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.
Drugs in sport
Date: Tuesday, July 23, 2013
Author: Henry Thornton
Henry has occasionally toyed with the idea of three classes of sportsmen and women - amateur, professional and enhanced. The first two classes would be expected to be drug free, while the 'enhanced' group would be free to take any drug, whatever the costs to those individuals and whatever the results in terms of extraordinary performance.
Before getting to this point, it is perhaps worth one last effort to clean up the professional sporting arena by introducing far more frequent and rigorous testing for drugs.
The latest Economist has made a powerful point about the current situation. 'Enhanced' sportsmen, currently illegal, often perform better than drug-free athletes. Game theory throws light on the consequences of this fact.
1. Athletes therefore have a strong incentive to take drugs to enhance performance.
2. Sports administrators, fearful of the consequences (lower performance sporting contests, therefore lower gate receipts, and lower salaries for sports administrators) of totally eliminating drug-enhanced athletes, run dead on testing for drugs.
The resulting weak testing regime makes it virtually mandatory for anyone who (or any team that) wants to win a high-profile sporting event to cheat.
The consequences if sports administraters got serious about producing totally clean contests would include an immediate drop in performance standards - ergo, less lolly to go round.
There is a further complicating factor. Professional athletes have short careers, often cut short by injury. Like workers in other industries, surely professional athletes are entitled to the highest standards of medical treatment. Henry understands that some drugs, currently deemed illegal for their performance-enhancing purposes, also practically guarantee getting an injured athlete back on the track or the pool or the stadium in the minimum possible time.
Surely, such drugs, administered by a qualified medical advisor, should be able legally to be used to help repair injuries. The medical advisors involved could be required to maintain a diary detailing the injury and the precise treatment used, and when the treatment ended. This is just common justice, enabling professional athletes to maximise their lifetime earnings, like the rest of society.
Now we live in a shadowy place where sports administrators have weak incentives to ban athletes that cheat, athletes feel they cannot compete unless they cheat and others sit on the sidelines waiting for nature to repair injuries. Sports fans are entitled to wonder whether or not the winners are enhanced, which provides alibis for poor performers and disappointment that ultimately will kill support for ambivalently regulated sport.
There are two solutions. The first is to get serious about eliminating drug use, which ultimately will fail, as prohibition of alcohol failed in the USA, creating massive criminal enterprises while it existed. Or let professional athletes use any drug or supplement they or their medical advisors can find. At a minimum, allow an athlete's medical advisor to treat injuries with any drug that could legally to be used on normal (non-professional atheletic) patients.
The Economist does not embrace the latter solution. As one might expect from desk bound journalists, they would be willing to settle for poorer levels of sporting performance.
The venerable mag concludes: 'The maths says there is only one way to clean this up: introduce frequent, ubiquitous testing, with all results, both positive and negative, made public. In the short run, that would probably result either in a huge number of disqualifications (if athletes thought the authorities were bluffing) or a sudden drop off in performance (if they did not, and thus stopped taking the tablets).
'How fans and sponsors would react to either of these is unpredictable. Which is why, presumably, it does not happen. Yet it would make sure that sports really are played according to their arbitrary rules as well as within the non-arbitrary rules of mathematics. And if fans don’t like it, they can at least change the former'.
Recession update + Bernanke review
Date: Monday, July 22, 2013
Author: Henry Thornton
The Australian Treasury, prompted one suspects by our new Treasurer, has taken another step toward realism.
Today's Oz reports that Treasury is revising down its growth forecasts for this year and the next, and where Treasury goes so will the Reverse Bank.
'Speaking from Moscow, where he attended a weekend meeting of G20 finance ministers, Mr Bowen said the world economy was presenting challenges to Australia.
'While Europe remained in recession, he said the big emerging countries - Brazil, Russia, India and China - "which we expected to be the engine room of growth to drive world growth, are coming off the boil as well".
'Treasury's budget forecasts that Australia's growth would average 2.75 per cent this year and 3 per cent next still tally with many private-sector estimates, but they were based on assumptions that were no longer valid'.
