The visiting guru, like Voldemort whose name cannot be spoken, has returned to Australia for his annual visit, slightly peeved that his visit coincided with the horse race that stops a nation, as this reduces his opportunity to practice his guruship.
Henry caught up with said guru thanks to the good offices of Shane NcNeice. His headline on this occasion might be 'Europe absolutely stuffed; US to struggle for a decade or more; Asia to grow strongly'.
(Alert readers will see that Henry has no future as a writer of headlines.)
'Greece will default' was the opening salvo.'Its public service is overstuffed; it joined the EU with dodgy numbers simply to get German rates of interest and borrowed far too much; the New Drachma's are already printed so Greece can cut wages by devaluing, which is far more palatable than cutting wages by 50 %'.
'There is no way they can avoid default; the Germans are simply not gonna pay; Greek debt will be written off 100 %; Greek banks will be bankrupt, and the State owned German banks and French banks, who also hold a lot of Greek debt, will be in trouble'.
'Greek debt default and interbank loans will freeze the Eurozone banking system which will need to be recapitalised'.
The guru acknowledged that US banks will not be immune as they are heavily involved in the Eurozone interbank market and have like Lehman Brothers issued a lot of credit default swaps that will be triggered when Greece defaults. Like Lehman Brothers, we know there are a lot of these instruments out there but the statistics are almost non-existant.
When questioned the guru agreed that, 'within a year', Portugal, Ireland, Spain and Italy would also default. While the guru implied that all this Eurozone mayhem would largely be contained within Europe, many in the audience, including Henry, wondered how this could be possible.
'Mrs Merkel has no interest in solving this problem', the guru added. 'She just kicks the can down the road. The crisis is keeping the Euro low, and with low wage increases and subdued labor costs in Germany this is helping to make German industry incredibly competitive'.
'There are no jobs in Greece (or the other weak nations of Europe) for young people who are queuing up to emigrate'.
'The big central banks are printing money 24/7; banks are not lending but accumulating cash to cushion themselves when the defaults are triggered. The latest statistics show US base money grew by 37 % in the year to September'. Henry observes that Milton Friedman must be spinning in his grave.
'The US budget deficit is 9 % of GDP, or $1.3 trillion. The Democrats want to raise taxes, and the Tea Party Republicans want to cut spending. There is complete political gridlock. Bene Bernanke is printing money like crazy and using most of it to buy government securities - eg $855 billion of that $1.3 trillion deficit.
'Foreigners are reaching their limit for buying US Treasuries and China is selling down'.
Warming to his task, the guru noted (to Henry's delight) that there aret two sorts of inflation - goods and service inflation and asset inflation.
Goods and service inflation is dead in the USA, as it was for 40 years after 1929. Young people who can't get jobs will be 'scarred for life' and except for food and energy there will be no goods and services inflation.
'But asset inflation is everwhere, even asset bubbles. The Australian dollar is a bubble, US Treasuries, Gilts, JGBs, even London houses, which are being purchased by Arabs, Russians, Indians and Chinese, are bubbles'.
'Eventually there will be a Northern Europe Euro and brutal readjustment in the South. We're talking about social revolution'.
There will be stagnation or slow growth in most of Europe and the USA, 'at least a decade of austerity'. Demographics will also hinder Europe, where indigenous Europeans are not replacing themselves, except in Sweden where there is two years paid maternity leave'.
'China is allowing wages to rise so that consumer spending can replace exports. China knows what it is doing'.
'There will be no war in Europe. The most likely war is between China and Russia over Siberia - a vast, resource rich area largely empty and unexploited'. (Henry kept his thoughts about a similar rich, lightly populated region to himself.)
'What about Australia?' a brave soul asked. 'Australians will feel very rich when the Australian dollar hits US$1.20, but there will be a lot of industrial unrest, like the UK in the 1970s'.
We thanked the guru in the traditional manner and Henry presented him with a copy of Great Crises of Capitalism. With appropriate modesty , it may be appropriate to say that some of this book's themes are similar to those of the guru, though stated in generally less colorful language.
The group then retreated to Vlados for a traditional (and consoling) dinner of lightly cooked meat, salad and red wine. The guru drank only coke.
