. We began with a bias in favour of 'academic standards' as one parent is a practicing academic and the other mixes with a lot of fine university researchers in his extensive work with Cooperative Research Centres.
Henry has long believed that the marketplace is not the best model for all activities, especially not the most important activities. Paul Vonnegut wrote a scathingly vicious novel about a bunch of Japanese men incarcarated in an American jail run by a private firm. The results were horrible, and one sighs when one hears of ructions at offshore (from Australia) detention of asylum seekers, also run by private firms. He has long doubted the desirability of utilities, hospitals, schools, orphanages and homes for old people run by private companies, although high status public (ie private) schools do a job often just as good, if not better, than the best public (ie government run) schools.
Four Corners basically made a case that stiff competition among Australian universities to earn money puts pressures on entry standards, especially for overseas students, many of whom it was alleged have little English when they start. But entry levels are also amazingly low for some courses in some of the lower-ranked universities. Perhaps even more worrying, because one can make a case that foreign students or poorly educated Australian students deserve a fair go, standards of work demanded of all students are said by the many academic interviewed to be extraordinarily low.
Students who deserve to fail are given many opportunities to pass, and sometimes are passed by higher authority asking another academic to remark the paper. Some of the academics interviewed were retired and thus had no obvious conflicts of interest - unless of course their fight to uphold standards was a prime factor in premature and enforced 'retirement'. At least one other eminently sensible women asserted that by appearing on Four Corners she would not be hired next semester.
Plaigarism is also alleged to be endemic, despite sophisticated tools that enable markers to check the repetition of sentences, paragraphs and even whole arguments. It was alleged that students caught out in this noxious activity are frequently given several opportunities to resubmit. And essays can be purchased for students unable to produce writing of appropriate standard. There was talk of overseas agencies who are paid to present qualified students. It was asserted that these agencies often fake the student's qualifications, and especially the English language requirement. One especially unhappy experience recorded a university teacher hinting that 'non academic favours' would be rewarded with a higher mark.
Now it would be easy enough to test the allegations in the TV presentation. Henry has asked a senior administrator in a highly ranked Australian university whether there are data of patterns of pass rates over time and, where honours degrees are involved, percentages of students in various catagories, that might show that his university is immune from the matters asserted on Four Corners. Henry is not holding his breath for a response.
For once, Henry thinks that Four Corners has uncovered an especially juicy scandal. Mrs Thornton agrees there is pressure on her and her colleagues to meet pre-specified patterns of results that include an implausibly low failure rate. One especially telling aspect of the Four Corners report was that none of three Vice-Chancellors, each at or approaching a million dollars a year salary, was prepared to comment on television. As noted above, a case could be made that foreign students or poorly educated Australian students deserve a fair go, the famous Aussie fair suck of the sauce bottle. But ultimately Australian universities will be competing for ever more discriminating customers, and competing with the top 10 % of world teachers, who will increasingly be from universities in the top ten. Check out Corsera, or look at the myriad of excellent lectures provided under the banner of Great Courses.
Here is the bottom line, itself a cruel irony. A reputation for low standards of entry and in the quality of teaching and evaluation will at best give us a niche market that will mean very little in the overall hot competition in global markets for many goods and services, including top shelf education.