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).