Confidence up, equity markets cheer, PM sets election date
Date: Wednesday, January 30, 2013
Author: Henry Thornton
Virtually everyone seems to have returned from the festive season with a new resolve to be happy.
Prime minister Julia Gillard today told us all she would in mid-August ask the Governor-General to agree to an election on 14 September.
Our feisty Prime minister looked both very determined and quite happy, especially when promising to 'soak the rich'.
Mrs Thornton's view is that this shuts the door on any challenge, except of course by Tony Abbott.
The good people at nab report the better global news while acknowledging the risks.
'Financial markets have lifted as confidence in the global growth outlook firmed but late 2012 data for world exports and industrial output remained soft, showing modest expansion in activity at best. Central bank action in the Euro-zone, US and Japan has boosted market hopes of sustained growth by removing tail risks like a Euro-zone break-up or premature US interest rate rises.
The nabsters have even defied the might of the IMF, whose global growth forecast has been edged down. But nab says: 'While the forecast global upturn is initially modest as activity is held back by weak conditions in Western Europe and Japan, things look brighter for 2014 with global growth predicted to finally rise above trend. The emerging market economies are still driving most global output expansion through the forecast period but a broad-based, albeit fairly modest, upturn should start later this year across the developed economies'.
'The Australian economy has softened', say the nabsters, 'with leading indicators suggesting the first half of 2013 will be difficult. Near-term outlook very soft – GDP forecasts 2.0% in 2013 and 3.3 % in 2014. CPI inflation surprisingly low for Q4 2012. We see core inflation (inc. carbon) of 2.6 % through 2013 and 2.8 % through 2014.
'Downward demand and price pressures have shifted the balance of risks towards an RBA rate reduction in February (rather than March). But with unemployment rising to 5¾ % by mid-2013, we still see the need for two additional 25 bp rate cuts – possibly in May and August, taking the cash rate to 2.25 %'.
Yet buried in the detail is a statement that Adam Creighton deemed worthy of a headline on page 2 of the Oz. 'Business confidence on the mend'.
And there's more. Alan Oster, nab's chief economist, has said explicitly that he sees a rate cut in February, followed by two more - in May and August - to a new record low of 2.25 %.
Mr Creighton starts his article as follows: 'Business confidence bounced back from record lows in yjr lead up to Christmas, boosting the chance the Reserve Bank will keep interest ratesnext month'.
Clearly Mr Creighton trusts UBS more that the nab. UBS's chief economist. Scott Haslem of UBS, Mr Creighton said the confidence spike might signal a 'turning point' in Australia's economic fortunes "because economic fortunes"because confidence tends to lead conditions'.'
Yer pays yer money and get what yer deserve, I reckon.
Henry's aorta in good shape.
Henry has been attending to more cosmic matters today, having scans and seeing the surgeon who performed Henry's emergency aortic repair over seven years ago - report here.
Readers will be relieved to hear that all the bits are in their proper places, there are no dangerous balloon-like structures about to pop and Henry need only return for another scan'n'consultation in three! years.
Just as you thought it was safe to go back into the water ...
Date: Tuesday, January 29, 2013
Author: Henry Thornton
"Semi-rational exuberence' is what the Economist calls current attitudes to equity markets.
There are two reasons for optimism although the veneralble mag says three. The main point is that several disasters have been avoided.
The Eurozone has not imploded, taking Euroland banks with it. America's politicians have avoided going over the 'fiscal cliff' but have a fair way to go to solve America's fiscal problems. China's economy is roaring back, with recent economic statistics beating expectations.
A second reason for optimism comes from 'central bank activism'. The ECB has promised to 'do what it takes' to save the Erro, the US Fed has promised to keep printing money intil the US unemployment rate is 6.5 %. What happens when the wall of money being created by this 'activism' reaches the point where traditional caution is required is uncertain.
Investment gurus - eg in today's Wall Street Journal - have cottoned on to the major risks for holders of bonds, who have prospered mightily thanks to near zero cash rates driving bond yields lower and creating capital gains for bondholders.
The bottom line is that the gap between exuberence and reality is wide and will get wider if current trends persist.
Enjoy the rise while you can, gentle readers, and soon Henry will provide some research that may be helpful.
