HOW GOVERNMENTS DESTROY INDUSTRIES

The world is a globalised place and much of it already knows that Qantas, GM Holden, and other Australian businesses are in deep financial strife. They don't understand how Australian governments have contributed to it.

There are tens of thousands of small and medium sized enterprises in Australia facing similar issues,  but without the political or union power to do much about it.

This struck home to me last weekend on a visit to Noosa, a much loved holiday village north of Brisbane. In the 1980's, some people proposed a fee to walk on the beach there. Beach visits have been an Australian icon since time immemorial and have been free.

Not any more.

Do you know where Australia's most expensive toll road is? It is not in Sydney, Melbourne, or Brisbane, or on any freeway connecting them. It is at Noosa. Why?

The previous Queensland Government, addicted as it was to Forms and Fees, decided to levy Australia's most expensive toll to drive on a gazetted road which in part uses a wide sandy beach.

The traffic jam was caused by the present need to pay the toll for which you spend 30 minutes filling in a form in a government office so that the government can exact the toll. Not only does a pleasant day at the beach become an exercise in useless form filling (the government does not need most of the information required), but the toll at A$11.50, for which the government provides nothing, is the most expensive in Australia. By far.

If you are really lucky, you can seek the assistance of one of the government officers to assist in the form filling. The catch is that the toll rises to A$16.00. For that premium, you also get a large dose of Attitude with a capital A. How inconvenient for a customer to drag someone from an airconditioned desk just so that you can pay a premium price for something which provides nothing that wasn't previously available for free.

This little example is just one of thousands which make Australia the uncompetitive and costly place it is today. Hence the swathes of empty shops, factories and offices in which people used to work. Much of it an outcome of deliberate government policy, in this case, an addiction to form filling which serves little purpose.

The Great Australian Complacency is coming to an end. Governments should lead the way by reducing their Forms and Fees, eliminate policies and procedures which reduce demand, and stop destroying industries.


David Millhouse is an international entrepreneur with over 30 years in venture capital and private equity internationally. Based in Brisbane, Australia he is a specialist in venture financing and capitalisation, as well as the management of high growth companies, many of which proceed to IPO. He has conducted business in the UK, Germany, Switzerland, USA, Canada, Singapore, Hong Kong, Australia and New Zealand. A scientist by original profession, with an MBA and LLM from Bond University in Australia. He is a trustee of Bond University, Australia’s premier private University, and was formerly a trustee of the Queensland Art Gallery/Gallery of Modern Art. There are 30 years of publications and media on his professional activities and he has had a stellar career at CEO level since 1983.

For personalised solutions to the issues raised in the blog, please contact CORPbuilders TM at www.corpbuilders.com.au or call 0413 748 844

IS AUSTRALIA THE NEW SOUTHERN EUROPE?

Most of the world thinks Australia is a quarry and a farm. A nice place to visit, albeit expensive. The country also manufactures things. And often does so well, but receives little credit internally and for the most part externally.

Internal criticism is normally directed at the futility of endless public subsidies for commoditised industries in a globalised world. Passenger cars are a prime example. Australians' don't buy many Australian built cars. They prefer European or Asian models, even if they are ridiculously expensive by world standards. Cars would be much cheaper in Australia if there were no domestic car manufacturing industry.

Interesting then that the examples of very high value adding manufacturing in Australia are lost in international perception and domestic Australian politics. And a great pity, because this is where the future lies and would stimulate a venture capital industry if government policy was as smart as the manufacturers.

I have provided examples before of high value adding firms which employ lots of people. A recent reported standout is CEA Technologies, based in Canberra. CEA has "designed, manufactured and marketed a naval defensive system more advanced than anything else on the world market" (Australian Special Report Defence 2nd November 2013). This protects naval surface ships from incoming very high speed missiles which have been almost impossible to destroy. "Like shooting a bullet with a bullet". And at very high closing speeds with unlimited manoeuvreability.

CEA has done it and major units of the Royal Australian Navy are being equipped with it. There are other examples in the defence sector where Australian engineering innovation and technology outstrips the rest of the world.

The strategic commercial basis is a customer with special needs and a budget to match. Just as post World War 1&2 economies were driven by the commercial application of military technology innovated at taxpayer expense, so can companies like CEA export their products to the rest of the world, provided regulations permit.

Just think what else could have been achieved had the subsidies provided to the motor industry been invested in manufacturing firms producing high value add products, not commoditised consumer products.

Anyone in government heard of the concept of opportunity cost? The alternative is the Southern European outcome, already underway in Australian cities and regional towns.

David Millhouse is an international entrepreneur with over 30 years in venture capital and private equity internationally. Based in Brisbane, Australia he is a specialist in venture financing and capitalisation, as well as the management of high growth companies, many of which proceed to IPO. He has conducted business in the UK, Germany, Switzerland, USA, Canada, Singapore, Hong Kong, Australia and New Zealand. A scientist by original profession, with an MBA and LLM from Bond University in Australia. He is a trustee of Bond University, Australia’s premier private University, and was formerly a trustee of the Queensland Art Gallery/Gallery of Modern Art. There are 30 years of publications and media on his professional activities and he has had a stellar career at CEO level since 1983.

For personalised solutions to the issues raised in the blog, please contact CORPbuilders TM at www.corpbuilders.com.au or call 0413 748 844

A TALE OF THREE CITIES (PLUS TWO)

I have been on business in three vibrant cities recently: London, Berlin, and Paris. You might think from media reports in Australia that these places are closed for business and all is doom and gloom.

Not so. Far from it. There is a building boom in London, both in the City and in the Westend. There is an air of confidence. New found I was told, but there nonetheless. London is open for business. To a large extent, London is its own economy, and is not a proxy for the rest of the UK.

Berlin, more sedate, provincial even (especially the airport), but since I was there to observe the elections to the Bundestag, and call on old friends, it didn't matter. What struck me about Berlin (I had not been there for several years) was the amount of building and the style of the building. In Berlin Mitte, Prussian Berlin is being reconstructed from original materials stone by recovered stone. The communist demolishers recorded where they sent the post-war rubble. In Potsdam, the Stadtschloss is finished and looks just like the original. In West Berlin, the style of the late 19th/early 20th century, complete with ornamentation and gold leaf, is making a comeback. So is Albert Speer if you look at one the new hotels.

Paris, frenetic, and in deal making mode. Which we did. Similarly Singapore.

There are two things that struck me back here in Brisbane: the clear air and the number of properties for lease, rent and sale.  I did not see this anywhere else in the parts of the cities where I was (perhaps the air was not as clear!).

My first read of the Weekend Australian told me why (5-6th October, p.16). John Black is an insightful statistician and demographer. He concludes : "Our labour market is now increasingly unemployed, under-employed, under-utilised or discouraged, and vulnerable....." I have written before that Australia was following the European road. That reality will dawn over the next few months as truth comes out. Australia is likely to enter a period of low growth just as the major Northern European economies are regaining confidence.

As John Black writes: "Cheers, Tony, It's all yours."


David Millhouse is an international entrepreneur with over 30 years in venture capital and private equity internationally. Based in Brisbane, Australia he is a specialist in venture financing and capitalisation, as well as the management of high growth companies, many of which proceed to IPO. He has conducted business in the UK, Germany, Switzerland, USA, Canada, Singapore, Hong Kong, Australia and New Zealand. A scientist by original profession, with an MBA and LLM from Bond University in Australia. He is a trustee of Bond University, Australia’s premier private University, and was formerly a trustee of the Queensland Art Gallery/Gallery of Modern Art. There are 30 years of publications and media on his professional activities and he has had a stellar career at CEO level since 1983.

