Saturday Sanity Break, 24 September 2011
Date: Saturday, September 24, 2011
Author: Henry Thornton
The week ended with a mild rally in US stock prices, after a less-that-it-could-have-been-fall in Australia on Friday.
The late rally is attributed to a 'pledge from global officials to maintain financial stability'. It is worth noting that the meeting of the G20 at which action could be agreed is six weeks away. And also that the form displayed by the G20 worthies so far is hardly conducive to overturning the current perceptions that the lunatics are in charge of the asylum.
Still, we live in hope. Today's lead story in the Oz begins thus: 'Fears of a possible Greek default and the US economy dipping back into recession pushed the Dow Jones Industrial Average to its worst week since the depths of the financial crisis.
'The US sharemarket edged slightly higher today, as a pledge from global officials to maintain financial stability alleviated some investor anxiety. The slim gains, however, failed to overshadow the Dow's 6.4 per cent weekly decline, its worst since the week ended October 10, 2008.
'The Dow, which plunged 674.83 points over Wednesday and Thursday, suffered the sixth-largest weekly point-drop in its 115-year history. The index has dropped in seven of the last nine weeks'.
Economists' talkfest - beware, reading may induce depression
Henry spent the previous two days at the conference of economists held in Sydney by the NSW branch.
There was much that is of interest. A session on happiness, which concluded that happiness is reasonably well correlated with economic factors, except that incomes over $100,000 do not add to happiness, a sentiment that Henry's Mother used try to convince him was true.
Sad to learn, however, that carers looking after a loved one on an inadequate income are the most unhappy group surveyed, even more so than people in goal or street kids. Yet another example of Galbraith's poverty in the midst of plenty.
Another session on crime and the economy, in which the lead presenter told us that global crime costs $50 billion (or was it trillion, my notes are lost). Sadly, no mention of the book called A Renegade History of the United States, recently reviewed here by David Jonson.
The biggest event of the conference was possibly the session on productivity, regulation and governance chaired by Janine Perrett, who confined her advertising for her program to a brief part of her introductory remarks.
Speakers were John Colvin, CEO of the Australian Institute of Company Directors, Gary 'Productivity' Banks and Saul Eslake.
All made wonderful contributions. Colvin showed a graph showing the 'unabated growth of regulations' in Australia and generally railed against regulations that risk 'strangling the goose'.
Banks pointed out that it is productivity improvement that creates wealth, and regulations need to be themselves regulated, with sunset clauses and systematic review by independent experts, such as his Productivity Commission.
Saul Eslake delved into the reasons for Australia's dismal recent productivity performance.
Part of the story is weak productivity performance by miners and utilities.
He did not say so, but utlities have fed on helpless consumers, and are a prime cases for review by the ACCC, if Henry's bills are any guide.
Miners have also had easy pickings, in their case because of the insatiable global demand for raw materials, with miners forced to meet demand by digging deeper into generally less productive deposits.
But non-miner, non-utility suppliers have also produced far lower productivity, and there are three (or is it four) causes that are responsible:
* The economy, which after 20 years of growth is experiencing bottlenecks, shortages of skilled labor, infrastructure, etc * Companies, who have never had it so good, and who have relaxed their productivity enhancing efforts. * Governments, who have lost enthusiasm for reforms that would increase productiviy. In addition, there has been a tsunami of productivity detracting regulations.
The fourth reason, perhaps on reflection the root of the problem, is that modern governments attempt to remove any possible risk. Eslake quoted research showing that the US government has spend $1 trillion trying to eliminate a risk that is less likely than drowing in the bath.
In Australia, fast population growth and high terms of trade masked the need to raise productiviy in the 1950s, 1960, and 1970s, and when these factors ended, Australia experienced its most dismal time ever. (The 1890s and 1930s were not mentions in this context, but we shall forgive this lapse as Saul is a relatively young man who is not greatly interested in times before his entry to the world.)
The end of the China boom (which Eslake said might be in 10 or even 25 years) would mean the vultures coming home to roost.
The international situation
Henry's contribution was to help discuss the current international situation, along with Paul Bloxham of HSBC and George Mathew of Infosys Australia, in a session chaired with his usual flair, by Tim Harcourt of Austrade and Airport Economist fame.
Bloxham gave an excellent overview of facts, leaving the distinct impression that the situation is dire.
Henry made the points that will be familiar to readers here, but which seemed new to most of those in the audience, who listened in what seemed like stunned silence to commentary on the idiocy of current and recent monetary, fiscal and bailout policy in the major countries of the west.
Mathew hails from India, and his comments provided a useful antidote to the gloom spread by the two former Reserve Bank officers.
While Henry missed the opening session, Mike Stutchbury reports today that another former RBA man, Don Stammer, had also spread some gloom of his own.
'Stammer says the risks from both inflation and China's economic cycle are bigger than most people realise. He is sitting in cash and inflation-linked bonds in anticipation of rising global inflation and a Chinese growth downturn in the next five years.