Saturday Sanity Break, 26 January 2013
Date: Saturday, January 26, 2013
Author: Henry Thornton
Happy Australia Day, gentle readers, and warm congratulations to all the worthies gonged for their efforts on behalf of this wide brown land.
Sadly, we can all look forward to a year of vitrolic mud slinging in Canberra, a matter explored in the Oz today by Peter van Onselen
Terry McCrann has come back from holidays full of vim and vigor. He presents an amusing but not always accurate history (but who cares about accuracy) but gets to the current problems at the end.
'The RBA wrote a more robust OS version for this new world, RBA7.0. To set the cash rate into a world of weakish growth and a strong Aussie dollar. That may still be what's needed. But there's an emerging alternative -- stronger growth and an even stronger Aussie. The software would have to be tweaked: RBA7.1
'A huge change in this direction was the decision by the Japanese to join the Fed and the ECB in massive money printing.
'The first would see the cash rate cut by something like 50 basis points in the first half of the year. It would simply be a question of timing.
'The low CPI enables the RBA to start on February 5, if it so chooses. The second would see the RBA needing to cut even more aggressively, and at the same time even less inclined to do so. It would be skewered on the horns of an impossible dilemma'.
And by the way, Terry, Japan's switch to printing money was initiated by government. There is a global backlash against 'independent' central banks. RBA7.2, perhaps.
Dirty business, mining.
Like many others, Henry was glued to the idiot box while SBS dissed Australia's mighty mining industry.
One of the themes of a wonderful book that hit bookshops yesterday, Ian McLean's Why Australia Prospered, is that it was mining that made Australia rich. My review will appear in the next edition of Quadrant.
The SBS series was good television but very unfair history. Apart from its nation building role, mining in the past twenty years or so has cleaned up its act. There is great concern for safety, keen interest in employing indigenous Australians (and paying for access to their land) and a source of technological advance.
Consider offshore investments, says John Wasiliev of AFR fame.
'In a year of never-ending debt dramas overseas, it will be a surprise to many Australian investors that European and American companies dominated the top 50 global share performers last year.
'Who would have thought with all the trouble and strife in Europe that, as a group, European companies did exceptionally well? There were nearly as many in the top 50 global blue-chip performers as American companies – 20 to 21.
'The lesson for Australian investors is that just because there are problems in certain parts of the world, it doesn’t mean the local underlying shares are not performing well. Local investors benefiting from the excellent performance of the Australian market last year would have been doubly rewarded overseas.
'But they would probably be surprised at which listed companies delivered the best returns – Bank of America (107 per cent), the UK’s Lloyds Banking Group (91 per cent) and Gilead Sciences, a US pharmaceutical company specialising in AIDS and hepatitis cures (77 per cent)'.
Open the borders. Que?
Date: Friday, January 25, 2013
Author: Henry Thornton
Slowly, slowly, Australia is beginning to wake up after the summer hollies.
I should say urban Australia is waking up. In the countryside, emergency workers have been at it since urban Australia left for the summer holidays. Counrty folk have been busy bringing in the crops, or some cases missing the seasonal festivities battling fire and flood, and property owners are trying to decide whether to stay or go.
Could climate change be causing more extreme weather? 'Naaaa!' say the skeptics, 'ain't no warming anyway'.
On the economic front, Japan's new Prime minister has said 'heel, Rover, heel' to Japan's central bank, perhaps a sign of things to come.
China's industrial production has risen further and the US economy continues to show signs of life.
Nevertheless, the IMF has reduced its growth forecast from 3.6 to 3,5 %, or was it 3.5 to 3.4? And warned the risks are more downside than upside. This is 'on the back of' Eurozone weakness, and to emphasise the point, Spanish unemployment reached a modern record on 26 %. Gor Blimey, gov'ner, where does this end? Revolution anyone?
No particular joy in the Australian economy, but China's resurgance has boosted iron ore prices, but not to the point that the big mining companies are making a 'super profit'. Ergo, no revenue from Mr Swan's mining tax, and a bloody good thing too.
Nice article in the Oz about the RBA board stacking undertaken so zealously by the Labor guv'mint. The incomparable Jillian Broadbent's third term is up soon. Where will they find a left-leaning female economist with RBA and financial markets experience? Why not another term for Jillian?