For personalised solutions to the issues raised in the blog, please contact CORPbuilders TM at www.corpbuilders.com.au or call 0413 748 844

THE POLITICISATION OF SCIENCE

I have written extensively on the impact that political views have on science and how scientific viewpoints then feed into public policy like a feedback loop. All well oiled by copious quantities of taxpayers cash.

The assumption that carbon dioxide is a poison of course is a fallacy. Carbon has been demonised. Television pictures of clouds of gases being emitted from electricity generation cooling towers have impact. Its a pity therefore that the television journalists do not inform their readers that those emissions are largely water vapour.

They also don't tell you that water vapour is a very potent greenhouse gas, far more so than carbon dioxide.

European forests have increased in area by some 5,000 sq. kilometres in recent decades. Some of this is "direct action" in the form of man made plantings, and some is the reversion of former agricultural land into forest. If you travel to western Poland you can see it.

Increases in water vapour and carbon dioxide should (are) sustaining increased vegetation growth, both in density and in geographic spread. There have been recent scientific publications, including satellite photography which illustrates the point. How rich the earth was in former geologic times, the evidence for which is found in an abundant fossil record. These were times when the atmosphere contained far more water vapour and carbon dioxide than it does today. Plants and animals thrived.

How interesting it would be then, if instead of this constant "we are all going to be ruined" harping from the green-politicised scientific community, we could envisage a world where northern Canada, Siberia, Saharan Africa, and Australia became the food bowls of the world. All it takes is water, warmth, and plant food: carbon dioxide.

For my readers who are interested in pursuing these themes, Ian Plimers' excellent book, Heaven and Earth is a good start. So is Taxing Air:Facts and Fallacies about Climate Change, but Messrs Carter & Spooner.

Taxing Air is challenging: it tolls the bell on what the so-called climate change is really about: extending the tax base for green-left governments. What next: a royalty on rainwater falling in your garden? Don't think it can' happen, especially now the government knows who has rainwater tanks.

David Millhouse is an international entrepreneur with over 30 years in venture capital and private equity internationally. Based in Brisbane, Australia he is a specialist in venture financing and capitalisation, as well as the management of high growth companies, many of which proceed to IPO. He has conducted business in the UK, Germany, Switzerland, USA, Canada, Singapore, Hong Kong, Australia and New Zealand. A scientist by original profession, with an MBA and LLM from Bond University in Australia. He is a trustee of Bond University, Australia’s premier private University, and was formerly a trustee of the Queensland Art Gallery/Gallery of Modern Art. There are 30 years of publications and media on his professional activities and he has had a stellar career at CEO level since 1983.

For personalised solutions to the issues raised in the blog, please contact CORPbuilders TM at www.corpbuilders.com.au or call 0413 748 844

ROBIN RUDD IMPOVERISHES THE POOREST

Australian real interest rates are near zero. That's right: close to zero. Monetary policy is similar to that in the US, UK, EU and Japan. Why?

The domestic Australian economy requires serious stimulation. It isn't happening, because the "politicians have made investment too dangerous". So writes Robert Gottliebsen in Business Spectator (www.business spectator.com.au).

Interesting then that the effect on un- and under-employment is yet to be debated. This from Morgan Stanley to their clients: "We think the real downturn is only about to begin". Specifically their comments refer to a savage decline in engineering and construction activity which, given many people fly into large resources developments from their home towns, is likely to spread the effects of such a downturn widely throughout the economy. It is already happening in once prosperous regional cities like Mackay in Queensland. Real estate prices are deflating there.

A zero real interest rate is not enough to provide business confidence to invest and employ these people. Uncertainty about income does not stimulate property prices, no matter how low the interest rate. Buyers beware.

Contrast this with a country which has few natural resources, but massive trade surpluses with every one of its major trading partners/blocks: Germany. Why? Why should Australians envy and strive to emulate the Germans?

Political stability is one reason. Angela Merkel, the present Chancellor has provided stable leadership in very difficult economic circumstances, and almost certainly will retain power in the forthcoming Federal elections (two weeks after Australia). Contrast this stability with the childish, selfish behaviours evident in Canberra these last years.

Investment requires stability, confidence, and certainty. I have found these qualities across the German polity, legal system and corporate governance systems over a long period of time. They have not been evident in Australia for many years and are not evident now. Not at least until the next government has had at least 12 months of settling in.

Doubtless, Australia's self styled fiscal conservative prime minister, his predecessors and their respective ministers think they are assisting the poorer segments of Australian society by taking from the "rich" and distributing to the "poor". In fact, the result of their collective policies is the reverse. Robin Rudd stands out as a wrecker, deliberate or not, which will take a long time to fix.

David Millhouse is an international entrepreneur with over 30 years in venture capital and private equity internationally. Based in Brisbane, Australia he is a specialist in venture financing and capitalisation, as well as the management of high growth companies, many of which proceed to IPO. He has conducted business in the UK, Germany, Switzerland, USA, Canada, Singapore, Hong Kong, Australia and New Zealand. A scientist by original profession, with an MBA and LLM from Bond University in Australia. He is a trustee of Bond University, Australia’s premier private University, and was formerly a trustee of the Queensland Art Gallery/Gallery of Modern Art. There are 30 years of publications and media on his professional activities and he has had a stellar career at CEO level since 1983.

For personalised solutions to the issues raised in the blog, please contact CORPbuilders TM at www.corpbuilders.com.au or call 0413 748 844

HENRY THORNTON & ALAN KOHLER ON THE DESTRUCTION OF THE AUSTRALIAN ECONOMY

On the 5th June this year I reported:

 

Henry Thornton is the non-de-plume of a highly reputable Australian economist. This week he writes: "Australia is no longer the miracle economy, and seems to be heading almost heedless into very difficult times". He goes on: "The current government has steered Australia into a situation of great economic disequilibrium whose main manifestation is a loss of competitiveness of Australian business". "Spending tax payers money has provided no preparation for the sacrifices that will be necessary to reform Australia's international competitiveness". "The budget has fallen apart and has been shown to be in far worse shape than the Treasury and the Government ....believed until recently".

 

Last week, the government unveiled a massive deficit with no realistic prospect of improvement. And their mea culpa is probably not even accurate.

 

If anyone doubts Thorntons' view, or mine in these blogs, look no further than Henry Thornton and Alan Kohlers' articles in the Australian of the 6th August (today).

 

Thornton writes: " Leaders in denial as we head for a recession we don't have to have". "The nations leaders are walking unknowingly into a new economic crisis, ironically just as other developed nations are showing signs of recovery" (Please read my Ping Pong Pang Series: all coming true). "The only excuse for the steady tramp into recession is the insularity and self congratulatory hubris of successive ministers and officials..." Listening to lightweight politicians and their syncophant commentators on the TV current affairs shows makes me cringe. Australians are Lions being led by Donkeys. So much misplaced trust.

 

Alan Kohler, another well respected economist writes today on the same page: "The men and women in federal cabinet over the next three years are the ones who will finally have to confront this challenge, more than 11 years after it was identified. It can be put off no longer".

