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Henry Thornton - Contributors: A discussion of economic, social and political issues Blogs
China`s next revolution
Date: Wednesday, February 29, 2012
Author: Henry Thornton

While Australia  squabbles over its political leadership, China's continuing strong economic growth is under question.

First there is the current weakness, the consequences of the recession in the North Atlantic nations following the global financial crisis.

As reported yesterday, one expert group sees a 10 % chance of a hard landing in China, and a 25 % chance of a soft landing. 

A hard landing would do immense damage here, with falling GDP, double digit unemployment and a massive shake-out in house prices.

Even a soft landing would create a local recession.

As the Rudd-Gillard-Swan governments have already spent the legacy  of Howard and Costello, and incurred large budget deficits and rebuilt government debt there is far less room for fiscal stimulus.

And, in any case, Mr Swan has already promised a return to a (tiny) surplus in 2012/13, with no caveats this writer could spot, and reiterated after news of slowing activity in China.

Now the longer term Chinese future is suddenly clouded also.

This comes courtesy of the World Bank and the Beijing's Development Research Centre, as told by Ambrose Evans-Pritchard.

'Few countries escape the middle-income trap', illustrated nicely by the following graph.

 Courtesy World Bank

From 1950, of many contenders, only Korea and Japan have broken from the pack, though for a while Iran looked promising.

Others (not shown) to have done well include Hong Kong, Singapore, Taiwan, Mauritius, Israel, and Equatorial Guinea.

'In the early 20th century Argentina and Australia were twin economies trading similar goods in the informal British Empire. Half a century later, the Australians were five times as rich. Shows what good governance can do.

'By contrast, the Peronists forced farmers to sell their produce to state export boards, at ever lower prices, until they killed the goose that laid the golden egg. The damage was gradual, but lethal'.

China has built its spectacular success partly on cheap labor, but that luxury (for business and political) leaders is nearing its end.

'Pay has already been rising at 16pc to 18pc annually in the Eastern cities for several years, and this is now happening in Chengdu and Chongqing in the heartland'.

There is also the issue of China's relaxed attitude to the acquisition of intellectual property. Evans-Pritchard says that when he was in Dalian in September he heard China’s software king, Lee Kaifu, warn that 'the economic prize will elude the country unless it cleans up its intellectual property laws. Firms are already going off-shore to protect their inventions, and the best entrepreneurs are already moving to states with a commercial rule of law, he said'.

"The role of the private sector is critical," said the World Bank less directly. "Innovation at the technology frontier is quite different in nature from catching-up technologically. It is not something that can be achieved through government planning."

There are powerful vested interests who will oppose the free market revolution that is required now.

China can no longer rely on imported technology to keep up blistering growth averaging 9.9pc since Deng Xiaoping began to throw open the economy in 1978 and unleashed the nation’s pent-up commercial energy. "China has reached another turning point in its development path when a second strategic, and no less fundamental, shift is called for," the report said.

'The report has been seized upon by Politburo reformers battling hardliners and vested interests. Li Keqiang, groomed to take over as premier this year, offered his "unwavering support" for the findings.

'He faces tenacious resistance from factions within the party, who insist that the country’s resilience through the global capitalist heart attack of 2008-2009 has vindicated state control of key industries and banks.

'The report said China’s growth will slow to 7pc later this decade and 5pc by the late 2020s even if China embraces deep reform. Stagnation lies in wait if it clings to the dirigiste model'.

Ambrose Evans-Pritchard concludes: 'If all goes well, China will be a "high-income" economy by 2030 and perhaps as dominant as Britain in 1870 or the United States in 1945, or indeed as flourishing as the Qing Empire itself in 1820 before the onset of catastrophic decline. Politics will decide'. 

Australia's economic reform had better get kick-started again.  Clearly we cannot rely forever on pennies from heaven, correction, the Middle Kingdom.  As a immediate step, a competent Foreign Minister would help.  Pity Bob Carr is ruled out by the self interest of lesser politicians.

Related articles.

Here is The Economist's view, with useful links to other sources and the report itself.

And a local opinion, that of Rowan Callick.

Market meltdown
Date: Monday, August 24, 2015
Author: Henry Thornton

'The Australian sharemarket has plummeted today amid a global sell-off sparked by fears of deflation and standstill economic growth, with a plunge on the Chinese markets making matters worse.

'At 3.15pm (AEST) the S&P/ASX200 index was down 4 per cent cent to 5007, the biggest intraday drop since 2007.

“Today has all the hallmarks of being one of the worst trading days of the past five years,” IG market strategist Evan Lucas said.

“Fear-selling is now stronger, faster and harder than ever before, and now there’s another pressure to it — are central banks out of tricks.”

'China’s main stockmarket gauge, the Shanghai Composite index, tumbled 6 per cent in the first minutes of trade, despite Beijing authorising the state pension fund to invest in stocks to shore up the markets'.

This grim news continues here. 

So what does it mean?

Whether this is part of a 'correction' (a 20 % fall), a 'crash' (up to 40 % fall) or a catastrophe (name your own figure) is impossible to say.  Henry said in his 2011 book Great Crises of Capitalism (signed off in late 2010) that he had no confidence that the Global crisis was over.  Since then 'Quantitative Easing' and near zero interest rates have boosted global share prices and there have been rapid recovery from downturns in global indices.

Factors that are worrying experts, and should be worrying us all, include: continued near-zero interest rate and uncertainty about how that situation can be normalised; the apparent severe slowdown in the Chinese economy - with non-official sources suggesting this problem is far worse that official numbers; continued uncertainty about economic recovery in the Eurozone and how very weak Eurozone countries like Greece can recover with continued, much disliked austerity imposed by creditors; the signs of slowing in the US economy; fears of global deflation; and poor 'Animal Spirits' among many global investors; businesses and households.