At last, a journo who gets it, well most of it.
Adam Creighton says 'enough' to rate cuts. 'CALLS for the economy to be more "actively managed" - code for cutting interest rates and embarking on further "stimulus" - should be ignored.
'Whether debt-fuelled government spending boosts measured economic output in the short run is debatable, but that it undermines long-run prosperity is a certainty.
'Public debt crises in the US, Japan and Europe should be stark reminders of the folly of decades of Keynesian "active management". In the month Nobel economics laureate James Buchanan died, it is timely to remember that even if it works in theory, the central Keynesian thesis is a disaster in practice'. More here.
The bit Mr Creighton does not (yet) get is what to do if the currency remains stubbornly high.
Neither has organised Labor, whose message to manufacturing industry is 'adapt or die'.
Henry cannot record all the times non-economists have supported the idea, and we believe careful thought would lead many people (= voters) to the same position.
Professor Warwick McKibbin has responded as follows: 'I agree with your identification of the problem but disagree with the solution. The problem with taxing capital flows is that it raises the cost of capital throughout the economy and hurts capital intensive industries. ... A better solution in my view is to reduce input costs of labor, capital and energy by focusing on productivity enhancing reforms particularly increase flexibility of labour markets, less government regulatory costs and reduce taxes on energy to reduce domestic input costs.
'At the same time you also need to produce a massive supply of long term (50 year) government bonds to sell to foreigners to soak up the demand for Australian asset to avoid a domestic asset bubble. The funds generated should go into infrastructure that reduces input cost for business. This second policy does not change the strong dollar but it generates returns over time to offset the costs of restructuring and it gives us a wealth transfer that is pure capital gain and a once in a lifetime opportunity fir significant nation building at almost no cost.
'Taxing capital for a capital scarce country makes less sense to me than dealing with competitiveness at its source which is domestic costs'.
Henry agrees with the desirability of reducing input costs of labor, capital and energy by focusing on productivity enhancing reforms particularly increase flexibility of labour markets, less government regulatory costs and reduce taxes on energy to reduce domestic input costs.
Indeed, for most of last year Henry's column on monetary policy was saying such policies were needed and the RBA should not need to cuts to interest rates if such reforms were introduced. (For example in August 2012.)
Henry also applauds the massive nation building program McKibbin suggests.
But the chance of both those policies – actually an entire set of new policies – being implemented any time soon is about zero. If by a miracle after years of debate we got such policies then the capital inflow tax could be reduced to zero and we would probably be coping well with an Aussie dollar far higher than at present.
We must soldier on, gentle readers, until the powers come to their senses.
Saint Augustine supposedly said 'Lord make me pure, but not yet', or words to that effect. Our current political leaders are sticking to an ideology of perfectly free trade, whatever the consequences.
Oh, except for people, that is.
If you really want to be pure, Prime minister Gillard, ponder the advice of Lord Desai and open the borders. Think of all the lovely lolly - correction, tax revenue.
Henry wishes anyone who has read this far a safe and productive Australia day holiday.
`Heel Rover` - central banks shown the leash
Date: Thursday, January 24, 2013
Author: Henry Thornton
Central bankers should be brought to heel by elected parliaments says Ambrose Evans-Pritchard of Telegraph fame.
'Intellectual fashion is changing. Central bankers around the world no longer command the charisma of a high priesthood.
Central bankers stoked a global bubble and then tightened monetary policy just as the money supply was collapsing in mid-2008.
This was exactly the complaint of the Federal Reserve Bank if New York when its request to raise the discount rate to curb the share boom in 1928 was denied by the Federal Reserve Board in Washington.
Approval was finally given just in time for the rate hike to deepen the developing recession, and help turn it into a global depression.
'Too little, too late' is an ongoing criticism of modern central bankers, perhaps familiar to Henry's readers. What is it that happens when people do not learn from history?
'The onus is falling on [modern central bankers] to justify why monetary independence is self-evidently a good thing', Ambrose-Pritchard continues,' and why central bankers should operate beyond democratic control'.
'The humbling of the Bank of Japan (BoJ) this week is just the start, as Bundesbank chief Jens Weidmann warned. “It is already possible to observe alarming infringements, for example in Hungary or in Japan, where the new government is massively involving itself in the affairs of the central bank, is emphatically demanding an even more aggressive monetary policy and is threatening an end to central bank autonomy,” he said.