 

In short, the China boom ended two years ago and Australia and the world is adjusting to new economic realities while China reforms and transitions its economy and the United States undergoes a rebirth based on cheap energy, cheap labour (by Australian standards), technical innovation and the availability of venture capital.

 

Well may the Australian Reserve Bank reduce the cost of money. That will not save the Australian economy from recession. A nasty period of price deflation in assets, products, and services costs is the inevitable result. But it will cleanse the profligacy which so defiles the opportunities for the Australian people today. Most people know others who have lost their jobs or are on reduced hours.

 

If you haven't already got assets denominated in US$, Euros, or Sterling, then its probably not too late, although it would have been better to act a year ago.

 

David Millhouse is an international entrepreneur with over 30 years in venture capital and private equity internationally. Based in Brisbane, Australia he is a specialist in venture financing and capitalisation, as well as the management of high growth companies, many of which proceed to IPO. He has conducted business in the UK, Germany, Switzerland, USA, Canada, Singapore, Hong Kong, Australia and New Zealand. A scientist by original profession, with an MBA and LLM from Bond University in Australia. He is a trustee of Bond University, Australia’s premier private University, and was formerly a trustee of the Queensland Art Gallery/Gallery of Modern Art. There are 30 years of publications and media on his professional activities and he has had a stellar career at CEO level since 1983.

For personalised solutions to the issues raised in the blog, please contact CORPbuilders TM at www.corpbuilders.com.au or call 0413 748 844

WHERE TO FOR AUSTRALIA?

Australia is at a cross roads. As I have previously written, the country can go down the road of old school socialism or it can have its own Margaret Thatcher moment. Only Australians can decide at the forthcoming Federal election on the 7th September.

Under the Rudd, Gillard, Rudd governments, Australia was taken down the socialist road, at huge cost to its economy, industries, and the welfare of its people. Despite the fact that Rudd marketed himself as a "fiscal conservative".

What he has actually done is to create a mountain of Federal Debt. Net Federal debt is now some AUD 250 billion and growing at a rate only exceeded by Spain and Slovenia. To plug the gap, he now proposes to tax bank deposits (Cyrus ?), despite the fact that these are already insured. For my non-Australian readers, State and Territory government debt is about the same volume as Federal debt, which should not be seen in isolation.

As a highly respected economist and former Reserve Bank board member, Warwick McKibbin, reports (Australian Financial Review 2nd August), there is a growing problem with deficit spending to fund social programs. Australia is not growing its debt to fund productive infrastructure. Concurrently, Rudd policies are reducing economic activity and employment significantly.

Monetary policy is following other countries, not yet at the money printing stage, but interest rate reductions will not work in an environment globally of credit contraction, including in China. It is this credit contraction and the reduction in the speed of money circulation that multiplies the sins of taxing and spending governments.

People are becoming debt shy: the shift to part time work and underemployment, and the ageing of the population serves to emphasise that trend.

There will be no return to the "normative", pre-Great Recession times. This is the new normal, and there is no China boom on the horizon to alter that. Indeed, the maturing of the Chinese, Indonesian, Malaysian, Thai and Indian economies will mean that their highly educated populations will manufacture quality products, and provide high quality services to Australian consumers. This is at the same time that Australian government policies have significantly increased the costs of production and delivery in Australia.

The choice is clear: more of the same which will result in the rapid export of the country's best talent and industries, or have its own Margaret Thatcher moment.

For those of my readers following Australian politics, this is a sample of what the spin doctors don't tell you:

https://www.youtube.com/watch?feature=player_embedded&v=u-5RgFe9OX4

http://www.spectator.co.uk/australia/8955281/a-complete-and-utter-fraud-2/

 

 

My prognoses for the Australian economy are all coming true. It is not pretty. This new (old) prime minister is the same person who has squandered 96% of the government revenue generated by Australia's once in a century resources export boom according to recent independent reports.

 

It is the same person who doesn't have much of a clue about the true state of Federal Government finances and purports to seek re-election based on ever increasing expenditures which have no revenue base.

 

It is also the same person who is presiding over huge spending on government advertising trying to persuade people he has all under control. What rubbish. He might, just, be able to keep the genies in the bottle until election day (he will keep deferring the election I suspect), but there is a generation of landmines being laid which will cost Australia and its neighbours very dearly.

 

Australians will rue the day if he succeeds. Think United Kingdom under the Callaghan Labour government of the 1970's. It took Margaret Thatcher to fix the mess.

David Millhouse is an international entrepreneur with over 30 years in venture capital and private equity internationally. Based in Brisbane, Australia he is a specialist in venture financing and capitalisation, as well as the management of high growth companies, many of which proceed to IPO. He has conducted business in the UK, Germany, Switzerland, USA, Canada, Singapore, Hong Kong, Australia and New Zealand. A scientist by original profession, with an MBA and LLM from Bond University in Australia. He is a trustee of Bond University, Australia’s premier private University, and was formerly a trustee of the Queensland Art Gallery/Gallery of Modern Art. There are 30 years of publications and media on his professional activities and he has had a stellar career at CEO level since 1983.

For personalised solutions to the issues raised in the blog, please contact CORPbuilders TM at www.corpbuilders.com.au or call 0413 748 844

 

 

 

"CORNINESS, INSINCERITY AND TOKENISM"

Not my words. This was written and published by a prominent Labour ex-Minister, Gary Johns, in the Australian of the 16th July. To quote:

"Whatever he has promised, Kevin can't. He can't deliver. Kevin can't because he is full of cant -corniness, insincerity, and tokenism".

"He can't balance the books, although he spent the money. He can't deliver prosperity because he can't so no to the unions. He can't scrap the carbon tax by renaming it a carbon price."

And this was only the start of the article, the themes of which are being picked up by much of the mainstream Australian quality press.

Australia had the opportunity (and did in 2007) for zero net public debt, reducing taxation, and at the same time investment into quality infrastructure. That opportunity has been well and truly squandered by the Rudd-Swan-Gillard-Rudd socialist government.

Australians now face a declining standard of living, rapidly rising un- and underemployment, a slowing economy, and public debt likely to rise to European levels.

Rudd, between wrapping his arms around whoever will tolerate him, ignores these realities and promises anything designed to win a vote. Ask Gary Johns. Yesterday, yet another business tax hit in an economy reeling from uncertainty and disgust.

He makes much of "saving" Australia from the Great Recession in 2008 onwards. In fact, recent objective analysis including that from Dr Doug McTaggart, formerly Professor of Economics at Bond University and CEO of the Queensland Investment Corporation, makes it crystal clear that in 2008/9, it was net exports that saved the economy. He writes: "The collapse in discretionary consumption, aided by a collapsing exchange rate, leading to a collapse in imports was a key reason why Australia did not have a recession". It had nothing to do with government spending, despite Rudds' protestations.

If this guy is returned at the next Australian federal election, Australians are likely to rue the day. Lower living standards will be the inevitable result.

David Millhouse is an international entrepreneur with over 30 years in venture capital and private equity internationally. Based in Brisbane, Australia he is a specialist in venture financing and capitalisation, as well as the management of high growth companies, many of which proceed to IPO. He has conducted business in the UK, Germany, Switzerland, USA, Canada, Singapore, Hong Kong, Australia and New Zealand. A scientist by original profession, with an MBA and LLM from Bond University in Australia. He is a trustee of Bond University, Australia’s premier private University, and was formerly a trustee of the Queensland Art Gallery/Gallery of Modern Art. There are 30 years of publications and media on his professional activities and he has had a stellar career at CEO level since 1983.