'That cyclical low will be the time to invest in the longer run China story. But it will also test Australia's political dysfunction and its economic management.
"So I am sitting on some cash, because if you think BHP and Rio are good long-term investments now, just wait 'til China has a period of 3 per cent growth," Stammer told an Economic Society forum in Sydney this week. "Think how cheap they will be."
'The former top Reserve Bank official, investment banker and now company director says he is not smart enough to know what would drive this cycle. But, at some point during the next five to seven years, Australian inflation will top 6 per cent, well above the Reserve Bank's 2-3 per cent target zone, he suggests. That would see the bank's cash rate rise to more than 7.5 per cent, compared with 4.75 per cent now. And the jobless rate would climb above 8 per cent, up from 5.3 per cent today.
'Australia needs to prepare for the inevitable volatility of our China boom by shoring up our defences. That means getting the budget back to surplus, maintaining a profitable banking system, keeping inflation low and removing impediments to business flexibility'.
Image of the week
Courtesy The Oz
I`ll drink to that
Date: Tuesday, March 19, 2013
Author: Henry Thornton
Now Cyprus is broke and Euroworries are back on the front page of the world's newspapers.
The pace of the equity market boom has already been worrying the old dogs, and exciting the young dogs. Two salivating young dogs presented to Henry yesterday, their ability to distinguish a dry old stick from a juicy bone alarming. Shares will keep rising, and overseas shares in particular. So we were told, with the supreme confidence of the young dog.
'How does the Fed exit from present super-easy monetary policy?', asked Henry. 'There is a big issue with America's tax and spending policy', answered the younger dog, though at far greater length than this summary suggests.
'I know about tax and spending', Henry replied, 'but what about zero interest rates and 'quantitative easing'?
The older young dog leapt in with a barrage of words, the message of which seemed to be that the Fed could go on printing money forever.
Most global equity markets fell by around 2 % yesterday, and the US market by 'only' 0.5 % overnight. Major Eurozone markets fell by similar amounts to the US indices, but individual bank shares by several times more.
This was not apparently caused by concern for the future of US monetary policy, although there is a meeting of the Fed's policy group tonight and Wednesday night, with fresh Bernanke-speak to follow, and perhaps to understand.
No, it was the travails of Cypriot banks which captured the attention of global markets.
While Cyprus and its economy are but a flyspeck on the page of history, its government's novel answer to its bankruptcy is to tax bank deposits by 'up to 10 %'.
Rip it out of poverty-stricken Cypriots and Russian millionairers who, it seems, have migrated to a country no doubt perceived as a safe haven.
Silly idea, really, and Henry was amused to see the Cypriot PM or President saying 'If not this, we'd have to leave the Eurozone and our currency would fall a long way'.
'Precisely, Mr PM/President, that would be part of any sensible recovery plan' would say any economist of note taking an interest in the troubles of Cyprus. And in a nation that has spent without saving, why would you penalise savings so obvioulsy? (What is Cyprus's only Nobel Prize winning economist, Professor Christopher Pissarides of LSE, up to, one wonders.)
The rest of Eurpoe is reeling in disbelief. What if little old Cyprus succeeds in taxing people's bank deposits? Even the threat of this is generating fear of similar action in France, and Italy, and Spain. And, since Eurocrats love a precedent, who knows what might happen next.
Unless the radical Cypriot plan is firmly quashed, goes the text, runs on Eurozone banks will bring down the whole ediface of Eurozone finance, followed quickly by American and British finance.
Even before this storm in a glass of brandy sour, old dogs of the global investment community were predicting a 20 % 'correction' of equity markets. And Ben 'Bubbles' Bernanke is yet to tell us how he plans to exit from overly easy monetary policy.
We have been warned!
Tiresais of Canberra says: 'You’ll no doubt agree with Ambrose E-P on this one! The world is truly turning upside down when the Kremlin has sounder views on private property than Brussels. I hate to think what ideas all this must be giving Bruce Springsteen’s fan on the Treasury benches.
Saturday Sanity Break, 16 March 2013
Date: Saturday, March 16, 2013
Author: Henry Thornton
'The PM's deliberate polarising of the country defies normal political logic' says Paul Kelly.
'Consider the pattern this year. Labor has unnerved the superannuation industry; it keeps finding new ways to irritate the mining industry. After the past fortnight, the Business Council of Australia has declared, in effect, no confidence in a government engaged in "ill-disciplined regulation-making for political expediency". The two other main business bodies, the Australian Industry Group and the Chamber of Commerce and Industry have passed the point of alienation. There is agitation in the sporting communities about Labor's management of the drugs issue; groups pledged to a strong skilled migrant intake, the IT sector, healthcare and hospitality have real concerns; and Labor has now triggered a political war with much of the media industry'.