'One could say that “alarming infringements” are in the eye of the beholder. The European Central Bank that he serves is itself a political operator of unbounded power'.
Ambrose-Pritchard quotes Professor Richard Werner, a monetary expert at Southampton University, who says the men of Maastricht misread German history very badly when they created a central bank that answers to nobody. “They thought they were modelling the ECB on the Bundesbank, but they weren’t. They have instead replicated the Reichsbank, which was not accountable to any democratic institution, and led to disaster.”
Ambrose-Pritchard quotes two further authorities with relevent recent research: 'Princeton professor Gauti Eggertsson has long argued that independent central banks have a “deflation bias” by their nature. This was fine during the quarter century after the Great Inflation of the 1970s, but as the inflation rate fell ever lower with each business cycle it eventually became dangerous, for there lies the dreaded “liquidity trap”.
And: 'A new paper by Paul McCulley and Zoltan Poszar argues that the taste for independent central banks goes “hand-in-hand with secular private debt cycles”. It becomes faddish during credit upswings such as the era of “monetary supremacy” from 1978 to 2008. The appeal wears off as the “deleveraging cycle” gathers force and the economy slides into slump. The US Employment Act of 1946 was the low point for the Fed. The bank was entirely harnessed to US Treasury purposes until its “emancipation” in 1951'.
Earlier this week I reexamined Henry's advice, and that of the RBA, in the lead up to and during the credit crisis of 2008.
In Australia, the mining boom was creating inflation. By tightening policy too little, too late the RBA was eventually created tight money just when it should have been easing. While Henry was on the ball (and ignored) about early tightening, and worrying about global pressures from 2007 onwards, I was not quick enough to see the need for easing. I confess to a 'deflationary bias', a judgment the RBA, by acting too slowly to head off inflation, may escape.
Indeed, the world's major central banks may now be labelled inflationists because of their reckless money printing, which is stoking currency wars and asset booms and may well stoke goods and services inflation before history of current monetary policy history is written.
'The greatest indictment of modern central banks is that they chose to target the consumer price level, one variable among many, and a bad one to boot. They took their eye off credit growth and asset prices'.
Evans-Pritchard has entered an important debate.
I do not yet subscribe to his 'heel Rover' model, but I do think the world's central banks, including the RBA, are excessively insular and arrogant.
Perhaps some good old-fashioned dog training would do no harm, and might do some good.
Confidence falters, inflation increases, correction, falls
Date: Wednesday, January 23, 2013
Author: Henry Thornton
That is good news for the RBA and the government. As Treasurer Wayne Swan says, it 'makes room' for further rate cuts.
It is also a clear sign that the Australian economy is weaker than generally believed, and that is bad news for the RBA and the government.
Still, they will be buoyed by Alan Kohler's 'Five good reasons to be optimistic about 2013'. Nice one Alan, and we agree the five factors you mention - risk again becoming thinkable in global markets, China, the US, Japan and even old, near irrelevant Europe, are positive factors.
The RBA's problem, and the government's, is that the miracle economy is struggling badly.
This plus lower inflation makes further rate cuts possible, but then there are the currency wars to consider.
In case you missed it, here is Henry's solution - latest person who may have taken notice is Heather Ridout, RBA board member, who says the economy needs 'active management' in 2013. Isn't what it already gets?
What can she be thinking of?, gentle readers.
Consumer inflation for the December quarter is available later today, 23/1.
Press reports say 'most economists' are expecting inflation around 2.4 %, representing a rise. Some of these stout fellows (just joking Saul) say such an outcome would/will cut the chances of another rate cut.
The general gloom locally, however, sees some holding on to their hopes of another cut, some hoping for several more.
One of these fellows, a recent departee from the gnomery, says no chance of a rate cut, they'll be raising rates by the end of 2013.
'A survey of confidence by the nation's peak business lobby', reports the ABC, 'has found some indicators are at their lowest levels in 15 years.
Henry is out of town today at a place where internet connection is lousy, and where the NBN will probably not go - just an hour from Melbourne's CBD - so may not be able to respond to the actual news.