For personalised solutions to the issues raised in the blog, please contact CORPbuilders TM at www.corpbuilders.com.au or call 0413 748 844

INVESTING IN VOLATILE TIMES: INFLATION OR DEFLATION?

This week, I had the pleasure of being invited to a lunch with Glenn Stevens, the Governor of the Australian Reserve Bank. The red wine was dry, but Stevens was dessicating. Apart from the odd joke.

There were two, one of which sent currency and capital markets into a tail spin. The second was a reference to his wife of thirty years wanting "long service leave". Just a joke I am sure.

The first aside was far more serious. He said that the banks' board deliberated "for a very long time" on interest rates. Others inferred that this was bank speak for a lowering of Australian official interest rates. Many were and are still predicting this outcome. It demonstrates just how sensitive world capital, currency, equities and bond markets are to the slightest whiff of volatility.

JP Morgan, in a note to their clients said "Glenn started a joke, which started the whole world cutting". "We were confused by both the content of this statement, and the manner in which it was delivered". (Australian Financial Review 5th July).

Lost in these inferences however, is a much more serious message. Many people in the community do not understand that low interest rates (whilst good for mortgage holders) are the harbinger of recession. There is not the demand for money from businesses and households, and the velocity of its circulation is reduced. i.e. there is a lot less economic activity per dollar on issue.

This has been the situation in Japan, Southern Europe, United Kingdom, and the United States (until recently: please see my Ping Pong Pang blogs on this site).

The real message from Stevens is reported in the Australian Financial Review (4th July). "Reserve Bank of Australia governor Glenn Stevens issued a dramatic pre-election request that the government restore the budget to surplus as soon as possible, and for the first time since 2008, a step which he believes will restore economic confidence". He urged that "Federal finances need to be brought back under control"and "that commitment will be heightened in the future".

It is true that monetary policy in Australia still has room to move. The problem is that money can be free (as it has been in other jurisdictions) and still not be in demand. In those circumstances, monetary policy loses its effectiveness, and is like pushing on string. That is the situation Australia faces today and reflects what has already happened in other countries.

As I have reported before, these conditions are reflected in true un- and underemployment rates approaching those in France and other European countries. The truth of this was manifested on Australian mainstream television this week (Four Corners, ABC). Don't be duped by the aggregate data coming out of Canberra.

Stevens, then may be the emperor without real clothes. His equivalent central bankers in other countries have had the same problem. These include Ben Bernanke, Mervyn King, and Mario Draghi. Each of them, together and separately, participated in a worldwide effort to prevent the advent of another Great Depression.

What is clear is that those countries that have bitten the bullet of fiscal policy and sound public finances are going to be the winners. That includes the US, United Kingdom, and the northern part of the Eurozone. Return to growth in those countries will provide investment opportunities on the upside. The rest, including probably, Australia, will be on the downside.

That is, unless the Australian government (and its constituent states) returns to sound public finances. Short term pain for long term gain. That will shake Australia out of its China induced torpor. If the Canberra soufflé rises twice, it won't happen.

THE CHALLENGE FOR AUSTRALIA'S "NEW" GOVERNMENT

Australia has a "new" government. Perhaps.

Most probably, it will be painting over some quickly growing cracks which were rapidly becoming an electoral tsunami which destroyed the "old" government.

Reports in the Sydney Morning Herald this morning state that four of six of Australia's states are in recession measured as declining state final demand. It also states that unemployment in Bankstown (an area of western Sydney) is twice the national average. And some, if you read my previous blogs on Australia's underemployment problem. The most reliable source of data seems to be Roy Morgan Research, not the Australian Bureau of Statistics. It is not just Bankstown.

Australia's true un- and underemployment problem is not that far away from France and other European countries. Ask the people who cannot find work, are losing their jobs in droves, and are moving back into their parents homes.

The SMH also carries an interesting article about Cash Converters, being a large listed pawnbroking firm. Middle income families are visiting the pawnbrokers. Professional people are starting to visit Centrelink, the Australian government's social insurance agency.

Interest rates, as set by the Reserve Bank, appear to be heading lower, a rare generational event. That doesn't assist small business since the banks do not reduce their lending rates accordingly. Or credit card holders. Or pensioners relying on fixed income. It does assist mortgage holders to reduce debt, an essential strategy since the deflation in house prices means that they end up in the same position viz a viz their bank loan covenants.

Electricity prices in Australia are now amongst the highest in the world, and rising. This is self inflicted in a country which has endless energy resources of most forms.

Energy price inflation is increasing. In addition, the relative decline in the value of the Australian dollar will mean significantly increased petrol prices.

This is a  double whammy for Australian business and households in an environment of deflating end product and services prices.

Some of these problems are a result of the China led boom in commodities. Most of the problems faced by businesses and households are inflicted by their own "old" government, previously led by the same person who now purports to head the "new" government.

The only saving grace may be that the leader of this "new", "old" government, may actually listen to Prof. Ross Garnaut, whom he knows well. If so, the magnitude of the problem may be realised in Canberra. Whether or not there is political will to accept the truth and do something about it remains to be seen, and will in part be determined by the fact that Australia is due to hold a Federal General Election this year. The date of this is now open (it was to have been 14th September). The date of the G20, that platform for middle power peacocks, will be a factor in setting the new date.

For Australian businesses and households, that date with destiny cannot come quick enough. Then perhaps, there can be a true NEW government, not a recycling of the failures of the recent past.

"SOFT EMPLOYMENT GROWTH GETS SOFTER"

So writes Michael J Knox, Chief Economist of RBS Morgans (Economic Update 19th June 2013), as it happens concurrently with my reporting yesterday of the unemployment and underemployment statistics from Roy Morgan Research (19th June 2013).

 

He continues: "Unemployment in trend terms continues to steadily drift up. Unemployment is rising and jobs are getting harder to get going into a Federal election. Most people are not economists. But everybody looking for a job knows that the economy feels worse".

"The last growth recession that Australia encountered where fiscal stimulus was not an option was back in 2002". Fiscal contraction is happening across Australia.

Michael is one of Australia's most prescient economists and his reporting is reflecting what you see in the suburbs, and, I understand, the increasing number of professionals visiting Australia's Centrelink social support network.

It probably means a reduction in Australian short term interest rates. Whether the exchange rate follows depends on the international money printers.
 

David Millhouse is an international entrepreneur with over 30 years in venture capital and private equity internationally. Based in Brisbane, Australia he is a specialist in venture financing and capitalisation, as well as the management of high growth companies, many of which proceed to IPO. He has conducted business in the UK, Germany, Switzerland, USA, Canada, Singapore, Hong Kong, Australia and New Zealand. A scientist by original profession, with an MBA and LLM from Bond University in Australia. He is a trustee of Bond University, Australia’s premier private University, and was formerly a trustee of the Queensland Art Gallery/Gallery of Modern Art. There are 30 years of publications and media on his professional activities and he has had a stellar career at CEO level since 1983.

