2013: A YEAR OF RECOVERY: FOR THE SELECTED FEW

Those who have been following my blogs will see a consistent trend. Confidence in a US led, German supported recovery, irrespective of whether you are a China Bull or Bear. Why? Because the troops fight harder when their officers point a gun at their backs.

And so it is in the US and Europe. There is change and it will now come quite quickly. In the US, innovation rich manufacturing is replacing outsourcing to China. Why? Radically reducing energy costs; flexible labour markets, declining real wages, and a huge technology base. China's reported unit costs are inexeorably increasing. China's actual unit costs have always been higher once you include what are euphemistically referred to as "transaction costs". These are the costs of State involvement in industry.

We used to have them in Australia. Organisations like the State Banks of Victoria and South Australia which sent those States bankrupt. Yes, Australi has had its Peoples' Republics, and there is one operating out of Canberrra now, although it is falling apart, as centrally managed economies always do.

So whilst the Americans are about to profit from an energy renaissance and a competitive manufacturing economy, Australia, led by political donkeys, has gone in the opposite direction:vastly increased unit costs from rapidly rising energy and labour unit prices. Thats' OK though since the economy is doing really well. Isnt it Julia and Wayne?

Except that it isn't for many people, and especially the SME sector (Mittelstand for my German readers).

As an employer, I always looked at the job ads in the Saturday papers to see whether my competition might want my employees. For instance, in the Brisbane Courier Mail, there used to regularly be 120-130 pages of advertising. Last week, there was 16 pages, and I do not believe it was because of a shift to online ads.

German led Europe has a real chance of a return to growth and stability. The banks are recapitalised and in Germany, there is a property boom, especially in Berlin.

Whither Australia? A wasted year. Policy instability. It demontrates very clearly how the present Federal Government does not understand or does not care about business.

HARD TIMES BREED OPPORTUNITY

If you are interested in my view on the future of world equity markets, please visit Investor Relations/Investor Update at www.millhouse.co http://ow.ly/gUNsv

PING PONG PANG 2013 + JAPAN

My Ping Pong Pang Series from 2012 is confirmed by articles in todays press (Australian 23 Jan.Maurice Newma) & Nouriel Robini (AFR 23 Jan). Now add Japan. Australian currency and equity markets are likely to be positive in 2013 but the real Australian economy will be recessionary. SME's which are trade exposed are likely to face deflation in prices and volumes. Look at www.corpbuilders.com.au for some insights and possible solutions. http://ow.ly/h2LJG

FINALLY THE TRUTH IS OUT

Dear Readers

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.

ASIA: WHAT NEXT?

Prominent US economist Paul Krugman called the Asian Tigers "Paper Tigers" a long time ago. But was he correct on the result, if a little mistimed? There seems to be some gloom about China, Japan, South Korea and Japan. India is slowing and Hong Kong is experiencing slower growth.

It seems likely that the major effects of transitioning these economies may now have been felt, and that growth in GDP/GSP will slow. This has happened in western economies previously.

In Australia, GSP per capita growth is a lot less than GSP/GDP overall. It may even be negative. That is why people are feeling poorer even though aggregate Australian GDP data are very strong at present.

The big dynamic though is developments in the United States. Manufacturing is being repatriated from Asia back to the US. We will see a relatively low cost, high quality economy in the US. This will give Asian countries a shock. The US will suck in capital from all over the world.

The demographic benefits that will follow for the US are losses elsewhere, including Australia if it wants to emulate Silicon Valley.

CAN AUSTRALIA BE SILICON BEACH?

Many of us have tried. Since at least 1983, there has been considerable energy put into the concept of Australia diversifying its economy through emulating Silicon Valley and other locations around the world where clusters of innovative firms prosper to become the next generation of large global corporations. There have been seemingly endless government interventions at the Australian Federal and State levels.

Many of these interventions address the issue of venture capital. It is not generally well understood in Australia that most venture finance in other countries relies on corporate venturing and wealthy individuals. In Australia, these sectors are not well developed and venture capital more often than not relies on some form of government support. The results from the industry over a long period of time have been less than spectacular and for the most part have not met the promise of high capital return. There have been some notable exceptions. For instance, Cochlear and CSL in the life sciences/derived health care sector. However, for most investors, financing start-ups is a very skilled and substantially risky business. Better strategy is to invest in enterprises where others have previously invested and profit from the sunk costs. Even better where there is/has been a lot of state financial support.

The conundrum for Australia is that the vast majority of investment offers in this sector are very early stage, with limited intellectual property estates, and, as Alan Kohler rightly points out (Business Spectator 22^nd November 2012) achieving scale. Scale means internationalisation from day 1. The problem is that there isn’t a capital market to support such a proposition. The argument normally is “prove it at home first”. Well often you can’t.

Scale problems include the obvious one of market size, but the real one is pervasive and insidious – talent. You need to be in locations where there are clusters of talent. Basel in Switzerland for biopharma, Silicon Valley are obvious examples. Other problems are self-inflicted. Employee stock and stock option plans come to mind.

With Australian dollar purchasing power, it is tempting for investors to buy into foreign transactions which are usually much better developed than Australian ones. Capital is very mobile and especially so in the world today. Entrepreneurial talent is also highly mobile and especially when armed with a valuable Australian dollar. Hence, the drain of talent to Singapore and Silicon Valley. Competitive currency devaluations may well result in an even more highly priced dollar. That will only exacerbate the problem just at the time when the Australian economy will need a big shot of activity.