The link to Australian superannuation is that the market meltdown has already hacked into incomes of retirees with self-managed funds, and will decimate returns several times more in a wost case.  Most if not all global decision makers, like Australian politicians and officials, have defined benefit retirement schemes that are backed by tens of millions of assets. This illustrates the ridiculous nature of those who argue, while sitting on a guaranteed pension backed by millions of dollars of assets, that a person who has accumulated a one, or two or three million super fund is 'rich'.

The only way to minimise the fallout from the market meltdown and all the current uncertain but mainly bleak prospects, is to embark on thorough-going economic reform, after the government carefully and honestly explains things are not 'she'll be good mate!' as weekend propaganda put it.

Superannuation and tax reform

Superannuation tax has raised its ugly head again, thanks to Henry Ergas.  The rhetoric is wonderful, and the warning (front page of The Oz) is chilling: 'It seems only a matter of time before super savers are slugged'. But try as he might, Henry (Thornton) cannot see how Henry (Ergas) justifies his argument that super savers are already being slugged any amount between 40 % of income and 465 %. We suspect it involves calculations that depend on humanity's defective way of discounting the future, but we cannot be sure.  Please Mr Ergas, explain so even a man close to entering his eighth decade can understand.

The big front page headline, of course, says Smokin' Joe Hockey is going to raise thresholds for income tax bands and (possibly) cut rates of income tax. Great for future earners of salaries, but not so good for people entering their eighth decade whose future income is (ahem) limited.  Smokin' Joe may not survive to introduce these essential reforms, although Henry dearly hopes he will. “At the moment, 2.7 per cent of Australian taxpayers [including both Henrys presumably] fall into the top income tax bracket, and they are paying more than 28 per cent of all income tax,” [Joe Hockey said].

Smokin' Joe will promise to reform income tax without introducing a higher GST tax rate, but rather cutting spending.  This is going to be part of the current government's pitch to voters at the next Federal election. Recall Smokin' Joe's first budget, dear readers. Fat chance of spending cuts even if the coalition wins the next election, currently not something to bet the house on. The possibility of super being slugged while income tax is being cut, in both cases when Henry (Thornton not Ergas) is no longer earning much by way of fresh income, is deeply disturbing.

Thorough-going economic reform includes tax reform.  In the modern global economy, rates of tax in various catagories need to be near the that of competitor nations or there will be massive local disincentives. But there are plenty of non-tax reforms that are needed if Australia is to become a dynamic, entrepreneurial nation that is as fire-proofed as possible in a dynamic, unstable world economy.

Saturday Sanity Break, 22 August 2015.
Date: Saturday, August 22, 2015
Author: Henry Thornton

The by-election for the seat of Canning is the next moment of truth for Tony Abbott and his government. Polls are unpropitious and the money-pinching scandal in the Victorian branch cannot help.  The battle over the Royal Commission into Trade Union Governance and Corruption into  should help, especially if Mr Abbott can persuade commissioner Heydon Dyson to tough it out and finish his report.

But Labor will run hard both to discredit the commissioner and get the commission closed down. Kelly again: 'Whatever happens, Abbott won’t close this commission. The political story of the week was the Abbott government’s resort to an aggressive campaign against Labor and unions over jobs, suggesting that Abbott has found a powerful script'.

Mrs T wonders what all the fuss is about.  The terrorists of the Middle East cut live people's heads off on camera, while a brave Australian soldier is persecuted for cutting off the hand of a dead terrorist so the body can he identified. 'Where is there any sense in the carryon' she asks. The Thornton household hopes Mr Hastie gets elected in Canning with an increased margin.


The dark clouds overhanging the Australian economy are ignored, with power brokers whistling happy tunes and telling us 'punters' 'she'll be good, mates', an attitude Henry emphatically objects to. The sustained examination of the global economy in Henry's Raff Report, whose latest edition is available here, suggests she won't be right. In contrast, the Raff reports: 'Figure 2 shows USA production of agricultural, construction and mining machinery. There is clearly no joy here and the rates of deterioration are accelerating. This is not the picture of an economy going gangbusters. Rather of one in a tad of difficulty. It’s rather interesting but considering all the charts the Raff has published over the past 6 to 7 years, none of them show a hike that might reasonably have been expected given the trillions of stimulus'. 

This burst of cold, hard reality comes just when we discover Australian share prices are now below levels at the start of the year.  Supposedly 'weakness of the Chinese economy' is the precipitating factor, but there are plenty of other reasons for gloomy global Animal Spirits.  Here is a list: sluggish Eurozone activity, evidence of slowing US activity (as systematically documented by Nick Raffan here), caution due to unsustainable levels of household, business and government debt everywhere, clear signs of global deflation and deep uncertainty about the eventual outcome of global currency wars and when and how the US Fed will begin to raise interest rates.

Go carefully, dear readers.


Bill Leak is a serious painter as well as an esteemed cartoonist.

He presents a hard hitting review of 'the Archibald' whose custodians for many years hung his fine portraits but never awarded him the prize.  (Henry knows a fine Victorian portrait painter whose offerings were not even opened, like an elderly spinster, returned unopened.) Bill Leak is not bitter, but perhaps a bit battered. Here are a few snippets.

'... things are crook, but nothing will change because art is different. It exists in a sort of mysterious realm protected by an impenetrable barrier of spin, written in arcane but deeply politically correct language. And no one dares question it for fear of revealing they don’t know what it means.

'The spin doctors of art have been very successful at making the world of art an inhospitable place, inhabited only by the cognoscenti and shut off to everyone else'.

But there is also a heartfelt tribute to real Great Art. 'Standing in the middle of the Simpson Desert and looking into the clear night sky is the sort of visual experience that can give you a sense of the numinous, to put you in direct contact with something too awe-inspiring to even begin to understand.