Naturally, the budget deficit will need to be revised further upward, and therefore extra savings will be needed, over and above the ham-fisted recent announcements.
Paul Krugman digs into the matter: 'The signs are now unmistakable: China is in big trouble. We’re not talking about some minor setback along the way, but something more fundamental. The country’s whole way of doing business, the economic system that has driven three decades of incredible growth, has reached its limits. You could say that the Chinese model is about to hit its Great Wall, and the only question now is just how bad the crash will be. ...
'How big a deal is this for the rest of us? At market values – which is what matters for the global outlook – China’s economy is still only modestly bigger than Japan’s; it’s around half the size of either the US or the European Union. So it’s big but not huge, and, in ordinary times, the world could probably take China’s troubles in stride. Unfortunately, these aren’t ordinary times: China is hitting its Lewis point [ie point when it runs out of skilled or trainable labor] at the same time that Western economies are going through their “Minsky moment”, the point when overextended private borrowers all try to pull back at the same time, and in so doing provoke a general slump.
Readers seeking another view of the China problem may read on here.
So far as domestic issues go, it is driven by slower than expected retail sales and a faster than expected reduction of investment plans that are driving the rising tide of official pessimism.
Henry sees far more general problems, especially the excess cost levels, that make slower consumption and investment spending a rational response for households and businesses respectively.
Henry's editor likes the book, which reinforces Chairman Bernanke's commitment to transparency and accountability.
His two reservations, however are significent.
The first is philosophic - and concerns the lack of any discussion of 'moral hazard'. Many financial institutions were bailed out after failing, but there was no effective punishment for their leaders, who were mostly allowed to retire gracefully with wealth acquired by overseeing rediculous risks intact.
The second issue is more technical, and here is the relevant extract from the review.
'My chief criticism of Mr Bernanke’s book is its failure to even mention a basic point that occurs to anyone who understands Macroeconomics 101. I see the failure to address this point as a curious flaw or deliberate omission in his analytic framework. This is doubly curious as Mr Bernanke is at pains to explain ideas in simple language, and to repeat other key points several times.
'At the end of each lecture, there is some dialogue between (unnamed) students and the Chairman, the students asking questions and the Chairman answering them. But no student was reported as asking the following question, and I could find no implied answer in the book.
‘Imagine, Mr Chairman, a demand curve for money and a supply curve for money, intersecting to define an interest rate that in turn defines an equilibrium in the market for money. Then the Fed imposes a near zero interest rate, thereby creating a major disequilibrium in the market for money, and therefore in other markets. Please explain how it all works out over the next ten or twenty years.’
'That is my question, and I ask it with with real concern at its absence from Ben Bernanke’s book. Like the absence of ‘moral hazard’ it leaves me with concern about the future of monetary policy and regulatory policy, and therefore about the future of the global economy'.
Saturday Sanity Break, 20 July 2013
Date: Saturday, July 20, 2013
Author: Henry Thornton
Mr Rudd has taken a mighty 'lurch to the right' with his PNG solution to the problem of people coming by boats seeking asylum, or at least eventual jobs and life in a nice country.
The response of many people is a massive feeling of being gobsmacked.
Here is a man who did his best to demonise Howard and Abbott for solutions far gentler than Rudd now has in mind.
Paul Kelly says: 'Rudd's policy is more sweeping, brutal and smarter than anything Abbott has proposed. It is cruel. It accepts that regional co-operation, in this case with PNG, is pivotal to any solution. It will cost many billions. It is consistent with Australia's international obligations. Its brutality will become a great disincentive to future boat arrivals. Provided the policy can be implemented, it will stem the boat arrivals.
'Rudd seeks to rekindle the climate change debate by making the contest his ETS against Abbott's "direct-action" plan. This reframes the issue for the election. Rudd wants to make the test: who is best to meet the climate change challenge?
'What is Rudd saying on the economy? The narrative reads: the Keynesian moment is over; fiscal restraint is vital; responsible macro-economic policy is not enough; fresh reforms must "be prosecuted with a new urgency"; with China's boom coming off, the aim is to diversify our sources of growth; and, buttressed by the lower dollar, Rudd champions a new national competitiveness agenda'.