For personalised solutions to the issues raised in the blog, please contact CORPbuilders TM at www.corpbuilders.com.au

 

 

 

 

 

 

 

 

INVESTING IN VOLATILE TIMES: THE SEARCH FOR ALPHA

"The message to come out of this latest period of profit downgrades is that the (Australian) economy is in far worse shape than the movement in the overall share market would indicate". Tony Boyd, Australian Financial Review 19th June 2013.

The Australian Bureau of Statistics reports Australian unemployment to be 5.5%. Roy Morgan Research in its monthly sample of 330,000 people reports it to be 9.5% plus another 7.8% who do not have enough work. This is a total of 16.3%.

What this data does not say, is that these people (2.1 million) are concentrated in the younger (<30) and older segments (>50) of the labour market, and in geographies where European levels of real unemployment are being experienced today.

It is all very well for the Federal Government and institutions to quote aggregate data which are heavily skewed by the resources industries, but the reality is that there are significant and growing areas of Australia where the social consequences of un- and underemployment are readily apparent.

These organisations are projecting that other industries will somehow fill the economic gaps being left by the tapering off of resource industry investments. This will require entrepreneurial effort and the drive for alpha and will take a decade at least.

I have written extensively in these blogs how, for investors, the search for alpha can drive investment returns in such a volatile macroeconomic climate. I have also written how government debt and market interventions crowd out industries which are able to generate alpha.

In Australia, alpha generation, if it is understood at all by governments, is severely hampered by government policy, including the upfront income taxation of Employee Stock Option Schemes in venture backed investments.

Other jurisdictions, including the United States and the United Kingdom are already more alpha friendly than Australia. As these countries move out of recession, Australia is heading into one, at least a "growth recession".

The next Australian government will need some serious policy incentives to solve the employment problem and retain its entrepreneurs. There are moves in this respect presently in the review of the Corporations Act to accommodate the use of social media for capital raisings ("equity crowd funding") but Australia is behind other jurisdictions.

Unfortunately, given the political uncertainty in Australia, it will be at least a year before investors and entrepreneurs are likely to see real change.

David Millhouse is an international entrepreneur with over 30 years in venture capital and private equity internationally. Based in Brisbane, Australia he is a specialist in venture financing and capitalisation, as well as the management of high growth companies, many of which proceed to IPO. He has conducted business in the UK, Germany, Switzerland, USA, Canada, Singapore, Hong Kong, Australia and New Zealand. A scientist by original profession, with an MBA and LLM from Bond University in Australia. He is a trustee of Bond University, Australia’s premier private University, and was formerly a trustee of the Queensland Art Gallery/Gallery of Modern Art. There are 30 years of publications and media on his professional activities and he has had a stellar career at CEO level since 1983.

For personalised solutions to the issues raised in the blog, please contact CORPbuilders TM at www.corpbuilders.com.au

PROFITING IN A VOLATILE INVESTMENT CLIMATE

For my readers in 28 countries, you might be interested to see how we are going to generate profits from these volatile times. There is a lot of strategy generation in these blogs and its implementation can be found below.

Please visit ACF Equity Research in London at:

http://www.acfequityresearch.com/millhouse/

for a more detailed analysis.

THE SEARCH FOR ALPHA IN INVESTMENT STRATEGY

Do you hedge against inflation or deflation? Some economists predicted a massive inflation surge from the money printing occurring in most major economies. Yet there is little evidence of it in the real economy for tradeable assets and services, and especially given the slowdown in China and other Asian countries. There is massive supply of underutilised capacity.

In those sectors, it looks as though investment strategy should be profiting from a deflationary environment.

That is not the case with non-tradeable assets in the worlds' two growth economies, being the United States and Germany. In some cities and regions, including California, New Zealand, and Berlin, real estate prices are inflating. Some years ago, I constructed the Deutsche Property Trust, and had a Term Sheet from Lehman Bros for USD 200 million. That was in 2007, so no guesses what happened shortly after.

Now, wherever you invest, you are investing in volatile conditions. That volatility creates opportunities, the windows for which could be quite short, and sometimes strategically and rapidly obsolete.

In the United States (where I have along predicted a resurgence in growth (please see my Ping Pong Pang blogs), the volatility is on the upside at present and in my view likely to remain so even if the money printing stops. This view stems from the US and Canada being able to source  and export their energy needs from domestic sources at lower than present world prices. There will  be a resurgence of manufacturing as the key strengths of the US economy build on this advantage.

Germany similarly, and whatever the present difficulties in the European Union, it is important to note that Germany is playing a long term game which is likely to result in more Europe rather than less (refer my blog on Joschka Fischer recently). Manufacturing and employment is growing strongly in Germany and this is now reflected in inflating real estate prices.

Generating alpha from opportunities in these two countries will be from upside potential including in the IPO markets.

Other countries, including Australia, will be on the downside, and include acquisitions of deflating asset prices, including some real estate. That is likely to continue for at least another year, and certainly until the political and economic mess in Canberra is resolved. Until then, the present socialist Federal Government has seen fit to destroy Australia's comparative advantages, disincentivise its entrepreneurial and aspirational workforce, and destroy the country's previously enviable fiscal position. Hence, every day, in most the mainstream press and commentaries, there are predictions of recession. Hello, I predicted it in these blogs nearly a year ago. Australia is looking more like France everyday.

Nonetheless, alpha is there to be earned, but on the downside.

Alpha generation is the true skill in private equity and hedge fund investing. But one size most definitely not fit all, and all investor presentations need to reflect that.

David Millhouse is an international entrepreneur with over 30 years in venture capital and private equity internationally. Based in Brisbane, Australia he is a specialist in venture financing and capitalisation, as well as the management of high growth companies, many of which proceed to IPO. He has conducted business in the UK, Germany, Switzerland, USA, Canada, Singapore, Hong Kong, Australia and New Zealand. A scientist by original profession, with an MBA and LLM from Bond University in Australia. He is a trustee of Bond University, Australia’s premier private University, and was formerly a trustee of the Queensland Art Gallery/Gallery of Modern Art. There are 30 years of publications and media on his professional activities and he has had a stellar career at CEO level since 1983.

For personalised solutions to the issues raised in the blog, please contact Corpbuilders TM at www.corpbuilders.com.au

PROFESSOR ROSS GARNAUTS' VIEW OF POOR PUBLIC POLICY

For my readers who are the remotest bit sceptical of these blogs, please have a read of the speech given yesterday at the University of Melbourne by Professor Ross Garnaut and reported extensively today in the Australian Financial Review and Australian newspapers.

Garnaut is one of Australia's leading economists and can be credited in part for Australia's 20 + years without a recession for his advices and guidance provided to Australian Federal Governments. He is worth listening to.

His message is quite simple: Australia wake up from your slumbers or face destruction (rather like Smaug the Magnificent in Tolkiens' Hobbit). Destruction in this sense means a slide into European style recession and unemployment.

One firm I should have included in my list of nine prospective industries we could have is one which is long established and manufactures and exports very specialist electronics based products - Codan, based in Adelaide. Codan fits nicely with a sustainable competitive advantage in astrophysics and the management of space. It is part of the defence related cluster in Adelaide and could become a key participant in such an industry.

Codan, like Cochlear, Resmed, CSL and others I mentioned yesterday demonstrates that you can successfully manufacture and export from Australia, at todays labour and exchange rate regimes, without tariff protection and without constant subsidy.