'Standing in front of great paintings can be overwhelming, too. Looking at great works of art and wondering how they were created is like looking at the night sky and wondering how all the stars got there.

'The difference, of course, is you know what you’re looking at was not created by an unimaginable God but by an almost — but perhaps not quite — imaginable human being'.

Read Bill Leak's full article, based on a recent speech, and decide for yourself.

Fiona Prior directs you to an ingenious visual record of the history of the Archibald Prize provided by the ABC that will have you up-to-speed with the changing face of portraiture in Australia in 60 seconds! Highly recommended.


Australia's netballers won the world title for the third time in a row. 'Go guuurls!' as we said last week, no doubt serious uplifting advice the shielas were delighted to hear.

The much maligned Aussie (men's) cricket team is well on the way to winning the dead fifth rubber after an embarrassing batting collapse by the pestiferous Poms.  Poor Cap'n Clarke, still his 15 runs eclipsed Bradman's final innings of zip. Leaving the Don's average a tad below 100 and the Pup's a bit below 50.  Both a lot better than Henry's average of 2.5,with some redemption after a final inninings for Mont Albert Fourths of zip not out while fighting (successfully) for an improbable draw.

The big footy news was the sacking of James Hird because of Essendon's dismal on-field performance.  If only he'd fessed up when the initial charges were laid and stood down he'd be seen now as an unreasonably persecuted here rather than, how shall we put it, a whipped dog.  Caaaarlton! of course in another proud footy club still recovering from punishment after behaving badly, in its case salary cap rorting rather than 'substance abuse'.

Almost as dramatic as Hird's departure from Essendon was Port Adelaide's beating of Hawthorn overnight, again showing signs that their early signs of infallability were simply too good to be true.  And Australia's previously infallable Rugby coach, Michael Cheika, fell to earth when our boys were belted by the All Blacks at Eden Part, where no Aussie team has won since the heady days if the Banana Republic, a state peeping out of the data again, though, of course, 'she'll be good, mates'.

The cricket team has finally come good.  Batters have batted like it is a test match, and Peter Siddle has reminded us all what a good bowler he is. One wicket for no runs after 5 overs it was at one stage. So absent monsoon rain for 2 days the series should end 3/2, but with many questions to be answered by both teams.

Image of the week

Courtesy HeraldSun

Saturday Sanity Break, 15 August 2015
Date: Saturday, August 15, 2015
Author: Henry Thornton

China's market meltdown will not influence Australia, says Treasurer Joe Hockey. The Chinese are learning about modern capitalism and have intervened to devalue their currency.  China will also 'do what it takes' with fiscal and monetary policy to maintain growth.  We certainly hope so, Mr Hockey, because failure of China's stimulus would make the RBA's recent forecast downgrade look like a gentle overture to a dramatic symphony.  Wait, there's more - jobs growth is strong, retail sales have picked up and Australia is surfing its way to renewed prosperity. We hope so, Mr Hockey, because many of those people Henry talks to are far more skeptical about the state of Australia's economy.  Maybe its because those people travel in crowded cars, trains and trams rather than in comfy Comm cars and at the front of aeroplanes, and pay for those uncomfortable trips out of their own pocket.

Politically, it was a heck of a week. The ridiculous debate about same sex 'marriage' - will it be a decision of parliament, will it be a decision by the people, will it be a plebisite or a referendum, most of us just don't give a toss. If gay people want to marry, let them do so. Traditional religous folk surely believe such people (and pedophile priests) will surely burn in hell forever, and surely that is punishment enough. Important that the legislation frees religous practitioners to say 'no thanks' to gay people asking them to marry them, but there will surely be gay religious willing to tie the knot.

How could a distinguished former eminant judge, now presiding over the Royal Commission into Trade Union Governance and Corruption, be conned into delivering a speech to a Liberal Party function? Henry hopes the Commissioner will be forgiven his misjudgment (or reveal how he was conned) and gets on with his job.  Sadly, however, mud sticks and this may mean he has to stand down in a stunning victory for Bill Shorten.

Henry was dining with around 100 of his closest friends at a social event last night. No-one was willing to say the government was doing a good job and there was much gloom about prospects for the conservative side of politics, and indeed about Aussie politics in general.

The shape of things to come

Brilliant article today on one vital medical development.

'Amanda Gorvin began to think her life had become unbearable in the early hours of a November morning last year when she found herself crawling agonisingly down the hall from her bedroom to the darkened kitchen of her home on the NSW Central Coast. ...

'If Anatomics [a Melbourne Company] could custom-build an implant to fit snugly into Gorvin’s damaged vertebra, Coughlan [a surgeon] explained, it might straighten her spine and alleviate her pain. The technology was so new that few surgeons in the world had attempted the procedure, and therein lay the rub: Coughlan would be the first Australian ­surgeon to attempt it, and Amanda Gorvin the first patient in the country to agree to it'. ...

“I was back at work four weeks after the operation, back in the gym after six weeks,” says [Amanda Gorvin]. “I was breathing better, my mind was clearer, I felt lighter. It’s incredible how much influence the spine has on the rest of the body. I remember that pre-surgical pain and now I ­haven’t got one per cent of it. It’s nothing short of miraculous.” As she speaks, Gorvin becomes emotional and reaches for a tissue. “This has absolutely changed my life,” she says.

'For Coughlan, it’s an outcome beyond his expectations and a pointer to where medicine is headed. “The last time I saw Amanda before surgery, she was pretty stressed and quite desperate. As a doctor, you try to factor in the physical and the emotional coping mechanisms of your patient. Maybe this is the way medicine can go, customised more to the patient’s needs.”

Read more here.  This is a vital part of modern medicine and shall solve many previously insoluble medical issues.