'KEVIN Rudd's Port Moresby solution is an enormous play' says Greg Sheridan'. 'It is by far the most dramatic and serious effort Labor has made to deal with the problem of illegal immigration to Australia by boat. It is audacious, bold and sweeping.
And yet, is this just Rudd's version of Julia Gillard's East Timor solution, unveiled with such fanfare, but no ultimate effect, just before the 2010 election?
And in conclusion: 'The Left did Howard an enormous favour by demonising him over boats. Everyone was a bit scared of Howard. Certainly everyone believed, on this issue, he had grip, had strength of will.
'Paradoxically, that allowed him to be much more humane than the chaos and catastrophe of the past six years'.
Laura Tingle and friends say 'Rudd slams the door on boat people', and a similer headline is used by the SMAGE.
Everyone writes of the practical problems, such as how many people will PNG take, and is the new scheme legal in either, or both, countries. Even his closest supporters must recognize that Mr Rudd was not too hot on implementing any of the policies he supported in his first stint as PM - except, of course, his 'lurch to the left' on boat people, which turned a trickle into a flood.
Everyone seems to have had the same response to Treasurer Chris Bowen's first speech in his new job: 'Thank goodness Swannie has gone and someone sensible is minding the money'. Sort of like Bill Hayden replacing Jim Cairns and the other Whitlam money wasters.
On the global scene, various experts discuss the 'rumbles from China', and Ambrose Evans-Pritchard of Telegraph fame points out that 'Bernanke plays with fire' with his unorthodox monetary policy.
'After weeks of utter confusion, the result of Fed taper talk is clear enough.
'Long-term borrowing rates are much higher across the world regardless of whether the underlying economies are in any fit condition to absorb this shock'.
This week's finest contribution comes from former Secretary of Treasury, John Stone, reminding us just what a mess Treasurer Swann made of Australia's fiscal policy and the fine analysis of Irving Fisher.
Caaaarlton!'s season was nearly finished when it let a 33 point lead in the third quarter drip away until there was just a point in it. Mighty Matthew Kruezer rucked tirelessly all day and took two tremendous marks in the last quarter to deny a rampaging North Melbourne a win. Whoever wrote that recent article about the high draft picks not achieving their potential at the Blues should be made a Caaarlton! life member. So we are still in the hunt for a place in the finals where, if everything goes well, we could give one or even two more highly fancied teams a fright, or even a belting.
(Memo Mick the Merciless: Your policy of sneaking around the boundary is working, but the big torp from the opposition goal square over the heads of the pack in the centre, with the three amigos waiting to pounce is a mighty weapon, which needs to be deployed occasionally. Also, despite various areas of improvement, we still need a serious enforcer.)
What a win it was for the Goldcoast Suns, beating the old enemy, Collingwood, and perhaps condemning them to a position out of the top four. St Kilda tried hard to help Caaaarlton! to stay in the eight by beating Port Adelaide but were pipped at the post after a mighty good game.
Pity we cannot report equally well of our cricket team. After a great start, then a dry period, then another round of pommie wickets, our bowlers could not finish the tail. Poor old Watto, shuffling across his wicket then challenging an adverse LBW decision even Henry could see from 12,000 miles away was plumb. After a refreshing lunch, other batters followed in short order, and the poms started their second innings somewhere north of 250 runs and three days to go. 'The water's five foot high and rising', as Johnny Cash would have said.
Image of the week
Debt and deflation; Stone and Fisher
Date: Friday, July 19, 2013
Author: Henry Thornton
John Stone is a former Secretary to the Treasury (1979-1984). He therefore knows a thing or two about economics and the application of fiscal policy to an economy in trouble.
This week John Stone has published an article about the former Treasurer, Wayne Swan, and his record as an economic manager. He has graciously allowed Henry to repost his article, which may be accessed here. The following extracts are a vital part of Mr Stone's indictment, and also contain reference to a wonderful but nowdays neglected masterpiece of economic analysis.