'Government by fake disaster movie seems to be going swimmingly for Obama. Every Republican attempt at fiscal discipline ends with higher spending and more taxes. That's the way it went with the Christmas blockbuster Fiscal Cliff, and that's the way to bet with Les Sequesterables. Even the Internal Revenue Service can't keep up: "Tax season" is here, yet it's not accepting tax returns from millions of Americans because the IRS hasn't yet processed the tax changes passed in the dead of night at new year'.
'MARC Murphy's ascendancy to the captaincy of Carlton comes at the perfect time, according to a man who once distinguished himself in the role, Blues president Stephen Kernahan.
'Mick Malthouse, who has been made responsible for returning the Blues to the lofty position they held through Kernahan's era as a player, said Murphy had been chosen because he was best placed to "uphold the tradition and the spirit of Carlton".
'The 25-year-old said he was humbled by Carlton's decision to award him the captaincy, ahead of older teammates Kade Simpson and Andrew Carrazzo.
'But the player needed look only around him during a press conference announcing the decision to realise just how decorated the company is that he now finds himself in. On walking into a room at Visy Park yesterday, Murphy was confronted by larger-than-life banners of Chris Judd, the champion he is succeeding, Mark Maclure, Alex Jesaulenko, John Nicholls - described by Kernahan, who also featured, as the greatest ever Blue - and Anthony Koutoufides.
Despite the hype, Caaaarlton! disappointed last night when well beaten by Brisbane.
Henry felt the urgency shown in th first games under Supercoach Mick Malthouse was missing.
But a more structural problem was illustrated. Caaaarlton! still lacks a power forward and a power backman, weaknesses demonstrated by Brisbane's dominant (and scarey) Jonathan Brown (five goals) and Daniel Merrett (commanding in the air in defence), not to forget the rich Mr. Rich (dominating everywhere).
It must be said that the coach and captain's imposition of some tough discipline seems to have encouraged the others - well done Warner, Cowan, Stark and Smith. Bowl out the Indians cheaply, Smithy and you'll have earned the all-rounder's spot given up by Watto.
The Caaaarlton! U19 squad was once given the instruction 'come to the game wearing a tie or you won't play'. Henry was one of the four who complied and, guess what, those four were the ones omitted. The non-tie wearing members of the team were an undisciplined rabble and failed badly. Henry went back to Nunawading to play in a grand final. That team would have beaten Caaaarlton! U19s, no doubt about it.
BAZ Luhrmann's 3D adaptation of The Great Gatsby will open the Cannes Film Festival this year, organisers said on Tuesday.
The eagerly anticipated film, starring Leonardo DiCaprio, Tobey Maguire and Carey Mulligan, was delayed from being released in 2012 so that Luhrmann could continue to refine the film.
The director is said to be a favourite of the festival.
His 2001 musical drama Moulin Rouge remains one of the most memorable opening nights in Cannes history, with an expensive after-party thrown by distributor 20th Century Fox.
Image of the week
Courtesy Wire Services
A world loosening up
Date: Friday, March 15, 2013
Author: Henry Thornton
Jobs are the subject of the week. The Australian government seeking to wreck the 457 Visa scheme that has plugged skills gaps, not only but also in IT, despite a manifest shortage of Australians with the requisite skills. Gloomy liason reports, small business in trouble throughout the land and ham-fisted downsizing by Australia's highly profitable banks seem to define the state of the labor market. It goes on. Fear of job loss in the Australian Labor Party. The Catholic Cardinals selecting a new non-Italian, non-European Pope.
The most immediate news is the apparent massive surge of new jobs in Australia in February, despite the far gloomier indicators revealed (here) by Henry's liason with real people, and Gary Morgan's Labor market survey. We call this the labor market conundrum, and we await a genius of statisticians to untangle the truth on this vital matter. (Professor Mark Wooden of the Melbourne Institute, we need you to step up!)
Unsurprisingly, all but the bleeding hearts who think the economy needs further rate cuts are suggesting this puts further interest rate cuts into the deep freeze.
The Australian dollar jumped on the jobs growth news, and this development emphasises the need for Henry's tax on capital inflow. But discussion of this matter has been notable only for its absence, the apart for the contributions of Professors Max Corden and Warwick McKibbin, plus some who needed to remain anonymous. (Comments page here.)
Other signs of returning economic buoyancy include a jump in consumer confidence, increases in house prices and reports of improving retail sales, at least among members of the Woolies and Coles near-duopoly.
On the other hand, the latest survey of 500 Australian businesses by nab indicated their confidence and reported trading conditions fell between January and February, while the volume of forward orders collapsed to their lowest level since 2009.
Nab itself is in the midst of a massive downsizing, which is progressing in stages, presumably to prolong the suspense and give everyone who is allowed to stay until the next round a reason to work like beavers.
Henry's battles with electricity retailers continue, and the Thornton household is now having power bills sent by the third retailer in 4 months. Numbers 1 and 2 both lied about their rates and deserve to be fined at least, and their CEO's banned for several years. Where is the regulator? one is forced to ask.