And if you are someone who takes a long view, try this article on our dying universe.


Fiona Prior takes us on a tour of the Venice Biennale All the World’s Future, curated by Okwui Enwezor. The Venice Biennale is the world's most influential contemporary art exhibition.

image: detail from Japanese Pavilion, Venice Biennale 2015


Following the stirring win in the Four Nations Competition, Australia's greatly improved Rugby team takes on the All Blacks tonight in Eden Park, where our last win was in the distant past. It will be a stern test and coach Cheika's bold selection calls seem to have injected new confidence and determination into a previously lacklustre mob.  Tonight it is the inclusion of Quade Cooper that has the Rugby community abuzz and Henry will be cheering from his armchair in Marvellous Melbourne.

More here. 

The Age has kindly provided an upbeat two page spread by Garry Lyon headed 'Carlton have foundations to build on'. The necessary renovation - yes Mr Lyon uses a nice extended metaphor about houses and streets - will require a lot of hard work and (Henry adds) better choice of the furnishings.  This is a team that 'let go' Eddie Betts, Aaron Jacobs, Vin Waite and many others, and now Gary Lyon says has only 16 players worth perservering with.  Tonight Carlton battles with Brisbane for the wooden spoon and a loss my open the door to a first round draft pick. 'So what' say the pundits, all the first round picks are good, or seem so, and there's a fair bit of luck involved.

The cricket sheilas are set to win indeed, if Henry can count, have already won the sheilas' Ashes. Great work Guuuurls, and an inspiration for the downcast and beaten Aussies.  Looks like a wholesale renovaton is called for, borrowing from Garry Lyon, with perhaps 8 elderly players freed to make their fortune in the Indian or Big Bash competitions.

And if you are someone who takes the long view, try this article on our dying universe.

Image of the week

Saturday Sanity Break, 8 August 2015
Date: Saturday, August 08, 2015
Author: Henry Thornton

Bronnie has fallen on her sword, Tony Burke is revealed as a pillock (Defn: A man who has dropped a major bollock. Not nescessarily (sic) a stupid bloke, rather, one who has done a stupid act.), the RBA has reduced its forecasts of Australia's growth rate and two of the newish ventures Henry has been grappling with have achieved important milestones. It is some time since Henry's team has been doing better than the Australian average, but this is definately one of those golden moments.  And this is not just because the Australian average is falling back, which it is in both politics and economics, but because Henry's team is winning. 

Jack the Insider discusses Polly travelgate against the benchmark of Ben Chifley and the latest wonderful British political satire 'In the thick of it'.

Henry is aware of the dreaded word HUBRIS that afflicts Australian Treasurers in particular. Sensible people fix the roof while the sun is shining and have a plan B in case Plan A turns to custard. Henry's team awaits with stoic calm the next slap in the face with a wet fish dished out by a scary universe. But it could be worse, dear reader, Henry's team could be getting the sort of bollicking handed out lat week by the Oz to Australia's pollies (Wraaaak!) and, by implication, econocrats (Booooo!).

'Global disruption is unsettling for workers, companies and governments. Relentless economic forces, largely brought on by technological innovation and capital flows, are reshaping jobs, industries and the wealth of nations. Australia is not immune from political challenges and budgetary pressure, although we have had a buffer because of past policy design and luck. But our inheritance and time for contemplating the next move are running out. We need leadership and proper perspective on the issues but our political system is not up to the challenge. The nation’s politicians are being sidetracked by failed ideas, false debates and third-order issues. We need advocates for growth through leaps in productivity to show the way, not mendicants and class warriors obsessed with redistribution'.

Read on here. 

An American doctor has said of the eurozone mess, as reported by the estimable John Maudlin: 'For such problems, there are no simple solutions. There aren't even complicated solutions. There are only best-guess measures with no guarantees of success. The currency union’s underlying flaws, like so many other modern problems, are far too intricate and perplexing for our minds and institutions to cope with. Failing to admit to our own overconfidence in dealing with the bloc’s problems will only perpetuate the crisis playing out across Europe.' 

More here.  


Fiona Prior has returned from Italy and is busily penning her Impressions of both Venice and the internationally influential 2015 Venice Biennale, a highlight of the world’s cultural calendar. See her preview for Henry’s readers of the work of Russian artist Irina Nakhova below.

Nakhova has filled one room of the Russian Pavilion with the installation of a giant head from which an enlarged projection of her eyes look out and scan the room. Fiona stands in front of the mask to give you a sense of scale but was overwhelmed by not just the size of this strangely monstrous military presence but also the sense of vulnerability contained in those giant eyes trapped inside.

If you have not already read Fiona’s impressions of Florence  and Rome please do so. We will look forward to reading of  Fiona's time in Venice next week.

The People vs Winter

If you think it has been a tough winter, cop this contribution, courtesy YouTube.

Footy'n'cricket'n'drugs stuff

Richmond, brave winners over mighty Hawthorn last week, were smashed by Adelaide on its shiny new stadiun overnight. Today Caaaarrlton! faces Collingwood which is

seeking its seventh straight loss. Given the historical feeling between these teams, if the blues cannot at least look like they are trying, If that cannot be said, what is needed is a clean out from the top, and in fact Henry hears that just such a cleansing is being plotted already.

Alas for Cap'n clark, most of the batters and at least one of the bowlers.  Australia's dismal first session (not even first day!) has sounded the death knell for several aging former stars, including very likely Cap'n Clark. Always go while you are at your prime, dear reader, even if your pals want you to stay.  The interesting question is whether our boys were on strike because what the cozy team members thought was the unfair sacking of Hard Hands Haddin. As it is, the best reports of Australia's dismal performance refer to the batters as having 'hard hands, soft heads'.  The Mont Albert Forths would have batted with more discretion.