David Millhouse is an international entrepreneur with over 30 years in venture capital and private equity internationally. Based in Brisbane, Australia he is a specialist in venture financing and capitalisation, as well as the management of high growth companies, many of which proceed to IPO. He has conducted business in the UK, Germany, Switzerland, USA, Canada, Singapore, Hong Kong, Australia and New Zealand. A scientist by original profession, with an MBA and LLM from Bond University in Australia. He is a trustee of Bond University, Australia’s premier private University, and was formerly a trustee of the Queensland Art Gallery/Gallery of Modern Art. There are 30 years of publications and media on his professional activities and he has had a stellar career at CEO level since 1983.

For personalised solutions to the issues raised in the blog, please contact Corpbuilders TM at www.corpbuilders.com.au

THE OPPORTUNITY COSTS OF POOR PUBLIC POLICY

Reports suggest that the Australian taxpayer has provided some A$19 billion in financial support to the Australian automotive industry this last 10 years according to the Australian Productivity Commission and reported by Henry Ergas (Australian May 25th 2013).

This is government venture capital that should earn a return based upon its opportunity cost. If you were a venture capital or private equity fund manager investing over a period of ten years, you would expect to generate a portfolio of assets which have a return of several times the initial investment amount. Normally this is measured as an internal rate of return and/or a multiple of the original investment.

What did Australian taxpayers get in return for this investment? A truly independent economic analysis may not exist. Perhaps a Ph.D or Post Doctoral Fellow might give this a thought.
I last published in 1988 on such a topic when applying venture capital rates of return to publicly funded University research. Stirred up a hornets nest actually.

What could have Australia achieved with this quantum of venture capital? Probably 19 industries, all based on sectors where Australia and Australians do have some comparative advantages which could become sustainable, not from mineral wealth, but from human capital.

Australians do not generally understand the present economic arguments about "productivity". Most think it will mean working harder for less. Indeed, many people are experiencing declining standards of living as GDP and GSP per capita decline. That's what they feel and no one is providing leadership to demonstrate otherwise.

Productivity can mean working less, but a lot smarter. If there is going to be a replacement for economic activity from quarrying of resources, in what is a hollowed out economy, then some serious strategic thinking about the future needs to occur.

This will need to include the elimination of the present Federal government vilification of entrepreneurs and wealth creation and a return to the previous and productive environment where wealth creation based on innovation and entrepreneurship was encouraged by both mainstream political parties. Peter Beattie, the former Queensland Premier writes regularly on this topic. If there is no wealth creation, then there is less to distribute, and the whole population becomes poorer. This is happening in Australia today.

So what are these industries where there is the opportunity to create sustainable competitive advantage? What could we have had? All of these industries are labour intensive, not easily commoditised or replicated, and are high value adding, high reward industries. A$19 billion invested in accordance with venture capital criteria would go a long way to advance the economic and social wellbeing of Australians.

Here are 9 examples:

1. A world class venture capital industry, well funded, with the capital and skill sets to finance the next generation of Cochlear, Resmed, CSL, Vaccine and drug development start ups.

2. A world class arts sector, building on the magnificent success of the Queensland Art Gallery/Gallery of Modern Art in cultural tourism. This would include full sized orchestras, ballet, opera and theatre companies in each major city attracting higher paying international tourists from around the globe. Competitors to Berlin, London, Paris, St Petersburg and New York; Bayreuth and Glyndebourne. If we want to get away from the economic and social tyranny of low end volume based tourism, this is a strategy.

3. Astrophysics and the management of space, a scientific sector where geography and intellect combine to generate a national sustainable competitive advantage.

4. Clean energy from nuclear power for domestic consumption and for the servicing of nuclear fuelled ships. Baseload power to complement irregular power from solar infrastructure. Stability in energy input costs is fundamental to all manufacturing.

5. Research universities equivalent to Stanford or MIT, with the spin offs from them generating our own Silicon Valleys instead of exporting scientific and entrepreneurial talent to the US, Singapore, and other countries.

6. The built environment. With limited exceptions, people do not come to Australia for its built environment. The value of design and architecture is not a quality generally recognised in this country.

7. Embrace online merchandising of products and services. The quality of the internet today and the devices that allow access to it is such that the whole world is now the market place. Printing books was the precursor to the Renaissance and the Enlightenment in Europe. Similarly today, the internet enabled the "Arab Spring". This global shift in the sourcing and distribution of value added products can change the demand profile of most industries.

8. Medical and dental services and the provision of telemedicine internationally, and especially into growing and modernising middle classes in Asia.

9. The recent Federal Governments' "Asian Century" White Paper is "laudable", but "disappointing that it fails to discuss how Australians can engage more meaningfully with Asia"..." it needs to develop its comparative advantages - and an understanding and respect of Asian culture" says Mr Trevor Rowe one of Australia's leading business men with close links to Asia and to academia. (The complete article is found at Asia Today International authored by Florence Chong).

My own experiences in Europe & Asia demonstrate just how right Trevor is.

There is a whole new industry to be had, not only in language training but in the development of much deeper cultural and historical understandings. It is the combination of these which make for successful business engagement.

What Australia has at present is nostalgia masquerading as sound policy. Please send this blog to your Federal and State members of parliament. Ask them to explain the opportunity cost of their policies.

David Millhouse is an international entrepreneur with over 30 years in venture capital and private equity internationally. Based in Brisbane Australia he is a specialist in venture financing and capitalisation, as well as the management of high growth companies, many of which proceed to IPO. He has conducted business in the UK, Germany, Switzerland, USA, Canada, Singapore, Hong Kong, Australia and New Zealand. A scientist by original profession, with an MBA and LLM from Bond University in Australia. He is a trustee of Bond University, Australia’s premier private University, and was formerly a trustee of the Queensland Art Gallery/Gallery of Modern Art. There are 30 years of publications and media on his professional activities and he has had a stellar career at CEO level since 1983.

For personalised solutions to the issues raised in the blog, please contact Corpbuilders TM at www.corpbuilders.com.au

 

FINALLY THE TRUTH IS OUT 2

On the 6th December 2012 I wrote:

"Finally the truth is out about the Australian economy: it is in recession. The real world has been telling us this for a year, but the Australian Government and much of the media has been hiding behind mining activity skewed aggregate GDP data. Could be good for some borrowers, but those that are worried about security of employment will not want to become even more indebted. Add to this the fiscal contraction from governments at all levels, and 2013 will be horrible for many people".

I copped considerable criticism for this view actually.

Interesting then that in the Australian Financial Review of the 22nd May 2013, the Secretary to the Australian Treasury Dr Martin Parkinson finally states "conditions in the non-resources sector have been not much better than the recessionary days of the early 1990's".

Hallelujah! Although he is wrong. They are worse. I was there and founded my previous business in 1991. That became very successful over its 19 year lifespan.

It is a tragedy that the leaders of the country are not being open and honest with the people, and when they are, then they are very late in admitting it. Probably the real truth will come out after the September election in Australia. The damage is already being done.

Dr Parkinson used to run the Australian Department of Climate Change.

PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS, WASHINGTON DC

I would refer my readers to the Peterson Institute for International Economics in Washington DC. In recent reports, there are some salient insights from that institution for my Australian readers and some very different insights for my thousands of international readers.