If it is good enough for Cricket Australia's high cricket officials to try to enforce decent standards, what about crooked and lying power providers?
The political news is dominated 'Mussolini' Conroy's attempt to abolish free speech.
'Musso' is attempting to ram through a major step in the Soviet/Fascist direction in the short time that might be involved in finding a solution to a major national crisis.
The smarties are saying this is a token effort, giving Mr. Conroy and the government an 'honorable' way to dump the whole idea.
If this is the fact, we should award Mr. C with another nickname beginning with 'M', but we think he is not smart enough for this.
The resident Machiavelli says all this is Gillard's survival strategy. Make Labor so unelectable that no-one else will want the top job. I'd say she's achieved her aim.
The thrashing of Labor in the West, and the appointment of Australia's first indigenous head of government in the North are two other novel developments.
New Pope appointed
None of this week's news in Oz is as momentous as the Catholic Cardinals chanelling God to select the first Jesuit, the first man to be called Pope Francis and the first non-European for a thousand years.
Pope Francis is a genuine man of the people, it seems, described as 'theologically conservative and socially liberal'.
'I'd far rather it was the other way round', said a (lapsed) Catholic close to Henry.
But perhaps another sign of a world loosening up, such as gay soldiers and sailors marching in uniform in Sydney's recent Mardi Gras and noone knowing the true state of australia's labor market.
Labor market conundrum
Date: Thursday, March 14, 2013
Author: Henry Thornton
The Thornton family picture framer said today business was 'horribly quiet'. People were not spending because of the gridlocked political situation, but he predicted the mother of share market booms after the voters elect Tony Abbott.
Mrs Thornton reports most weeks that there are increasing numbers of 'closing down' sales and empty shops.
The junior Thorntons are spending untold hours applying for jobs online, sometimes receiving the rejection notice - obviously automated - within seconds of sending their carefully crafted application. It seems respectable degrees - two in the case of the oldest and second oldest, plus cheerful and hard-working personalities - are not compelling for the robots who deal with the online job applications. Only the youngest has a job for next year, obtained by the quality of the work he did in a work experience job arranged by Henry.
A professor visiting recently from Oxford said the only way to get a job in England is through personal referral, perferably by a cabinet minister or captain of industry. And in Italy and Spain, there are no jobs for young people.
Henry's medical advisor - well, one of them - said today people were still getting ill, and also that the stock market was booming because the Coalition was going to win and 'fix the joint up'.
In February 2013 an estimated 1.36 million Australians (10.9% of the workforce) were unemployed. This is virtually unchanged from last month but is the equal highest rate of unemployment since January 2002. The Australian workforce* was 12,511,000, comprising 7,497,000 full-time workers (up 301,000); 3,654,000 part-time workers (up 38,000) and 1,360,000 looking for work (up 33,000) according to Roy Morgan.
A further 1,113,000 Australians were under-employed - working part-time and looking for more work. This is 45,000 more than a month ago, and represents 8.9% of the workforce* (up 0.1%).
In total 2.473 million Australians (19.8% of the workforce) were unemployed or under-employed in February. This is up 0.1% or 78,000 more than last month and also up a large 329,000 (2.3%) over the past 12 months since February 2012.
In February an estimated 649,000 Australians (down 95,000) were looking for full-time work, a trend in February that has happened in seven out of the last ten years, while a record high 711,000 (up a large 128,000) are now looking for part-time work. Considerably higher than the rise a year ago of 17,000.
The ABS today announced the biggest increase in Australian jobs since ... well , almost it seems since Moses was found in the bullrushes.
'Australia's seasonally adjusted unemployment rate remained steady at 5.4 per cent in February, as announced by the Australian Bureau of Statistics (ABS) today.
The ABS reported the number of people employed increased by 71,500 to 11,628,300 in February. The increase in employment was due to increased part-time employment, up 53,700 people to 3,510,800 and increased full-time employment, up 17,800 to 8,117,400. The increase in total employment was driven by an increase in male part-time employment, and female full-time and part-time employment.
'The number of people unemployed increased by 400 people to 660,000 in February, the ABS reported.
'The ABS monthly seasonally adjusted aggregate hours worked series showed an increase in February, up 11.3 million hours to 1,632.8 million hours.
'The ABS reported a seasonally adjusted labour force participation rate increase of 0.3 percentage points to 65.3 per cent in February.
'The seasonally adjusted underemployment rate was 7.1 per cent in February 2013. Combined with the unemployment rate of 5.4 per cent, the latest estimate of total seasonally adjusted labour force underutilisation was 12.5 per cent in February'.
In Roy Morgan's latest release, linked above, Mr Morgan said: “Today’s Roy Morgan February employment estimates show Australian unemployment rate unchanged at 10.9% (1,360,000 people unemployed, up 33,000 in a month – a new record high figure). Australia’s under-employment rose 45,000 to 1,113,000 meaning a record high 2.473 million (up 78,000) Australians (19.8%, up 0.1%) are either unemployed or under-employed.