Australia's swimmers have fared will in the world swimmeet held somewhere in the Russian Federation.  The shock of the week was to hear that modern tests suggest that one third of olympic medals were won by people with now suspicious drug tests.  If the AFL had been on the case, as advised by Henry all those years ago - link here - we would today know which Premier teams had received help from banned 'substances'.

Image of the week

Courtesy Heraldsun

Greek tragedy
Date: Thursday, August 06, 2015
Author: John Mauldin

In this week’s Outside the Box we have a unique diagnosis of Europe’s ills from … a medical doctor. The author is Dr. Luc De Keyser, who currently serves as the chief medical information officer at Xperthis, the largest provider of hospital information systems solutions in Belgium. He has done pioneering work in multicenter clinical trials, medical ontologies, paleonutrition, and examining human conflict from an evolutionary perspective.

Dr. De Keyser (writing for Stratfor) is not sanguine about Europe’s future. There are times, he reminds us, when a doctor has to make the tough call and conclude that the patient’s case is simply without hope. It's a painful diagnosis and not one that the doctor enjoys sharing with the patient. But at some point the patient must be told.

The fundamental obstacle to solving Europe’s problems, he asserts, is that Europe is simply too complex to fix in any straightforward or dependable way:
For such problems, there are no simple solutions. There aren't even complicated solutions. There are only best-guess measures with no guarantees of success. The currency union’s underlying flaws, like so many other modern problems, are far too intricate and perplexing for our minds and institutions to cope with. Failing to admit to our own overconfidence in dealing with the bloc’s problems will only perpetuate the crisis playing out across Europe.

Our poor human brains, the good doctor says, simply aren’t built to cope with a sociopolitical entity as big and complex as Europe. One thing we not-so-evolved apes like to do is interpret information in a way that confirms our preconceived notions. This is called confirmation bias, and in simpler times it kept us out of harm’s way by encouraging preferences for things we knew to be safe. This is a limitation that afflicts economists right along with the rest of us. And so we see, for example, Wolfgang Schäuble, finance minister of Germany, and Yanis Varofakis, former finance minister of Greece, obstinately pushing diametrically opposed economic programs. Which is OK, says Dr. De Keyser, until people on both sides start to claim that adherence to the other guy’s economic school of thought is going to ruin the livelihoods of millions of people.

We’re riddled with other sorts of biases, too – stuff that the field of behavioral economics is still trying to understand and help us all to cope with. Dr. De Keyser recommends humility: “[W]e must first accept that it is our fate to be overwhelmed by the problems of modern-day society.” Well, that’s a start, I guess; but maybe we should just bring the challenge closer to home and recognize that just as Europe’s (and the US’s and China’s) leaders struggle mightily and often futilely to manage their societies, we too should be keenly aware of our mental limitations in managing our investments and businesses. We all have a lot to learn.

All too often in our investment portfolios we want to make the investment world conform to our biases and opinions. More often than not we find out that reality is far more complex and that there is a plentitude of variables, many of which are unknown to us, that influence what we fervently wish to be a simple, straightforward solution.

RBA meets ...
Date: Monday, August 03, 2015
Author: Henry Thornton

... amid the encircling gloom.

The RBA meets today and is widely expected to sit on its hands. Main facts include:
* China's economy is slowing, China's stock market has had a flogging, and commodity prices are mostly falling, last month by an eye-watering amount.
* Greek shares, especially shares in Greek banks, fell dramatically when the Greek market opened yesterday.
* The Aussie dollar is slowly sinking, but the rate of sinking is less than the plunge in commodity prices.
* Jobs have been growing, as least according to ABS statistics (Gary Morgan's more accurate reading agrees on a fall in unemployment though from a much higher base.)
* The most recent statistics on job ads shows a tiny (inconsequential) fall after a substantial rise. (And the official (ABS) rate of unemployment has again lurched, this time upward, to 6.3%, and much worse for young people.)
*  Goods and services inflation is within 'the band' but asset prices, while volatile, are still rising too sharply for comfort.
* House prices in Sydney and Melbourne continue to grow at scary rates, especially if one has children soon to be needing help to get into the market.
* The current account deficit is very large, meaning Australia Inc is still borrowing from abroad to maintain its unsustainable lifestyle.
* Household debt is of the order of 150 % of household income - an heroic Greek-like performance -  and households are being understandably cautious about borrowing and spending.
* Business investment is weak, especially in mining but also in the non-mining sectors that are meant to replace mining as the engine of Australian growth.
* Senior econocrats are suggesting that sustainable growth may be slower than it has been.  Combined with a rapidly aging population, this makes the outlook grimmer than it has been for many years.

What would you do, dear reader, if (heaven forbid) you were elevated to the RBA board now meeting in solemn conclave, presumably in the bunker at the top end of Martin Place?

'Cut interest rates' I hear you cry.  'And tell APRA to get on with reining in the banks who are presumably funding most of the Sydney/Melbourne housing bubble'.

Sadly, dear reader, monetary policy is already 'set easy' and very soon will be facing a rise in US interest rates. 'Never bet against the Fed' is an old saying that applies especially to Americans. But if the aim is a far lower exchange rate for Australia the punters of Martin Place may be tempted to give exactly that a go.  'Anyone for a 50 US cent dollar?' asks Chairman Stevens.

A far more lasting solution would be a program of widespread economic reform, including reform of our antiquated Tax, Welfare and Industrial Relations systems.  The Oz today speculates that the Productivity Commission is about to recommend limited IR reform, but if they think our dysfunctional parliament is going to endorse a slightly freer wages system, they will be deeply disappointed. One hopes the review of parliamentary travel and accomodation rorts may provide some (minor) budgetary relief, but on the far bigger question of welfare and tax reform, please do not hold your breath.