In that case, we shall hope the expected news is accurate.
'The Australian Chamber of Commerce and Industry's December quarter Survey of Investor Confidence reveals that businesses found current conditions were a little less bad than the previous three months, but were expected to get worse.
'The index of current business conditions rose marginally from 48 to 49.2, but was still just below the 50-point level that generally separates improving conditions from a deteriorating situation.
'The same was true in measures of current sales and profitability'.
Roy Morgan Research reported overnight a renewed fall in consumer confidence.
Gary Morgan said: 'Roy Morgan Consumer Confidence has fallen 4.1pts to 119.9 after the ending of the New Year’s sales period. This point is confirmed as Australians saying ‘now is a good time to buy’ major household items dropped to 59% (down 4%). Since Roy Morgan began weekly Consumer Confidence interviewing in late 2008, Consumer Confidence at the end of January (after the sales period) has been lower than at the start (during the sales period) in three out of four years.
'Also falling were indicators of the Australian economy with just 31% (down 3%) of Australians expecting ‘good times’ for the Australian economy over the next 12 months and 36% (down 4%) expecting ‘good times’ over the next five years.
'However, the fact that the number of Australians who consider themselves worse off is a minority (25%), and the lowest recorded since 2010, is a strong point for the Australian Government'.
And in the Australian, Maurice Newman lifts the lid on the global Ponzi scheme.
'The West has now reached the point where total private and public debt, together with unfunded government liabilities, can never be repaid by an ageing demographic. One day even debt servicing will be an issue. With fewer taxpayers and lenders, the ability to take from the future to provide for the present will end. This is when we see the final collapse of the great international governmental Ponzi scheme.
'Already in Europe, where lenders and taxpayers in the peripheral countries have either fled or are bankrupt, economies are surviving on the grace and favour of others. In America, we see the future with 11 states having more people on welfare than they have in work. The employee pension fund for the state of Illinois is $US95 billion in deficit and growing at $US17 million a day.
'And central banks that became the last resort for empty treasuries now find their own balance sheets stretched, their liabilities too short and their asset quality increasingly suspect. For all their intervention, other than to defer the evil day and encourage speculation in assets, quantitative easing has done nothing for economic activity. Indeed, the Fed has recently lowered its growth forecasts.
'What has differentiated Australia is that the Hawke-Keating and Howard-Costello governments largely eschewed the public policy excesses of the major economies. This changed in 2007 and Australia is now in the process of establishing its own Ponzi scheme'.
There was a 25 basis point rate hike in that month, and that was it for the year.
In April 2007 we explained the likely bias of hawks and doves among the staff of the RBA.
We concluded: 'We have disposed of the two main arguments of the doves. The Reserve should raise cash rates tomorrow by 25 basis points. This would be a case of better late than never. If they do not, inflationary pressures will continue to build in the Australian economy'.
In May, 2007, the RBA was still happy, boasting in the relevant monetary policy review that: “Despite the general strength in demand and activity, the evidence from producer and consumer price indices is that inflation has moderated recently … [A]n appreciable tightening of policy had already been implemented during 2006, and the more benign recent inflation outcomes also lowered the starting point from which any future pick-up in inflation would occur."
Henry, needless to say, wanted stronger action to curb inflation.
In June it was clear that asset prices were seriously out-of-control. 'House prices have soared, share prices have rocketed, resource company shares have glowed in the dark, but consumer prices are subdued. The graph shows the extent of the dislocation between asset inflation and consumer inflation in Australian markets'.
'Henry’s column last month was about the global asset boom (which Henry sees as a bubble). “The problem's global, we’re feeling nervous” is a fair summary. The period since has included a plethora of warnings by financial market practitioners, including Henry’s “Lexington”, a former Merrill Lynch executive and advisor to three presidents.
'Henry’s Lex summed up one of several columns as follows: "A critical mass has been reached, only awaiting a detonating event ... be vigilant, have an action plan and, most important, know your investment time horizon (when you must use the capital) and your risk tolerance".'
We ended 2007 still worrying at the great surge in credit issued by banks and the increasingly shakey asset bubble.
In July 2008 the BIS dropped a bombshell: 'The fundamental cause of today's problems in the global economy is excessive and imprudent credit growth over a long period ...'