“Although total employment rose 105,000 to 11,151,000 over the last 12 months (full-time employment up 89,000 to 7,497,000 and part-time employment up 16,000 to 3,654,000), there was a far greater rise in total Australian unemployment and under-employment – now up a significant 329,000 over the past 12 months.
“These figures clearly show that the Australian economy remains in a weakened state with record high unemployment and under-employment. The economy clearly needs extra stimulation and in the run-up to the Federal Election our politicians will find it harder to provide the leadership in improving the Australian economy we all require. The uncertain political situation means the RBA was wrong to leave interest rates unchanged at 3% yesterday and must recommence cutting interest rates at the earliest opportunity.
“Australian interest rates are amongst the highest in the world and international news backs up the argument that the RBA must re-start lowering interest rates immediately. Overnight the Dow Jones Index in the US closed at a record high of 14,253.77 – this is the first time the Dow Jones has closed at a record high since the beginning of the Global Financial Crisis. However, in Australia the All Ordinaries Index is currently around 5,100, which is around 1,700 points (25%) below its record high above 6,800 reached more than 5 years ago in November 2007.
“In addition, news today from the ABS National Accounts provides a worrying illustration of Australia’s economic situation with the southern States of Australia – Victoria, South Australia and Tasmania now all in recession, as well as the ACT – all of which have now recorded two quarters of negative growth during the latter half of 2012.”
Gary Morgan told Henry today: 'The ABS is wrong because of the questions asked, so simple'.
If it was as simple as the ABS not knowing the right questions to ask, you'd think the wise men at the RBA would be using Roy Morgan's numbers.
Henry's liason (reported above) supports the view that things in the Labor market are tough.
But still the whole machinery of government rolls on saying things are fine. I suspect the voters know better. (See later contribution below the graph.)
A few weeks later - good sense ...
A sensible bloke, Peter Smith by name, writes about 'More imaginary employment numbers'.
'Employment did not increase by 74,000 in February nor did it fall by 36,000 in March. What then did happen? No-one knows. Trend estimates, which even out sampling error, show employment rising by 15,500 in February and by 12,600 in March. This is the best guide we have. If employment growth of this order of magnitude were to continue, month in and month out, unemployment would rise gradually and progressively because the civilian population (of over 15 years of age) is currently growing by around 27,000 per month; that’s around 18,000 joining the workforce based on two-thirds participation. Do the math as the Americans might say.
'Sluggish growth in employment is consistent with the rise in the seasonally adjusted unemployment rate from 5.2% in March, 2012, to 5.6% in March, 2013; during a period too when the participation rate has reportedly fallen from 65.4% to 65.1%. Without that fall in participation, the unemployment rate would now be about 6%. And well over 6%, if the participation rate in March 2011 of 65.7% still applied'.
Japanese hydrates and the US recovery
Date: Wednesday, March 13, 2013
Author: Tiresias of Canberra
Very interesting news from Japan. An important slap in the face to Ozzie complacency about the likely future of the global fuel market. Once again ingenuity trumps resource endowments. It also threatens to take the wind out of the sails of the US, which always does very nicely when its competitors have to pay for overpriced fuel from the Mid-East.
Ambrose Evans- Pritchard reports that Japan has extracted natural "ice" gas from methane hydrates beneath the sea off its coasts in a technological coup, opening up a super-resource that could meet the country's gas needs for the next century and radically change the world's energy outlook.
'The state-owned oil and gas company JOGMEC said an exploration ship had successfully drilled 300 metres below the seabed into deposits of methane hydrate, an ice-like solid that stores gas molecules but requires great skill to extract safely.
"Methane hydrates available within Japan's territorial waters may well be able to supply the nation's natural gas needs for a century," said the company, adding that the waters under exploration also contain large reserves of rare earth metals.
'Government officials said it was the world's first off-shore experiment of its kind, though Japan been working closely with the Canadians. The US and China have their own probes underway.
'he US Geological Survey said methane hydrates offer an "immense carbon reservoir", twice all other known fossil fuels on earth (illustrated in pie chart below). However, it warned that the ecological impact is "very poorly understood".'
Tiresias writes 'Re your opinions in Monday’s blog ('economic recovery will be helped if people spend more, as they will need to do if recovery is to continue'), I beg to disagree.
I suspect that a lasting economic recovery in the US is not on the cards because the cluster of asset bubbles has confounded price signals, so that many (if not most) investors in the US are at a loss to gauge lasting value. People are also spooked by the increasingly erratic nature of policy decisions, the lack of any apparent principle in US monetary and fiscal policy and the recklessness of printing more dollars. To cap it off the pollies and central bankers have decided to extend public assistance to failed businesses (rather than just ease the predicament of workers in the downturn) thereby making the business cycle more or less useless as far as clearing out deadwood and preparing for a new round of growth. Why invest in marginal businesses or industries that should have been closed down in the first place?