Is Henry overly pessimistic?  No doubt, but do remember dear reader that a pessimist is an optimist with experience.

Saturday Sanity Break, 1 August 2015
Date: Saturday, August 01, 2015
Author: Henry Thornton

The Reserve Bank (and probably also Treasury) is beginning to think its forecasts were too optimistic.  This was a generic feature of Australia's previous Labor governments and their Treasurer Wayne Swan.

Australia's Treasurers and econocrats are not alone.  Many countries have fell for overoptimism and associated hubris.  Even Treasurer Hockey has been too optimistic, but then no-one thought the Chinese economy would slow, commodities would fall like stones in a pond and the Shanghai stock exchange would pop like a  bursting bubble.  After all, nothing like this has happened before, has it dear readers? And realists who have offered warnings (eg here) have been described as 'fools', 'dingbats' and virtual traitors.  In Henry's case this was for the second time, the first time being in the leadup to Treasurer Keating's 'Banana Republic' moments, as described here.

Richo this week said it well: 'There should be a law against treasurers “fixing” budgets. Wayne Swan managed to get Treasury to sign off on promised surpluses when deficits were certain. In opposition Tony Abbott and Joe Hockey rightly belted him for it day after day. In government they have mimicked his every move and once again a willing Treasury have acquiesced. On budget night I said the growth figures in the document would not stand up till Christmas. It is not yet four months from budget night and even the Reserve Bank is debunking these dodgy numbers. Just like Swan, Hockey has set out a path to surplus he knows will not be trodden'.

In recent times, the Greek economy has provided the most extreme case of hubris fuelled by false optimism.  Here is a revealing article from Bloomburg.

'In 2010, as Greece signed a bailout deal with the International Monetary Fund, forecasts by the IMF and the European Commission suggested the country’s debt-to-GDP ratio would peak below 150 percent of gross domestic product in 2012. The forecasts also projected that Greek GDP in 2015 would be 8 percent larger than in 2011. This optimistic vision of the future was based on underlying assumptions that Greece would go from having the lowest productivity growth in the euro zone to among the highest, alongside the highest labor force participation rates and employment rates equal to Germany’s.

'No one—including the IMF—believes those assumptions anymore. The latest estimates suggest Greek GDP will be 10 percent smaller than in 2011. Why were those early prognostications so rosy? It turns out that the IMF, the EU, and other institutions have a tradition of consistently overoptimistic growth forecasts in times of crisis. Dealing with that tendency would significantly reduce the harm done by future financial crises'.

More here.

Those who do not understand history are doomed to repeat it.  Like most western nations, Australia is suffering an investment drought, slow growth, shortages of jobs, lack of business and household confidence ('Animal Spirits') and continued poor international competitiveness. The gradual drop of the Aussie dollar is making us poorer, adding to the income recession that cannot be overcome except by radical economic reform that neither major parties seem unable to face, much less propose.  The 'punters' (ie voters) are disgusted that a sense of entitlement is most deeply embedded in politicians of all shades of opinion, from greedy social democrats to deep dyed conservatives.  We agree with parious pundits that either Speaker Bronnie has to go or the PM has to institute thorough-going reform of the whole mess.  All pollies except cabinet ministers to travel economy class would be a good start.


The Aussie cricket sheilas fought back wonderfully from a first game loss in the wimmin's 'Ashes'. The blokes also fought back well in the second game of their 'Ashes' but have crumbled horribly in the third test.  This is largely the fault of the batters as the bowlers toiled manfully and Mike the Merciless grabbed two wickets in three balls with two of the best short balls at the throat seen so far this series. Nathan Lyon also wove (spun?) his net brilliantly and at one stage was 3 for 3 off three (overs.) 

Bring back Watto is Henry's advice.  After all he did make two 30s in the first test, far better than his captain and just about every other batter in this game, Rogers in dig 1 and Warner and Nevill in dig 2 excepted. The expected result, Poms by teatime on day 3, occurred on schedule leaving two spare days for Australia's selectors to ponder what to try next.  Bring back Watto is Henry's suggestion.

Footy has been besmirched by booingate. Adam Goodes is a superb player, an Aussie of the year and a great exemplar for his role as a leader of the growing indigenous cohort in the AFL. The Swans should just refuse to come out after half-time if it happens again, and stick to this policy until the booing stops.  No money back for the fans, either.

Biggest footy question is whether Hawthorn have peaked too soon. We will know soon but we would like to know what is the secret of their sucess.  The old graffiti that asked 'What would you do if Jesus came to Hawthorn!' might now need to be answered 'Play him with Box Hill' rather than 'Play Peter Hudson at Centre Half forward'. We learned a lot about this matter last night, when a fired-up Richmond lowered Hawthorn's colors.

We really must cheer Foreign minister Julie Bishop for her wonderful speech at the UN Security Council.  She looked fabulous on evening TV and Greg Sheridan's report is well worth reading.  One for the ages.

Henry must apologise for lack of weekday stimulus for several weeks now. There are two reasons; a major (pro bono) task assembling a large three-dimensional jigsaw for 17 research institutions plus uncounted companies seeking a boost from research relevant to their businesses; also, incomplete recovery from a carpel tunnel hand reco, with said hand proving stubbornly determined not to return to normal.

Image of the week

Courtesy The Oz

Saturday Sanity Break, 25 July 2015
Date: Saturday, July 25, 2015
Author: Henry Thornton

Whod'ave thought it, comrades. Bill Shorten turning back the boats, soaking the 'rich' and sucking up to the unions.  Sounds like a perfect way not to get elected, brothers and sisters.  Meanwhile, Tony Abbott has made a reasonable start in creating a debate about tax reform, greatly helped by Premiers Baird and Wetherall.  Conservatives will almost always prefer government to cut spending rather than expand taxes. But if you do have to increase taxes - due to ingrained 'entitlement' mentality among the 'punters' (AKA voters) - a widened and/or higher rate of GST is far superior to just about every other tax one can envisage.