'Swan’s claim that his “fiscal stimulus" pulled us through the GFC is simply false. We came through it because (1) we had an enormously strong fiscal position; (2) the Reserve Bank cut its official cash rate by 4.25 per cent, adding hugely to mortgagees’ net disposable incomes; (3) our banks, after initial deposit flight problems were overcome, were never in real trouble; and (4) China’s demand for our minerals soared even faster following its huge credit injection at that time.
'Surely, though, Swan’s “fiscal stimulus" must have contributed? On the contrary, in anything but the very short-term, its confidence-destroying effects in blowing away our budgetary surplus and net asset positions were seriously adverse.
'True, Swan does then seem to have received bad Treasury advice. The prescription to “go early, go hard, go households" – attributed to the lessons (sic) from the 1991-92 recession – was plainly wrong. As pointed out in this newspaper in February 2009 (and detailed in my HR Nicholls Society address a month later), Treasury's error lay in seeing 2008-09 as another “cyclical” recession, like that of 1991-92. It was, rather, a “balance sheet recession" of the (rare) kind that Irving Fisher wrote about in his famous, but unfortunately long forgotten, Econometrica paper in 1933'.
Thanks to the power of modern technology, this paper is available with only a few strokes of the keyboard. What follows are a few extracts from Irving Fisher's classic paper, with only a brief, perhaps self-evident, further comment by me.
Irving Fisher: IN Booms and Depressions, I have developed, theoretically and statistically, what may be called a debt-deflation theory of great depressions. In the preface, I stated that the results "seem largely new," I spoke thus cautiously because of my unfamiliarity with the vast literature on the subject. Since the book was published its special conclusions have been widely accepted and, so far as I know, no one has yet found them anticipated by previous writers, though several, including myself, have zealously sought to find such anticipations. Two of the best-read authorities in this field assure me that those conclusions are, in the words of one of them, "both new and important." ...
I venture the opinion, subject to correction on submission of future evidence, that, in the great booms and depressions, each of the above-named factors has played a subordinate role as compared with two dominant factors, namely over-indebtedness to start with and deflation following soon after; also that where any of the other factors do become conspicuous, they are often merely effects or symptoms of these two. In short, the big bad actors are debt disturbances and price level disturbances.
While quite ready to change my opinion, I have, at present, a strong conviction that these two economic maladies, the debt disease and the price-level disease (or dollar disease), are, in the great booms and depressions, more important causes than all others put together.
Some of the other and usually minor factors often derive some importance when combined with one or both of the two dominant factors. Thus over-investment and over-speculation are often important; but they would have far less serious results were they not conducted with borrowed money. That is, over-indebtedness may lend importance to over-investment or to over-speculation.
The same is true as to over-confidence. I fancy that over-confidence seldom does any great harm except when, as, and if, it beguiles its victims into debt. Another example is the mal-adjustment between agricultural and industrial prices, which can be shown to be a result of a change in the general price level.
Disturbances in these two factors—debt and the purchasing power of the monetary unit—will set up serious disturbances in all, or nearly all, other economic variables. On the other hand, if debt and deflation are absent, other disturbances are powerless to bring bring on crises comparable in severity to those of 1837,1873, or 1929-33.
Irving Fisher's full paper is available here, and will repay careful study.
Henry, in conclusion: It may self-evident that the global economy, especially the economies of the so-called 'developed' world, but also China, is/are weighed down by excessive debt. Extraordinary monetary stimulus by the major central banks has staved off deflation, but when the US Fed tries to reverse that policy will be a time of greatly increased danger.
Date: Thursday, July 18, 2013
Author: A Reader
I note your comments - Stone the crows, comrades - about the possibility of inflation increasing due to the depreciation in the Australian Dollar.
I believe that the impact will be far greater than has been acknowledged for the following reasons:-
1. The Australian economy has come off off a long period of time with a high dollar. This has led to the closure of Australian based manufacturing, eg cars, with more product imported rather than locally made. Therefore a much greater proportion of product will increase in price, rather than the assumption that the rates of imported verses locally made is constant. 2. Services inflation – I live in a mining and CSG gas locality. Most of the specialist CSG companies that service the CSG wells are based in America. Therefore I would expect that the rates they charge to undertake activities will increase.