Henry comments: much wisdom in what you say, Tiresias. What I find amazing just now is how strong US equity markets have been when all the issues you list should be causing markets to struggle.
Could it be the effect of Ben Bernanke's printing press?
Exiting from zero interest rates and massive 'quantitative easing' wis the monetary policy challenge of the 2010s.
My concern is that Fed Funds rate effectively zero, and allied ‘quantitative easing’, have created serious difficulties not yet totally evident or understood. The recent small-scale market panic when Fed minutes revealed discussion about the difficulties of the exit from current extremely easy monetary policy illustrates exactly the dilemma facing the US Fed and therefore the health of the global economy.
Tightening monetary policy, as in 1928 and 1929, on top of a general expectation that markets are over-valued, will bring any asset boom to an end. But, as Friedman and Schwartz said in 1963, ‘monetary policy cannot serve two masters’. Policy-makers need to have a clear way to modify asset booms when the evidence suggests the strong risk of the boom getting out of control.
History says that booming share prices combined with low goods and services inflation should ring a loud warning bell.
The paradox of thrift - too much or too little?
Date: Monday, March 11, 2013
Author: Henry Thornton
'Since March 2009 the Dow has more than doubled while the American economy has grown by a cumulative 7% in real terms. Over the same period, the Chinese economy has grown by 41% but the Shanghai stockmarket is less than half its 2007 peak'. The Economist, March 9 - 15, 2013.
Equity markets 'have been booming as a result of a deliberate strategy of central banks: by forcing down bond yields, they hope to persuade investors to buy risky assets and thus restore confidence to both businesses and consumers. In much of the developed world, ...' Precisely, but fortunately for us, Glenn Steves and his merry men (and women) have not joined this gadarene stampede.
So far, so good. Central bank intervention, says the venerable mag, risks encouraging what Alan Greenspan memorably called 'irrational exuberance'. This was the case in the 1980s and 1990s, and there are signs in credit markets of that again being the case. A separate article by Buttonwood makes this case.
'As yet, however, the excesses are not on the scale of the last two bull markets; indeed, the American public is only just regaining its appetite for equity mutual funds. So central banks can be excused for sitting back and enjoying the bull run, especially as any action they could plausibly take to halt it would damage a still-fragile economy'.
But there is a paradox. Economic recovery will be helped if people spend more, as they will need to do if recovery is to continue. But with bond yields low and equity valuations high, market returns are unlikely to be high. Therefore people need to save more, especially if they wish to keep building a satisfactory retirement fund.
'Balancing the desire for short-term consumption and the need for long-term thrift is one of the trickiest issues for rich countries as they navigate their way out of the crisis.
'Perhaps the Dow will resolve that paradox by continuing to soar', says The Economist. But 'More likely, it will not'.
Saturday Sanity Break, 9 March 2013
Date: Saturday, March 09, 2013
Author: Henry Thornton
Wall Street posted fresh gains overnight, as the Dow hit yet another record closing high on a payrolls report that surpassed even the most optimistic forecasts.
'The S&P 500 climbed for its sixth straight day, putting it less than 1 per cent from an all-time closing high. The benchmark S&P index rose for its ninth positive week out of the last 10. All three major US stock indexes racked up their biggest weekly gains since the first week of the year.
US employers added a greater-than-expected 236,000 workers to their payrolls and helping to push the jobless rate to a four year-low of 7.7 % 'in a bright signal on the economy's health'.
Meanwhile, in distant Australia, '457 reasons Labor's lost the plot' says Paul Kelly.
The 457 Visa program is the main reason Australia did not have a major wage breakout during the boom. It also explains why business can cope in the face of Australians reluctant to leave the coffee shops for the mines.
It is no wonder that the Gillard government is doing its best to hobble such an effective program, following the narrow sectional interest of its militant union backers.
Paul Kelly does not put it so directly, but its all there, gentle readers, and good on the venerable veteran commentator. Read on here.
Our thoughts from earlier this week, including on 457 visa holders, may be accessed here.
And Paul Kelly seems to be warming to the opposition leader. He concludes his 457 expose as follows: 'Abbott's position is long known. In his speech last April, he tied his support for 457 visas to tough border protection. "These are the best possible immigrants to Australia," Abbott said of 457 visa holders. He put up his values in lights - he stands for stopping boatpeople and welcoming 457 visa holders who come to do a job and pay taxes. Gillard invites the public to see the differences between Labor and Coalition on 457 visas, but this is an invitation that may backfire'.
Excuse me, Miss Gillard, is this a policy-free nay-sayer speaking?
The front page teaser says last year's interest rate cuts are starting to take effect, with house prices up in all capital cities except ... you got it, Adelaide. Auction clearence rates are rising, and affordability is improving, especially for rich people.
Most analysts expect only single-digit growth in coming years, sadly for us property owners, happily for the kids, it seems the next boom is some way off.