To summarise:

• Countries that have reined in public spending are now growing faster whilst the profligate founder;
• Small countries with illiquid bond markets can lose access to international financing at minimal levels of indebtedness;
• Many countries hit their borrowing ceilings suddenly and unexpectedly because of the inherent volatility of credit markets;
• Northern Europe has minimised fiscal stimulus and grown reasonably well;
• Southern Europe, France and the United Kingdom have pursued fiscal stimulus and all suffered from recession;
• The earlier sufficient fiscal adjustment is undertaken, the earlier confidence can be restored amongst citizens, businesses and investors.

In the Australian context, I have pointed out before that Australia is a smallish (albeit worlds' 12th largest) economy but not as developed as other larger economies with which it is often benchmarked. It also has a small and illiquid domestic bond market and is very exposed to the vagaries of international capital and internationally traded commodities.

Hence the recent warnings about Australia from some very eminent opinion makers including Prof. Ross Garnaut and the deflationary warning signals now being commented upon in the mainstream Australian press.

In the European and German context, Northern countries are likely to continue to do reasonably well, especially as the US economy starts to grow again. Had the European institutions imposed their own regulatory standards earlier, then it is likely that the profligate fiscal and tax policies at the national level in the Southern countries would not have been able to inflict such damage on their own citizenry.

Australians take note. Think about getting your assets denominated in USD and Euros, your liabilities in AUD.

THE PRICE OF POOR PUBLIC POLICY 2

An insight into Australia's possible future lies on studying events in Europe and the United Kingdom. Policy pursued to date by the present Australian government will lead inexorably to a Southern European economic outcome. It has happened in some states of Australia previously and can happen again, nationally.

What is not often recognised is that sovereign debt in Australia is not just at the Federal level. As I remarked last week, it is also at the State level. Add in the unfunded liabilities which are not reported as part of government debt. If you do, as reported by Christopher Joye (Australian Financial Review 18th May), then you will see Australian governments debt at around 45% of GDP, not the 11% net debt widely reported internationally.

Australian governments debt has to double only once more, and the country ends up with an aggregate debt position similar to that of the problematic European countries. If you think it can't happen, then please think again. It already is, and the track to economic serfdom was layed in 2007.

Parts of Australia's non-resources economy are already in recession, and the plateauing now occurring in the resources sector will accelerate that slowdown. So would loss of the present AAA credit rating on Australian government debt. If you think that Australia could not possibly have a European style unemployment crisis, then think again. Some districts of the Australian cities already have it, and especially amongst young people and males above 50.

I have spent a lot of time studying German political and economic history. One of the insights I can share is the commonality of objective of various German governments in recent years including those those of the left wing. Not so long ago, the German Greens were part of a mainstream German government. Interestingly, not the hysterical shrieking wraiths that seem to populate the environmental movement in this part of the world, but serious and pragmatic thinkers like Joschka Fischer who led the German Greens for two decades. He became Foreign Minister and Vice Chancellor in the Federal Government.

It was that government that set the German economy on the path of flexibility (including in the labour market) that underpins economic stability and comparative prosperity in that country today.

Fischer's contributions from then are echoed today. He helped to create a European polity based on mutual trust, solidarity, the rule of law and compromise. He does not believe that austere economic policies and structural economic reform alone will solve the economic problems being experienced in the eurozone. These problems stem from profligate social expenditures, unfunded by a consistent tax base, and restrictive regulatory practices, supported by devaluing national currencies over decades.

Fischer believes that the solution lies also in a banking, fiscal and political union: in effect what we have in the United States and Australia, and what Winston Churchill proposed in 1945 - the United States of Europe. The real crisis in the EU is not financial: it is political. Whether Angela Merkel can bring the peoples of Europe together sufficiently for what could be the Final Act of this play remains to be seen. If she can, then monetary stability of the German model could be the result.

It is a pity that given Australia does not have these impediments to conquer, it is nonetheless following the southern european path of unfunded policy profligacy. The outcome, if left unchecked, will be the same.

As I wrote last week, younger Australians will have good cause to look back in anger at the 2007-13 period and the opportunity costs to them and the nation of poor public policy.

JAPANS' BRAVE NEW WORLD: DEFLATION OR INFLATION?

There has been so much focus on China this last decade that the world has perhaps lost sight of developments in Japan. It is still the worlds' third largest economy and one of Australia's largest trading partners, especially for its commodities exports.

When I first visited Japan in the 1980's, real estate in Tokyo was the most expensive in the world. Two decades of deflation later, the present Japanese government and its central bank have embarked upon a massive program of money printing in an effort to stimulate inflation.

Change always creates opportunity for investors. Ask Kyle Bass and Richard Howard from Hayman Capital. Bass predicted the US sub-prime crisis and the European Sovereign debt explosion. They publicly predicted a "full blown bond (Japanese) bond crisis in the next few years". This arises from the threat of rising Japanese interest rates on sovereign debt consuming the "bulk of the nation's entire tax take". Hayman's view of Japan is cathartic.

That assumes the money printing instituted by Haruhiko Kuroda at the Japanese central bank does generate the required inflationary policy objective. It may not, as Ben Bernanke has found out in the United States. They can both control the supply of money, but they cannot control demand for it, or the velocity of its circulation. In the US, the velocity of circulation has been dropping - less activity for a quantum of money supply. That is one reason why the money printing to date in the US, UK, Europe has not resulted in inflation, or even inflationary expectations of consumers. Demand for money has dropped. Prices have deflated.

The same could occur in Japan. Hayman might be wrong, but keep an eye on its Japan Macro Opportunities Fund. That will give you some clues as to where Australia is going to head, both from a trade and an investment perspective.

Volatility in Japan could mean asset allocations to other countries, including Australia. That has implications for the relative value of the Australian dollar and its exports to its second largest trading partner.

Given the size of the Japanese money printing, a bet either way can have massive gains or losses at the fund and at the country level.

(You can find a full discussion at Australian Financial Review 11th May 2013 written by Jonathan Shapiro).

THE PRICE OF POOR POLICY

The policies pursued by the present Australian Federal Government are now starting to hit home. And not in a good way. The effects, already apparent if you look, are now going to be apparent to every household and business.

Having pilloried the entrepreneurial people of this country, and targeted the so-called rich, government finances are now so precarious that the reach of the taxman is now extending beyond those small groups into middle Australia. Higher marginal tax rates, additional levies, and increased costs are now going to suck the financial life out of these households.

Imagine, an outer suburb, pleasant and leafy, but not wealthy, two children and a couple of dogs. A 4WD and an old second car for shopping and school. A belief in personal and social responsibility. The backbone of the nation. These are the people who are now going to pay the price because there are not enough "rich entrepreneurs" to go after, even if this were a proper policy goal.

It is going to take many years before the full impact of policy error works its way through the community, and as Maurice Newman comments "Younger Australians are entitled to look back in anger as they realise how recklessly their future has been mortgaged".

Add in the facts of the struggling SME sector where most of the employment presently is - (some of this is anecdotal, much is not):

• 1,000 restaurants to close;
• 62% of SME's are chasing late payments from debtors totalling over A$10.00 billion;
• 240,000 jobs lost in the SME sector;
• Reduced hours because of penalty rates, even if people wanted to work those hours at the normal rate;
• 51% fall in engineering vacancies.

The list goes on.

Two of Australia's most eminent academic economists in a recent paper argue that "commodity prices, resources investment, and resources exports would shift from being a powerful stimulus .... to a deflationary influence of similar force over the next 18 months". (Reported by David Uren, Australian 13th May).