However if the Australian dollar does fall much further this may not be a problem as rather than RBA rates having to increase rates to take money out of the economy, the rise in government and corporate interest payments on high levels of debt will certainly cause money to be sent overseas rather than spent in Australia.
I note the assumption that many economists make that when unemployment rises that interest rates must fall. I believe that we’ll be heading the other way with interest rates either staying the same or rising at the same time as unemployment is rising. I believe that this is a culmination of excessive levels of debt bought while it was “cheap” to fund marginal projects, whilst banking on the terms of trade continuing. However revenue prices have now fallen and more cash is required to meet interest payments, rather than employing more people .
I’m not an economist, however I don’t think that rising unemployment occurring at the same time as rising interest bills is a good thing.
Stone the crows, comrades.
Date: Wednesday, July 17, 2013
Author: Henry Thornton
The RBA is concerned that the plunging dollar will create [just a little extra] inflation.
Hundreds of highly paid analysts have had to downgrade their forecasts of a rate cut in August and the traders will be nursing hurt feelings and perhaps some lost dollars. (Be of good cheer, traders, these are depreciated dollars.)
The RBA minutes said: 'The news in recent months had generally been consistent with the outlook for growth being a little below trend and inflation remaining consistent with the medium-term target. The most significant change had been the depreciation of the exchange rate, though members noted that it remained at a high level. The depreciation was expected to add a little to inflation over time, but the forecast was for inflation to remain consistent with the target. Members noted that it was possible that the exchange rate would depreciate further over time as the terms of trade and mining investment declined, which would help to foster a rebalancing of growth in the economy.
'Given the exchange rate adjustment that was occurring, and with the substantial degree of monetary stimulus already in place, members assessed the current stance of policy to be appropriate for the time being. The Board also judged that the inflation outlook, although slightly higher because of the exchange rate depreciation, could still provide some scope for further easing, should that be required to support demand'.
This statement was probably described by some young bloke within the RBA as 'just a toe in the water.' If growth really is just a 'a little below trend', and inflation indeed 'remain[s] consistent with the target' all will be well, with only a wet toe to tell the tale.
At a debate with Ross Garnaut at 'The Shop' earlier this year, I said: The large fall in the dollar [then underway] would create fresh dilemmas for the Reserve Bank.
In recent times, the strong dollar has kept traded goods inflation low. Low traded goods inflation has coexisted with non-traded goods inflation of around 4 per cent. The net result has been overall goods and services inflation comfortably within the RBA's target zone.
But a large fall in the dollar would mean traded goods inflation would jump, and non-traded goods inflation would also rise more quickly. The RBA might well find that its target 'inflation zone' was unable to be achieved by modest increases of interest rates under official control.
The Reserve Bank struggled to find a good answer when the effects of financial deregulation destroyed its ability to achieve the 'money growth projections' imposed by government from the mid-1970s to the mid-1980s.
The Bank now, following a large fall in the value of the dollar, would have to at least suspend the inflation target, or exclude traded goods (assuming non-traded inflation was not too high for policy to reduce it quickly), risking red faces or worse.
The 'bank economists and traders are happy to buy whatever line the RBA are running at any one time, and not many have heeded Henry's free advice - hence the desk thumping and teeth grinding as the Old Lady of Martin Place begins her ponderous turn away from the looming iceberg.
The dilemma facing the Old Lady will get sharper before it disappears.
The economy is weak, and a falling dollar will help the economy but is likely to require a suspension of the 'inflation target' that has served Australia so well since 1993.
The sooner the Old Dear gets around to explaining this issue the better.
Until she does, Henry will try to keep readers ahead of the game.
Cracks widen in China`s economy, USA financial services
Date: Tuesday, July 16, 2013
Author: Henry Thornton
More news on China's financial travails emerge as we learn of the likely failure of real US financial reform. This crisis ain't over yet, gentle readers.
'China’s central bank governor said the economy was facing strong downward pressure as growth slowed again in the second quarter.