Indeed, the AFR's Christopher Joye has flirted with joining the lonely man who cannot be named who says the next move in interest rates may be up.
'Watch the jobless rate', says Mr Joye. 'An unambiguous decline in the jobless rate, propelled by an aging population that shrinks the pool of productive labor, will force the RBA to remove its extreme stimulus'. Wow!
She's back. Fiona Prior, creator of the first version of Henry's site and teacher of Henry about html code. Far more importantly, mistress of all things cultural, after a long sabattical while she did, ... well, interesting stuff.
Here is Fiona's take on the Oscars and the Mardi Gras - we especially loved the serviceman and women marching in those lovely uniforms.
Readers can look forward to news and views of movies, exhibitions and any cultural event that catches the lady's eagle eye.
Image of the week
Courtesy The Oz
The smoking gun
Date: Friday, March 08, 2013
Author: Henry Thornton
'WESTPAC'S plain-speaking London economist James Shugg remains as gloomy about the global economy as he was over a year ago, when he said the Australian dollar could plunge to US80c and a break up of the eurozone would prompt a "global catastrophe".
'Mr Shugg said yesterday he thought the renaissance of economic optimism this year was built on a mirage, a result of "quantitative easing" in Europe and Japan, rather than fundamental economic improvements. He suggested Greece, and potentially other European countries, were likely to default next year.
"I stand by every word of what I said in November 2011," he told The Australian from London.
'At a Rockhampton, Queensland, conference in late 2011, Mr Shugg said he had never been so worried about the economic outlook in 25 years.
"I've started smoking; I can't get to sleep at night. Markets are freezing up and things are even worse than you are reading about," he reportedly said then.
As if in response, the diligent team at nab ask three questions, which presumably means they have some concerns.
• The recent capex and exploration expectations data suggest that mining investment may be approaching a turning point. A decline is inevitable: the question is when and how fast.
• On the basis of past engineering construction commencements, there are reasons to believe that there is a risk of a decline in 2014 big enough to take 2% points off GDP growth in that year unless another “mega” project starts soon. Lower levels of bulk commodity prices are also likely to be positive for the underlying trend in mining project commencements.
• If mining investment retreats spectacularly in 2014, non-mining investment will need to fill the gap quickly if employment growth is to be maintained.
And in the wider world ...
The US economy is defying its fiscal deadlock to produce stronger than expected signs of life, though it seems it is a close run thing.
'340,000 initial claims for jobless benefits were filed in the latest week, less than the 350,000 expected. The reading comes ahead of Friday's closely watched jobs report. On Wednesday, Automatic Data Processing and Moody's Analytics said private-sector job growth was higher than expected in February.
"Five of the last nine [jobless claims] reports have come in better than economists had anticipated ... It is much more indicative of a trend," said Eric Wiegand, senior portfolio manager with US Bank Wealth Management's Private Client Reserve.
In another shot in the 'currency wars', China has warned Japan to desist in forcing the yen lower, correction, throwing out its garbage.
'BEIJING—The president of China's giant sovereign-wealth fund warned Japan against using its neighbors as a "garbage bin" by deliberately devaluing the yen, joining growing international griping about a potential currency war.
In unusually strong language, Gao Xiqing, president of China Investment Corp., echoed alarms from Latin America to Europe that the new Japanese government is aiming to boost its exports at other countries' expense via a weaker currency—allegations often leveled at China itself by the U.S. and others.
In Euroland 'Fading hopes of growth have helped push the euro lower. The eurozone downturn in the fourth quarter was larger than expected, with a contraction of 0.6 per cent on the quarter.
'Exports fell 0.9 per cent, the biggest drop since late 2009. Hopes of a rapid bounce back in the first quarter only seem justified in Germany. Economic survey data for February show a Continent still stuck in recession.
'Meanwhile, the Italian election results, with a surprisingly strong showing for activist Beppe Grillo's anti-austerity Five Star Movement, have moved growth up the political agenda in Europe once again. Euro-area unemployment hit a record 11.9 per cent in January'.
Graham Richardson says Julia Gillard's trip to Western Sydney was a grave mistake, and whoever thought up the idea should be shot.
Henry's resident colorful racing identity, T.P. Mahar, has devised a delicious plan - Ted Baillieu contesting the Federal seat of Melbourne Ports, thereby ridding the parliament of the pesky little green man.
The latest Morgan poll shows this is not an entirely mad idea, so read on here.
Mrs Thornton's tennis pals have started the weekly tennis game and yapathon early today to beat the heat. (Surely this long run of autumn heat is proof positive that the planet is cooling?)
This week's yap is mainly about politics, which is at least better than the various affairs/badly behaved kids that make up the ladies' usual fare. 'The [Victorian] Libs are too short of talent and were not ready to govern' seems to be the verdict.
US equities boom, Aussie equities lag. Chinese equities dead, buried and cremated. Que?.