Suddenly 'jobs' are on the agenda too.  The clever people in Canberra and Sydney have noticed that growth is slowing but jobs are (apparently) doing a bit better, ergo productivity is sagging. Of course, those of us in the real world have children who cannot get jobs.  Henry met one of Australia's most successful entrepreneurs this week.  He makes high tech microphones and can out-compete even Chinese manufacturers as almost every job is done by high precision machines.  Fantastic for production and exports, but no so good for jobs.

As we have laboured to inform readers, the official (ABS) jobs data is flawed due to overly-optimistic definion of 'employed'. If a more realistic allowance for who is 'employed' is allowed, as done by Gary Morgan, the true rate of unemployment is not much below 10 %, and underemployment is about the same ratio. These are the national averages; for young people, the numbers are far worse. Even kids in Melbourne's leafy Eastern suburbs with impressive degrees (yes, the plural is not a typo), parents with useful 'contacts' and willingness to work as (unpaid) 'interns' struggle to find jobs. Prospects in the poorer parts of Melbourne, or in regional areas, can only be imagined.

And house prices in Melbourne and Sydney continue to rise. Last week, while Henry was on the road in Northern climes, morning television reported that Sydney's median house price hit $1 million.  'Crazy' said the RBA's Glenn Stevens. Glory be, brothers and sisters, how can a young person with no job aspire to own a house, or even a broom-cupboard-sized apartment? And Brother Shorten wants to double the refugee intake. Nice idea, comrade.  Even Henry would applaud this if there was a long probation period for immigrants that had to be spent in a rural town or city.


Henry and Mrs T spent last night in front of the TV.  After the news we watched Carlton get towelled by Hawthorn for a quarter, hoping for a miracle.  Then we switched to the Sopranos, a 1990s series about criminals and their lives in upstate New York. Then back to the footy to watch the dying minutes of Carlton's largest beating in the entire history of Aussie Rules. And Henry's dear old Blues have to play the Hawks again before the finals.  Could the once mighty Blues beat Box Hill (AKA Hawthorn seconds)?

Probably not, but and their performance this year makes the case for relegation to an inferiour group just about waterproof.

Meanwhile the Aussie sheilers have beaten the Poms in the second one-day game of their 'ashes' battle. The lads will put on their whites again in the week ahead to provide more distraction from the footy, distraction much needed for dear old Henry. Someone wrote this week about why batters fear Michael Johnston's fiendish fast bowling. Apparently it is because his hand is hidden for longer due to his particular 'slingshot' action.

Lovely story in The Age today about the man who was robbed of a gold medal and a record in the Moscow Olympics.  We hope justice is handed out before too long.

What a comeback it was in Darwin when Lleyton Hewitt and Sam Groth fought back from 0-2 (provided by the two Ks) in the Davis Cup tie in Darwin. Here is a stirring report.

Image of the week.

Saturday Sanity Break, 18 July 2015
Date: Saturday, July 18, 2015
Author: Henry Thornton

Henry’s readers might recall that the Raff has tracked many US economic time series for many years, in fact for 36 years. Over that latter period the US data has never provided a bum steer. And so it is that the current business cycle in the US is at a peak as depicted in Figure 1. Long-time readers of Henry might recall the Raff Report suggesting never buy resource equities at the peak of a cycle; only at the bottom and get out before the peak before the thundering herd heads for the revolving door.

Exibit 1: US New Orders for Durable Goods

Read on here, dear readers, and note the Raff's medical challenge. We wish him well, his analysis having contributed materially to those, including Henry, who have followed his advice.

 Other economies.

What can we say?  China's wild stock market crash and partial recovery is typical of market behaviour toward the end of a bubble.  China's government, however, has learner plates with respect to the wilder excresences of capitalism and may stave off the eventual supercrash for a time.  This need not slow the economy more than it has already slowed, as Australia discovered after the 1987 sharemarket crash.

Lovely to hear soothing Chinese words on front page of the Oz today. 'Make love (well, trade) not war' is always comforting and we believe they are sincere.  Why start a war to obtain access to resources (remember Japan, possibly also Germany before 1939), who were denied access, or thought they might be.

Greece has retained its place in the Eurozone we judge by a fingernail, and there is a long way to go before this festering sore is properly sorted.

Australia seems gradually to be waking up to the fact that we are in dire trouble and that real economic reform is extremely unlikely with this parliament.  The good news is that the RBA, Treasury and the business community (in the form of the BCA's Catherine Livingston) are all publicly calling for economic reform.  Doing better probably requires some sort of gross economic or political  shock - a massive CAD, our little dollar at 50 % of the big dollar, continued rising unemployment, a double dissolution election that either returns the coalition with a majority in both houses of parliament or neither major party receiving many votes. What would a Nats-Green coalition get done, dear readers?  Not much, one fears.

We shall refrain from bothering to remind readers that we have been warning of severe economic danger for several years now (well 2.5 years at least) and have been co-author of the most comprehensive reform proposals yet published. No invitation yet to the G80 talkfest being run by the AFR and the Oz, but it will be great to see the crack economic commentators going about their work.  Nodding in unison, no doubt.


Fiona Prior writes: "Henry has featured the 2015 Archibald winner at the bottom of this blog. I’m not in place to review this weekend so below I have placed a link to all the finalists for Henry’s readers.

This year’s Archibald winner Nigel Milson with his expressive portrait of Charles Waterstreet Judo house pt 6 (the white bird) is touched by alchemy….. An exceptional artist with a troubled, criminal past; a barrister known for his eccentricity and his singular style; an artist/subject bond tinged with the salvation of at least one party …. You really could not have created the recipe with better ingredients. Milson is also a winner who possibly is more deserving than many who have come before. I can make statements like this as it is Australia’s Archibald Prize and outspoken views are mandatory!