'Meanwhile, a prominent government scholar said the country was already in the midst of a financial crisis.
While growth in the second quarter fell slightly, far more worrying is, firstly, the concerns of the central banking boss, who is sure to be a cautious fellow.
The AFR corrspondant continues. 'The lack of a negative surprise buoyed regional sharemarkets but People’s Bank of China governor Zhou Xiaochuan was more circumspect.
“The current domestic and international economic situation has become extremely complicated,” he said.
'Mr Zhou said “unstable and uncertain factors” were increasing and had placed economic growth “under relatively big downward pressure”.'
The 'prominant scholar is Xai Bin, a 'prominent economist' at the State Council’s Development Research Centre, was more alarmist.
He said China needed to act quickly to avert a larger debt crisis.
“We need to find ways to let the bubble burst and write off the losses we already have as soon as possible to avoid an even bigger crisis,” Mr Xia was reported as saying by German financial news services
“Deep adjustment means economic growth slows as costs are paid; it means hard days, it means the bankruptcy of some companies and financial institutions and it means reform,” he said.
'Mr Xia is the first high-profile government scholar to openly question the sustainability of China’s growth and the growing indebtedness of state-owned enterprises and local government vehicles'. Read on here.
Given the general gloom at the recent Melbourne University seminar, reported here, none of this should be a surprise, except perhaps the willingness of prominant people in China to hold forth on the issue.
Being savaged by Wayne Swan for 'deliberate pessimism' in one thing, but getting members of the politbureau offside in China might have real consequences.
USA financial reform
The GFC should have shaken to the core those responsible for US financial regulatory policy. Like the pain of childbirth, the searing experience of the GFC seems to be receeding. From all reports, Wall Street has conducted a wonderful rearguard action that means its practitioners will be able to keep ripping off the people and have their foolish mistakes bailed out by the taxpayers, almost all of whom are from Main street. (The titans of Wall Street rarely pay income tax on their vast earnings.)
Now, at last, there is a sensible to restore the Glass-Steagall Act, introduced in 1933 (in the middle of the Great Depression) and repealed in 1999. John Authers explains why is should be reintroduced but won't be.
'The case for repeal went as follows. Financial services groups wanted to offer customers a one-stop shop. Companies could access both syndicated loans and equity; individuals could buy mortgages, insurance and stocks, all in one place. This would diversify revenue streams, reducing risk. Access to deposits, a cheap form of finance, would ease the costs for investment banks. The higher margins that come from pumping more sales through the same distribution system would lift returns for shareholders, and cut prices for clients.
'How did that work out? Let the market be the measure. On the eve of the agreement to repeal Glass-Steagall, on October 24, 1999, the S&P 500 financial services index traded at almost three times book value.
It now trades at 1.3 times book. Trailing 12-month earnings per share for the sector are lower now than they were in October 1999. The financials index as a whole has fallen 15 per cent – although with dividends included, it has made a positive return of 15.2 per cent, or about 1 per cent per year. Repealing Glass-Steagall was terrible for shareholders.
'But what about clients? Did Glass-Steagall repeal really have much to do with the financial disaster of 2008? Critics point out that it was specialist investment banks such as Bear Stearns and Lehman Brothers that brought the financial system to its knees, not financial supermarkets.
'But this ignores the fact that no super-market could possibly be allowed to fail. Both Citigroup and Bank of America, owners of Salomon Smith Barney and Merrill Lynch respectively, needed repeated injections of government aid to see them through. Both contributed in full to overblown credit markets'.
The seven decades of the Glass Steagall Act now look like a golden age of stability.
Wall Street, of course, will fight all the way to prevent a return of Glass-Steagall, and will prevail.
So much the worse for global financial stability.
US Fed Chaitman, Ben Bernanke, in his recent 'Four lectures' (soon to be rviewed here), manfully makes the case that there has been meaningful reform in US financial regulations. Unless and until boring but safe commercial banking and exciting but risky investment banking is again seperated (by restoration of Glass-Steagal) we shall all live with the possibility of financial armageddon.