The world economy is near a 'tipping point' that is likely to eventually slow inflation, and may even create a severe slowdown, even a global depression that converts inflation to deflation.
Finally, this unhappy situation is due to lax monetary policy allowing an unprecedented credit and asset bubble.
''In every stock-jobbing swindle every one knows that some time or other the crash must come, but every one hopes that it may fall on the head of his neighbour, after he himself has caught the shower of gold and placed it in safety. Après moi le deluge! is the watchword of every capitalist of every nation'.
Saturday Sanity Break, 19 January 2013
Date: Saturday, January 19, 2013
Author: Henry Thornton
The big central banks are laying the basis for massive trouble say a couple of grizzled veterans of economic policy, as reported by Adam Creighton.
John Stone, former head of Treasury, said of the massive 'Quantitative easing' program: '[It is] "irresponsible, verging on the criminal".
Roderick Dean, former Deputy-governor of the New Zealand Reserve Bank, said: [It is a] "highly worriesome policy designed to avoid addressing the fundamental issues of extremely large national fiscal deficits".
We said last weekend: 'Important nations are deeply indebted, with highly inflationary monetary policies whose effects are masked by the deep recession induced by the global crisis'.
The economics team at nab have concluded that China's growth is again rising: 'Today’s economic data releases for China came in broadly in line with expectations, providing evidence that the economic slowdown may have bottomed in the September quarter. The national accounts show that the economy expanded by 7.9 % over the year to the December quarter, up from 7.6 % in the June quarter, which is the first time growth has accelerated in two years.
'However, revised q-o-q growth rates suggest the economy’s growth momentum stabilised around the June quarter and has remained relatively steady; q-o-q growth was 2 % in the quarter (from a 2.1 % revised rate in Q3). The outcome was slightly stronger than our forecast for 7.6 % y-o-y growth made late last year, largely reflecting the much stronger than expected foreign trade result. Average growth for 2012 came in at 7.8 %, slightly stronger than our previous forecast of 7.7 %.
'This year we expect growth to recover to around 8¼%, with the PBoC possibly commencing monetary tightening later in the year if inflation pressures start to return'.
Henry says: Tiny changes really, well within the standard error band, but moving in the right direction.
Andrew Cornell at the much improved AFR asks is 2013 going to be positive for equities, or another year of pain.
'It’s not yet quite Pamplona but there are bulls on the loose. The thundering of hooves may still be distant but they can be distinctly heard in equity, risk and currency markets. The latest HSBC survey of global fund managers shows 75 per cent hold an overweight view towards equities in the first quarter of 2013. That’s up from just 40 per cent in the fourth quarter of 2012. Significantly, none of those surveyed are underweight in equities, while 60 per cent are now underweight in cash – the safety net allocation of recent years.
'A similar survey from Bank of America Merrill Lynch found investors’ appetite for risk at its highest in nine years, while an increasing number of investors judge equities as undervalued – particularly in Europe'. More here.
Cricket'n'tennis, and then footy
At the start of the 'one day' season, Australia's 'B' team caught the Sri Lankans snoozing, it seems. The 'A' team was last night humiliated by Sri Lankan pace and swing.
Such a gutless performance will save Henry from the bother of watching cricket for the rest of the summer, and before long the pre-season footy stories will begin popping up. Even today, we learn that Essendon are leaner and fitter than ever before, but that probably means they will (again) run out of gas well before the finals.
Still, before then we get to see Roger Federer demolish Berbnard Tomic, then admire Novak Djockovic as he demolishes everyone he meets.
Image of the week
'Nation ablaze' says The Oz and one must say that a picture tells the story.
The year of the snake - correction, economic policy
Date: Friday, January 18, 2013
Author: Henry Thornton
Tony Abbott has said that this is the year for him to outline the coalition's economic policy agenda.
It is certainly the year in which the gilt is coming off the economic gingerbread in the miracle economy, and new policies are needed urgently.
Now even the official labor market statistics are looking worse, and will look more worse as the year wears on. More here.
Yesterday, Professor Warwick McKibbin commented on our attempt to cap, or even reduce, the Aussie dollar by taxing capital inflow. His comments outline exactly the wide-ranging policy revamp that Australia needs.