Date: Thursday, March 07, 2013
Author: Henry Thornton
'If prices of a great many goods and services are held down by structural change or by effects of recession or depression, asset inflation will take the place of product inflation in response to expansion of money. This is part of the story of the global economy in the two thousands. Since China did not allow its exchange rate to float upwards, eventually it began to suffer goods inflation and global asset inflation lost some of its strength, and became for a time severe asset deflation. Then The US Fed stepped in and restored monetary expansion'. Great Crises of Capitalism, 2011, p 237.
We have seen plenty of vindication for what we are calling 'alternative inflation' as opposed to Milton Friedman's 'single inflation' hypothesis. The US economy is in sluggish improvement mode, with subdued goods and services inflation, but the main equity indices have set new records.
Meanwhile, Aussie stocks languish well below their previous records, even though we have a 'miracle economy' that is (supposedly) the envy of the world. But it seems to be playing catch-up, and as a shareholding family we hope the boom lasts.
Yesterday's economic news here included a good GDP figure, albeit one heavily dependent on net exports.
David Uren reports: 'EXPORTS of iron ore and coal are roaring ahead, but the rest of the economy is being left behind as spending is restrained'.
Alan Kohler declares shares are in a bear market and the bull market is in gold and bonds. Bond markets are the 'new bubble', headed for a crash, while gold prices are driven by the flood of paper money.
China stocks have been a disaster, says Kohler. In fact the Shanghai crash is worse than that of the Nikkei in 1989-90. Despite stellar growth, China is suffering from a busted housing bubble as well as unbreathable air in its major cities and rumblings about a fair suck of the soy sauce bottle for all.
But wait, the comparison with the USA saves the day. 'As it often does, the stockmarket is telling the truth: the US and China are both in woeful shape. It is just that the US is the least woeful'.
Kohler's colleague, Robert Gottliebsen adds to the analysis. The third quarter on 2012 saw corportate profits as a ratio to GDP the largest (at 14.2 %) since 1950, while the workers' share (61.7 %) was the lowest since 1966.
The ham-fisted slashing of government spending under the latest version of what passes for US fiscal 'policy' will lead to more sackings and greater corporate profits, or so the argument goes. Shale gas will also boost US economic restructuring, and so, one is inclined to conclude, the American share boom has some disance yet to run.
As we have argued, however, the crunch comes when the US Fed decides to begin turning off the money tap. Then there will be the mother of corrections, and it will be good to be cashed up.
On with the show, gentle readers.
Sensible policy ... at last
Date: Wednesday, March 06, 2013
Author: Henry Thornton
At last, a sensible policy initiative from the Rudd-Gillard-Swan government. (Henry is like the ABC in reverse - mostly supporting the conservative cause, but recognising excellence on the radical side when he sees it. For example, Bill Kelty telling Labor to leave superannuation alone.)
The sensible Rudd-Gillard-Swan government initiative is to allow people on the dole to earn more before ripping the dole off them.
There is no way to avoid the fact of a high effective marginal tax rate on dole recipients who earn money in the real (tax-paying) community, but so long as that rate is less than 50 % it is still better for dole recipients to earn more.
Such people presumably already earn money, but in most cases it is in the black economy, where the marginal rate of tax is zero, so we should not expect too much to change. But the idea is 'directionally correct' as one of Henry's old mates put it overnight.
Ultimately, if western civilisation lasts, everyone, regardless of income or wealth, will be able to claim a minimum amount for frugal living, subject only to their names being listed on a website (or the twenty-second century equivalent) to discourage well-to-do folk from bludging on the rest of society.
While the Rudd-Gillard-Swan team are about it, why not let boat people released into the community earn their keep? First because we need every person available to do their bit, and secondly, far more important, if we do not do this such people will be forced to join the black economy, making them minor criminals. If punishment is required, or deterrence, make them work for local councils, just about the most unloved jobs going around.
Incarceration makes many such people mentally damaged, and living on sub-dole welfare payments will make them desperate, ripe for enrolling in criminal gangs.
Far better to stop the flow of boat people at the source, which is Tony Abbott's plan.
While the Rudd-Gillard-Swan team is at it, please rethink your negative attitude to 457 visa workers. Such people provide much-needed skills, and we (and the visa holders) get a good hard look at each other, making successful 457 visa holders who wish to stay excellent migrants, not unlike Tony Abbott and Julia Gillard. In fact, we are all immigrants, aboriginal Australians some 40 thousand years ago, the rest of us one to nine (or is it 10?) generations ago.
The RBA board did the sensible thing and left interest rates on hold. That bright young man whom Henry cannot name for fear of inflicting on him the kiss of death syndrome has now opined that the 'easing bias' he and others discern in Glenn Stevens' carefully polished utterances may be designed to talk the dollar down.
No hints about the introduction of a tax on capital inflow, despite a leading economist's assertion to Henry: 'Yes, I understand the argument - very logical - and I expect the RBA is considering this policy option (as are other countries, eg Brazil)'.