I hope Henry’s readers will explore the Archibald 2015 finalists here. Enjoy. Note the number of politicians and art-related public figures, choose your favourites and maybe even visit the Art Gallery of NSW before 27 September 2015 to experience the originals."


The poms celebrated too soon after smashing a sleepy Australian side on a heavily doctored pitch in Cardiff. Our team was too old, especially Rogers, Smith couldn't bat and the bowlers were either injured or had lost their mojo. Well, glory be (as Henry's grandmother used say when an apparent miracle took place), look what is happening at Lords. Rogers a 'big' hundred, Smith joins the immortals, the untried (at this level) wicketkeeper takes a catch off the second ball of the game and the supposedly buggered bowlers got four for after Australia 'asked' (chuckle) the poms to bat after nearly 2 fruitless days in the field.

Caaaarlton! is expected to be smashed comprehensively by Free tonight. Just think, the blues get to play Hawthorn twice in the run up to the finals.  Is this more evidence that the authorities are determined to keep this once mighty team in its newfound place in the AFL celler?

In Darwin, sans Tomic, the two K's (cannot spell, too tired to look up) got smashed in the opening two games of the Davis Cup, against a country also with a K-name. K1 crying 'I don't wanna be here' as he went down, not exactly fighting. Fortunately little Llyton and former footy player Groth are representing  us in the doubles today, and Henry is confident they will fight like maddened wallabies. This may give K1 and K2 the chance for redemption on Sunday.  Mr Tomic's apology to Tennis Australia gives him a chance at redemption also, but who do these wunder-kids think they are?

When Henry became an Australian national boomerang thrower, there was no carry on, no dummy spitting just humble acceptance of the finest sporting win of his life.

Sport excessively like 'stuff' today so it is time to shut down.  We are hoping for a review the Archibald later today.

Image of the week - 'seriously scary' the verdict of our art critic.

Courtesy Archibald PR Dept.

Saturday sanity Break, 11 July 2015
Date: Saturday, July 11, 2015
Author: Henry Thornton

China's 'do what it takes' approach to maintain what was looking like one of history's greatest share bubbles seems to have had some effect. Booms eventually bust, and history shows that, the bigger the boom, the bigger the bust, though history also records an upward trend.  So we must stay calm, like corporal Jones in 'Dad's Army' shouting 'Don't panic'. And in Europe the Greeks have presented a tougher budget to the financiers. The departure of the Game Theorist Marxist is another fact that is presumably helping the Greek cause.  On the other hand, as we must say, Greek debt is now reported to be $380 billion, a result that would have made Wayne Swan feel his life had not been in vain.

Here is our tribute to Comrade Wayne and his pals - Julia in Wonderland. ('Vanity, vanity, all is vanity'.)

Treasury Secretary speaks out.

'Treasury boss call for IR reform' reports Peter Martin in the Smage. John Fraser has delivered a fine speech, including the telling point that Australians are 'overly complacent'.  Here is the link to Peter Martin's report, and this link takes you to the full text, which is a must read.

Read the speech and ponder, dear readers.

Aussie property 'undervalued'!!!!!!

Despite fears of a property bubble, Australian house prices are 30 per cent undervalued, the widest such gap in three decades, research conducted within the Reserve Bank has found.

'Under our assumptions owning a home is now more attractive, relative to renting than it has been at any time in the past 30 years'. Peter Tulip, Reserve Bank senior research manager.  Could this bloke be off among the flowers at the bottom of the garden?

'Delivering the "preliminary results" to a session on housing at the Australian Conference of Economists in Brisbane, and stressing that they should be attributed to him and not the bank, Reserve senior research manager Peter Tulip said that whereas a year ago home prices were "fairly valued", today they are about "30 per cent undervalued".'  His boss, of course, recently said some prices were 'crazy'.

More here.


With Mrs T away tending to family business in Sydney and Boggabri, Henry made a fire, cooked and ate a chop, gave the bone to the Border Collie Jack, and settled in front of the fire with a bottle of reasonable red. The Blues fought hard throughout but were gradually overcome.  A clear mark in front of goal by Kreuzer was instead given to a Richmond player who was the 'man in front' but did not touch the ball. This was effectively a two goal turnround on a cold and windy, lowscoring night.  The Blues battled on, their spirit eventually crushed by a better team and whistle-blowers who seemed to think it was their job to wreck the game, especially for Carlton.  

After the fiasco of the Gibbs tackle, two weeks in the stands, then the near identical tackle that was ruled hunky dory, Carlton fans are entitled to be mad as hell. But no-one's listening so why bother? Jack Elliott would be in the AFL threatening mayhem right now if he was still El Supremo at the club.

Henry was hoping for a long and watchable Ashes series.  But with the Welsh wicket shaved and (allegedly) brushed and shaved again, our ferocious quicks, especially enforcer, Mitch the merciless, were unable to terrorise the pommie batters.  Looks like we're headed for a belting.  The Smage certainly comments thus.

Not much other stuff this week, except for a superb article about Bill Shorten's performance at the Royal Commission into union hi-jinks. Highlight was when Justice Heydon, QC, and a former High Court Judge, gave the opposition leader some advice designed to raise his credibility.  Answer the question, don't ramble off answering another one, and for goodness be brief.  Another translation - Avoid pollie speak. As the good book says: 'A fool also is full of words: a man cannot tell what shall be; and what shall be after him. who can tell him?'

And on the subject of Same sex bonking certificates, Paul Kelly today  provides a magisterial account of the dilemma involved in balancing same sex marriage against religious people's right not to accept such a law.

Image of the week

Courtesy The Oz

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