Saturday Sanity Break, 13 July 2013
Date: Saturday, July 13, 2013
Author: Henry Thornton
The biggest economic issue for the week has been further evidence of a worsening labor market in Australia. Our new 'Recession watch' column aims to keep up to date with the economic news and Henry's ongoing judgment.
Henry's latest advice to the board of the RBA lays out the state of the matter as it was in early July, and may be accessed here.
The image of the week at the end of this blog tells most of the story with crystal clarity. If any readers are able to construct a graph with employment, workforce and hours worked since 1980, it will provide a good illustration of what might happen in the 'realistic worst case' - ie even the ABS rate of unemployment over 10 % of the workforce.
The British Loins demolished our Rugby team, and took coach Deans out at the same time. Andy Murray won Wimbledon and is shortly to be knighted, or even elevated to the House of Lords. Now the pommy cricket team have their foot on our neck in the test match being played at Nottingham.
But despite another dismal batting performance from our top order, and our middle order, we hail Agar the 'Orrible (as the pommy tabloids describe our newest superstar cricketer). Has two wickets and should have three but sadly his bowling performance, good as it has been, pales into insignificance compared to his batting.
Ed Cowan, you'd better perform tonight, or your number three spot my go to the 'orrible one.
Henry presumes that Caaaaarlton! will get wacked by St Kilda tonight, and his advice to Mike Fitzpatrick and Mick Malthouse is simple. We need couple of key position players PLUS a real enforcer. Our good players get monstered each week and there is no fear of retribution. Think about it as you plan the spring cleaning that is to come. At least Gibbs and Kruezer are safe, unless Mick the merciless has some deeply devious play in mind.
[Ed: Henry is too pessimistic about the footy, and Carlton has kept its season alive with a good win against St Kilda. With four winnable games to come, its not over yet.
The cricket team has to set a record to win, with a mere 311 runs to get on a wearing pitch. Still, it ain't over til its over.]
Image of the week
June 2013 - Henry's Real Un- + Under-employment Rate - 19.1%
The old razzle dazzle
Date: Friday, July 12, 2013
Author: Henry Thornton
The global monetary policy chief, Ben Bernanke, has again spread confusion in markets with a dose of the old razzle dazzle. More specifically, Fed minutes led market participants to expect an early end to current super-easy monetary policy and then, after markets panicked, Bene the Benificent said there was no immediate plans to do anything like that.
One is inexorably reminded of Bene's immediate predecessor, Alan Greenspan. The grizzled veteran of the interest rate wars once famously said, 'If you think you understand me, I must have misspoke', or words to that effect, sadly minus the Richard Gere razzle dazzle.
The misspoken minutes caused equity markets to drop and the US dollar to rise, while Bene's soothing commentary caused equity markets to rise and the dollar to fall.
The (small) Aussie dollar fell and then rose, mirroring the (big) US dollar but equity markets moved down then up in parallel. Welcome to the wild world of modern central banking.
Its not a breeze that's blowing through the global markets, folks, its building to a bloody typhoon. Imagine the carnage when Bene or his successor actually stops buying bonds and hints his/her's next move is to raise cash rates.
The mild-mannered men of Martin Place must watch all this and thank whoever's resignation it was who triggered the start of their salary rises. Then Governor R.A. Johnston got to $250 K, and the reward for turning up has now breached a cool million. Defined benefit pension too, comrades, we gotta have the best.
But I am diverted from my main task of keeping the ba**tards honest. 'Official' ABS unemployment has began to rise, reaching 5.7 % for June. Total unemployment, when measured more correctly by Roy Morgan Research, is almost double that, and it turns out a sizable majority of voters think the Roy Morgan numbers are more accurate.. Jobs ads are falling like a Stone, and I don't mean the former Secretary of Treasury John Stone who must splutter into his cornflakes whenever he sees a modern Treasurer in action. Think what rising unemployment is doing to the budget, comrades.
Chris Bowen has written a book, Hearts & Minds, which is to be serialised in The Oz. Can't wait, comrades, and Mr Bowen's boss, Kevin 747 Rudd, has already picked up his plan to reform the Labor Party. Fat chance comrades is the view in the union ranks. As former Labor heavyweight, Graham Richardson says, no-one is about to allow Kevvie to lock himself in as leader virtually forever.