Scary stuff.

I have long commented that political and institutional Australia has been hiding behind aggregate economic data. Now the tide is going out and we all shall see - especially middle Australia - who has clothes on.

Please review my blogs of 6th December 2012 ("Finally the truth is out") and 18th February 2013 ("Lions led by donkeys"). What you read in those blogs is now becoming daily news.

As Henry Ergas reports (Australian 4th May 2013), "Bad policy just does not happen". How right he is.

For my non-Australian readers, the Australian economy is being squeezed from several directions at once. Some of these pressures are inflicted by its own government, and some are the consequences of a globalised world and just have to be managed.

What is clear, and many Australians are starting to become very concerned about their specific situations, is that the future is not going to be like the immediate past. Why?

First: The money-tap is being tightened by falling real commodity prices and increasing supply sources. This will also apply to LNG and other commodities as the United States and Canadian suppliers change patterns and pricing in world markets. Reversion to the long term price mean results in lower prices for Australian producers.

Second:The global sea of newly created money in the United States, United Kingdom, Europe, and Japan pushes down the relative quantity of Australian dollars, and increases its relative price, especially since the Federal debt remains AAA rated, along with Norway, Switzerland, Canada, and Sweden. The ECB may reduce European interest rates to zero or below. Australia has relied heavily on foreign capital inflows, which presently upwardly support the relative value of the Australian dollar. But, because Australia is not a "developed" country in the sense that Switzerland is, and Australia will continue to require capital inflows to "develop", then the policy measures to reduce the relative strength of the Australian dollar need to be be different. Taxing those foreign inflows, as proposed by eminent economist Henry Thornton (nom de plume), may not be the solution. And reductions in Australian official interest rates are probably akin to pushing on a string.

The chances are therefore, that the relative value of the Australian dollar will remain where it is. That changes the producer economics permanently and reduces domestic profit margins hugely at a time of rising unit cost structures. Hence the lower corporate tax receipts, even though Australian corporate taxes are high by world standards.

Third:Australian public debt as a percentage of GDP is reported to be relatively low by "developed country" standards. What is not reported is that if you add in the sovereign debt of the Australian States and Territories (who can themselves borrow on world capital markets), you get a vastly higher level of sovereign debt (about twice Federal debt). This is already becoming a political issue in Australia with fiscal consolidation occurring Federally and in the States. Governments are needing to borrow for well into the foreseeable future.

Four: Price inflation for tradeable goods and services is presently benign in Australia. Price inflation for statutorily mandated services, pensions, labour, electricity, and utilities is significant,  and is causing increasing business and household distress. So are personal tax rises. Australians pay a top marginal rate of almost 50% if you include levies and other quasi income taxes. The marginal rate in Singapore is 20% and in New Zealand 33%, and both countries are competitors for Australian talent.

Five:It is inevitable that measured unemployment will rise. The real killers, as I have blogged before, are underemployment, a belief that jobs aren't available, and a decline in entrepreneurial activity. It is this loss of confidence that is deflating property prices. If people are not confident, or they know people who are not confident, they will not borrow money, no matter how low the interest rate. Go back to 1991. At some point, this will affect the banks and the bubble in bank share prices will be pricked as a result.

This all points to a deflationary domestic environment. Real spending in government, business, and households will decline. So will the velocity of circulation of money. This makes Australia and Australians vulnerable and uncertain. That is certainly the feeling you get talking to real people. Real people understand intuitively and from walking around that things are not as well as they were. Political and institutional Australia is only now waking up to that reality. Their problem is that they have lost control and do not have the necessary policy tools to regain it without significant forthcoming pain.

More and personalised guidance can be found at www.corpbuilders.com.au

INVESTING IN VOLATILE TIMES

For my many readers who have been following the themes in these blogs, you can gain some insight into how this is being developed into investment strategy by visiting: http://www.abnnewswire.net/press/en/75159/Article

THE DESTRUCTION OF COMPARATIVE ADVANTAGE AND THE POLITICISATION OF SCIENCE

This series of blogs reflecting disparate climate change opinion commenced on the 13th April 2013 where I related my early experiences in the politicisation of science. In particular, the predictions by one Paul Ehrlich in the 1970's that the earth will cool and food supply will be reduced. Scientific opinion and Malthusian economics rolled into one. Neither proved true.

And neither have the more recent hyperventilations on so-called anthropogenic warming which is leading to significant economic hardships in Australia and flawed energy policy in Germany and other countries. In these countries, destruction of comparative advantage is the result. My most recent post on this issue described what is likely to happen given the energy revolution underway in the United States.

Very credible scientists from the United States, Russia, and Taiwan now offer different views on climate change, and appear to be of the view that the earth is heading for a cooling period.

Abdussamatov from the Russian Academy of Sciences believes that "another cool period was due and would come about regardless of whether industrialised countries put a cap on their greenhouse gas emissions". "Mars has global warming....without the participation of Martians". He predicts a new "little Ice Age" will start this year or next"(On earth).

Hill at the US National Solar Observatory said "three different analyses of the sun's recent behaviour all indicate that a period of unusually low solar activity may be about to begin". From the Academia Sinica in Taiwan, where there are concerns about cooling as a result of Chinese emissions, Hsu states " the pause in warmingof the past decade is more likely to be explained by natural variability".

So there you have it: From the US: "the connections between solar activity and climate change are still very poorly understood"; from Taiwan: "the problem is the present state of climate models is still too simplistic for nature", and from Russia "a deep freeze that would last for the rest of the century".

(For interested readers, please refer to Graham Lloyds' column, Weekend Australian May 4-5 2013 and the original references).

From an investors' perspective, the gaming of misguided public policy could reap huge rewards. The losers are the households, small businesses, and larger company shareholders who all have to pay the costs associated with politicised public policy.

THE DESTRUCTION OF COMPARATIVE ADVANTAGE IN GERMANY

One of my German readers of this series of blogs has recommended you visit www.eike-klima-energie.eu. Herrn Sebastian Poetter is a leading Berlin and Brussels based lawyer and kindly posted me this link. It is in German but easy to translate.

The German economy (please refer my "Ping Pong Pang" Series) has been a sucess story this last 20 years. This success is based on a combination of world leading technical innovation, the availability of capital, investment into science and engineering skills, a flexible labour market, and access to relatively lower cost labour in other parts of Europe.

Germany is a high energy cost economy and was forecasted to become much more so, to the point that renewables (particularly wind) become competitive with nuclear and fossil fuels. The reality is different. That is a direct result of the energy revolution in the United States and Canada. This revolution will result in the US and Canada becoming largely self sufficient in energy and lower world prices for LNG and other fuels.

The result is that previous energy price forecasting for German industry is wrong and planned reliance on much higher priced renewables likely to cut a swathe through German manufacturing industry. Present energy price assumptions will destroy the aggregate advantages created by German industry.

I actually do not think this will come to pass. The Germans are too smart and they think long term and strategically. But it will mean changing the present assumptions and resulting policy mix. Change creates investment opportunities in a an environment of future declining world prices for energy sources.

Compared to the  policy mess in Canberra, Australia, where clearly, there appear to be few smarts and even less strategic thinking, and i know where i would put my money. Not in LNG developments in Queensland. No wonder Woodside deferred its investment into its Browse LNG project in Western Australia.