WHO WILL LEAD THE UPTURN?

I recently gave a short presentation in Brisbane where I told the audience of very senior business people that I thought the Australian media reporting of European political economy was “shrill” and “often ill-informed”. There are some exceptions to that including the article in todays’ Weekend Australian by Robert Gottliebsen, and a recent publication from my good friend Michael Knox of RBS Morgans. Michael reports that of the “5000 banks in the Euro area, there are 27 which were undercapitalised under the supervision of the European Banking Authority”. He concludes: “All that remains of the European banking crisis is that market participants learn that it is over”. That is exactly my conclusion.

Gottliebsen is not taking a bet and acknowledges that there are tough times in Europe. Not, however, as tough as the post-war years: it is these years that define European political economy today and for the foreseeable future. My bet is that Europe will get its act together.

In the meantime, the China story is over as we knew it. Australian resources producers in minerals and gas are getting towards the top of the costs curve in a world of declining real prices and huge energy developments in the United States and elsewhere.

Mark my words, the US will lead the world out of its present woes, and German led Europe will recover in much better financial shape as its primary partner. That defines our corporate strategy. The German experience with its postwar Wirtschaftswunder (miracle economy) will prevail and enable its European colleagues to become competitive in the world. Gain follows pain.

Where does that leave Australia? In short, a hollowed out economy which will need significant new multi-industry investment as resources investment declines and stops. There will be rising unemployment, more company failures, more house mortgages and small business loans underwater. Roger Montgomery (www.rogermontgomery.com) is worth reading: “Now that the tide is going out, we are about to find out who has been swimming naked”.

Add a bloated government sector which will need to wound back by the next Federal Government. There is pain ahead. So don’t provide your house as security to the bank for your business loan.

G20 HUBRIS

For my readers in other countries, you probably were bemused by the lecture recently given to the statesmen and women at the G20 by the Australian Prime Minister. For many of us here, it made us cringe. This woman is an old style British socialist from the valleys of South Wales (UK). She will only ever be a footnote to history as the first female PM in Australia, for destroying her very reputable predecessor (Kevin Rudd), and lying to the electorate.

What her admonishments at the G20 omitted was the chaos in Australian economic policy. This chaos is being masked by the booming resources sector, without which Australia would be headed down the European road right now. So called climate change policy is destroying large swathes of manufacturing with massive job losses. Banks will not finance electricity generators. What does she do? She gives large amounts of taxpayers money to companies which otherwise would have to sack their workforces so that they can pay her carbon tax she said she would not introduce. Similarly, a return to industrial relations policies which belong to another age where “workers” doffed their caps to “bosses” is scything through the SME sector.

Australia today, readers, is like an obese person who does not want to get on the scales to see how heavy they are. There is a heap of bad news out there, masked only by iron ore, coal and LNG exports to China and India. If that slows, there will be no option but to get on the scales and take the medicine.

There have been recent Australian statesmen who should proudly and properly address the G20, from both sides of politics. She isn’t one of them. Sorry.

IS THIS AUSTRALIA'S INDIAN (CHINESE) SUMMER?

One of the more sober assessments of the European situation came this week from the New Zealand Prime Minister, John Key, speaking from Berlin. Key is a smart and very experienced operator and worth listening to. He commented that Greece is such a small economy that is it not likely to cause the collapse of the euro. Nor is it likely that Greeks will vote to leave the Eurozone. This contrasts with much of the hype in the Australian media.

That hype went into overdrive this week on the release of the Australian economic data. What it misses, but has been picked up a little by Alan Kohler, also an experienced operator, is that you must look behind the aggregate GDP data. If you do, you see a much different picture. As Peter Switzer commented in the Weekend Australian, if the economy is so good, why don’t we have inflation?

By far the bulk of the reported GDP gains were in resources extraction and from a relatively small group of people. Hence the per capita productivity data reported this week. Take out resources (and i suspect some of the GDP growth should be reported as GSP growth since whilst it may be Australian companies that are reporting, there is a huge amount of imported capital equipment which you can see affecting the current account data), and you see a very different economy.

Is this Australia’s Indian Summer?

www.millhouse.co

THE VALUE OF LOW SOVEREIGN RISK

Last week, the German government was able to issue bonds (“Bunds”) with a yield of 0.07%. That is a negative real interest rate. Few countries can do this: the United States can when it issues Treasuries. What does this mean for business capital costs. Typically the cost of raising capital for companies is a function of the so-called risk free rate (government bond rate). If you an Australian business you therefore pay substantially higher debt cost than a German or United States business since Australian Commonwealth bonds are considerably higher yielding. That means there are fewer Australian businesses that can attract capital since resulting hurdle rates are higher in Australia than those other two countries.

What we now see is business credit constrained by the adoption of Basel 3 rules etc. because of that tighter prudential regulation and more costly because of higher Australian sovereign risk.

WITHER CHINA?

What I did not comment on yesterday was WHY some manufacturing is moving to Europe from China. Dr Clint Laurent from Global Demographics reports that “Asia is turning into a content of empty nesters” and that “the Chinese labour” market peaked in 2010”. In the coming 10 years he says, “ the workforce will shrink by 40 million”. China “has no spare capacity in terms of labour.  Everyone  who can work is working”. “Its industrial boom had been helped in part by an influx of people from rural areas…and that resource too had all but run out with most young people having already migrated” to the cities”.

The “current steep rises in labour costs in China are due to the ageing of the population” and are “set to rise as much as 14% p.a.” “Chinese demographic shift is real and is happening now” he says.

“He also says that “the youngest age brackets in India are no longer growing”.

This is one of the reasons that some manufacturing is moving to Europe – ageing of the population and the exhaustion of hitherto cheap labour pools is starving the Chinese economy of lower cost workers.  (www.theaustralian.com.au/

business/paulgarvey)

I have long known that the real cost of a skilled IT or science based worker is cheaper in some European countries than it is in China or India. Now that paradigm is being extended to lesser skilled workers. Hence my long standing focus on Berlin as it regains its economic hinterland.

www.millhouse.co

Yesterday, I commented on the evolving and essential role of Germany in the world economy and the move of some manufacturing TO Europe. And how present events suit  long term German political economy. Reported this week is that the German trade surplus is around USD 200 billion. For Australian readers, this is around 60% of the present Federal Governments annual budget and around 15% of Australian GDP.