Kevvie has 'held out the olive branch to business'. His seven point plan is like his plan for party reform - the dreams of a man determined to entertain everyone by zipping about at lightspeed, allowing neither himself or (nor?) others any time for careful reflection.
Henry says 'let's get on with the election Mr Rudd. You can take a few days off to attend the G20 meeting; take Tony Abbott with you and you can both have some quality plane time to reflect, or simply sleep.
Allowing the voters some time for careful reflection also. Fat chance, comrades, best keep zipping, and give them the old razzle dazzle performed so well by Richard Gere in the movie Chicago.
World trade, global recession?
Date: Thursday, July 11, 2013
Author: Henry Thornton and Nick Raffan
There is a lot of angst about slowing Chinese growth. Earlier this week we reported a seminar of eminent China experts at which there was a lot of honest comment about the problems facing China's new leadership group. The quality press today seems full of 'China slowing' stories, with plenty of highly relevant hand-wringing. Today we focus on a more general, but related, issue, the strong slowing of world trade. As the Director-Genetal of the World Trade Organisation (WTO) put it recently: 'The world needs more trade to stave off recession'. The graph below shows the aggregate picture, which looks suspiciously like the onset of a 'double dip' recession, or at least a very substantial 'growth recession' to Henry.
Henry's Rafff Report for July emphasises these disturbing facts. He points out that graphs provided by the WTO show imports and exports - all falling sharply - for the USA, Japan, EEC (external), China, Republic of Korea, Brazil, The Russian Federation and India. We repeat, all falling sharply. Nick Raffan continues to discuss implications for resource sector equities.
Regular readers of the Raff Report will recall that the recommendation has always been to buy resource stocks at or near the bottom of a business cycle and exit somewhere near the top. This strategy is perhaps more difficult with economic growth cycles out of sync. The USA seems on a path to recovery, although last time Raff Report considered US New Orders for Durable Goods it seemed that orders stood at or close to a cyclical high. Whilst at the same time, the unemployment crisis in Europe seems worsening.
Timing is everything when buying resource stocks. This is because this sector usually pays miserable dividends and investors seeking yield invest elsewhere. The truth of the matter is that mining companies are right out of favour at the moment with canny investors focused on oil and gas. Even in the energy sector it’s hard to pick winners.
Very brief comments for the metals are: with respect to COPPER, price remains under pressure with COMEX inventory falling and LME stocks still on a rising trend and standing at a 5-year high. The price of ALUMINIUM is under heavy downward pressure, partly weighed down with low energy prices as major cost input. LME stocks of aluminium have been steady over the past 30 days but remain stuck near a 5-year high. NICKEL does not look flash with LME stocks rising and price continuing to soften. LEAD and ZINC look comparatively encouraging with LME inventories retreating from 5-year highs with prices looking like finding a bottom.
Past Raff Report cautioned that newly developed technology to extract GAS from shale (tight gas) would lead to collapse in price, not only of gas, but also of THERMAL COAL (now below the FOB cost for most Australian producers) and that is what has happened. The Raff Report also suggested that some plans to build nuclear power stations might be scrapped and replaced with gas turbines. This may or may not have occurred but one thing for sure is that the price of URANIUM has slipped below US$40/lb from US$52/b in May 2012. Most producers of U3O8 need US$60/lb to make a go of it.
The full Raff Report includes 3-year share price charts for six resource companies representative of their sector. These companies are listed on the London Stock Exchange (LSE), and the prices are shown in pence. There is no joy here. Even the price of successful Tullow Oil is below where it was 3 years ago. Tullow is an oil producer and explorer that have demonstrated exploration and production success within the African continent, principally Uganda, Kenya and Ghana. The first of these charts is for the world's leading diversified miner, BHP Billiton, and even its chart looks pretty sick.
Neither Henry nor the Raff are liscenced security experts, so we offer no advice. But readers should tread gently - its pretty gruesome out there.