We replied in part as follows: 'The chances of both those policies – actually an entire set of policies – being implemented is I fear about zip. If by a miracle after years of debate we got such policies then my tax could be reduced to zero and we would probably be coping well with a dollar far higher than at present'.
Overnight's news is that mining giant RIO has sacked a much respected CEO and his head of strategy, presumably for overpaying for assets in the boom. True blue Aussie Sam Walsh is to take over. Having delivered the 80 % of RIO's total profits from his iron ore empire, Mr Walsh is well placed to keep the show on the road, and potentially to restore the sizable slice of Henry's retirement income lost in the massive fall in RIO's shares during the GFC. RIO had already announced sizable cuts to costs (ie jobs), and presumably this was Tom Albenese's last hurrah. Job losses in Australian manufacturing continue to rise and, as previously reported, the smaller mining companies and most other small businesses are retrenching staff or going broke at a hefty rate.
It seems Boeing's Dreamliner has dud componants that put the plane at risk. Fingers are being pointed at the 30 % of the product made offshore, in some cases in unregulated sweatshops. I can hear the confident bloke from XYZ-consulting saying: 'Boeing is spending too much on safety. You could raise your EBIDTDA by outsourcing, and while you are at it reducing safety checks to global best practice'.
The world's greatest Treasurer, Wayne Swan, has been giving advice to his betters. The USA, he said earlier this week, should get its fiscal house in order. And China should press ahead with its currency reforms. Surely he has some sage advice for the Eurozone leaders, or is that problem just too hard even for Swannie?
Mr Swan is certainly no shrinking violet when it comes to giving messages to the RBA. He was reported to have told a meeting in Hong Kong that he 'has deliberately built Labor's budget strategy on Reserve Bank of Australia rate cuts'. This presumably means that he is very confident that the Bank will continue to cut interest rates, since he is also reported as having told the same meeting that it 'was unlikely that the budget will be returned to surplus this financial year'.
Like Bernard Tomic and that American president, it would be far better if Mr Swan spoke softly (and prudently) and carried a big stick (raquet in Bernard's case).
Monetary and industry policy
Date: Thursday, January 17, 2013
Author: Henry Thornton
The debate about Australia's monetary and industry policy is hotting up.
Yesterday's AFR says that Wayne Swan has told a meeting in Hong Kong that he 'has deliberately built Labor's budget strategy on Reserve Bank of Australia rate cuts'. This presumably means that he is very confident that the Bank will continue to cut interest rates, since he is also reported as having told the same meeting that it 'was unlikely that the budget will be returned to surplus this financial year'.
The front page of the Australian says 'Big projects ordered to buy local'. Nice idea, but if the government does not know the owners of 'big projects' are not good Aussies but rather capitalists red in tooth and claw, they haven't taken seriously the fiasco of the mining tax.
Meanwhile, Henry has had some interesting academic feedback on his solution, which is to add a variable tax on capital inflow to the RBA's armonary, but no response from the powers. Olympian detachment is, of course, the first refuge of the incompetent. If previous form is followed, it will be followed - eg an independent, inflation-fighting central bank - by the powers claiming ownership of the idea, then implementing it. (Comments here, including from Professor McKibbin of ANU, and former RBA board member.)
Boral is the next big manufacturing company to announce retrenchments - 700 in Australia and 2,400 around the world. These numbers were extracted from a cautious CEO on PM last night, along with reports from analysts suggesting it may be too little, too late to save Boral.
New 'official' labor market numbers released today, shows the rate of unemployment at 5.4 %, a net loss of jobs and still declining participation rate. There was a fall in full-time jobs of over 16 K, partially offset by a rise in part-time jobs of over 8 K. These trends will get worse, and the earlirr prediction of 'most economists' of an unemployment rate of 5.5 % is rapidly being replaced by 6 %, still highly conservative in Henry's view.
And, as Alan Kohler demonstrated on the ABC news ('Its as simple as ABC') last night, hours worked are falling faster than job numbers, and hoursa worked are not far off the low levels of the GFC. The good news is that companies are (again) protecting jobs by having people work shorter hours. The bad news is obvious.
Of course we know from the Roy Morgan survey that matters are far more grim than these trends suggest.