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
Wednesday, 8 May 2013
Tuesday, 7 May 2013
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
Monday, 6 May 2013
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.
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.
Thursday, 2 May 2013
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.
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.
Friday, 26 April 2013
THE DESTRUCTION OF COMPARATIVE ADVANTAGE #3
The politicisation of the climate change debate has and will damage Australian businesses and households. Science has been subverted by politics and some of those scientists who dissented have been publicly criticised or worse. The so-called "deniers". Shades of the Inquisition. How dare you not be "politically correct"?
How refreshing then it is to see documentaries on the ABC which actually have a factual basis and explain in laymans terms how variances in the earths' axis to the sun influence its climate to the point of major and catastrophic change. Perhaps these documentaries should be rebroadcast to the schools? Climate change has natural origins. What a novel idea lol.
Also refreshing is that, finally, august institutions like the Actuaries Institute predict that the "impact on private insurance premiums will be marginal over the next 60 years" (Submission to the Australian Senate reported in The Australian 26th April 2013). Actuaries are the very professionals who advise insurers on the quantification of risk.
After the taxpayer funded hysteria of dams running dry, the Gold Coast being swamped, and the hugely expensive electricity guzzling (coal fired) desalination plants being built around Australia, finally there is a dose of reality. i.e. those who underwrite property risk are being advised that, well, there is not that much risk after all. "Relatively small, when compared with inflation" actually.
How refreshing then it is to see documentaries on the ABC which actually have a factual basis and explain in laymans terms how variances in the earths' axis to the sun influence its climate to the point of major and catastrophic change. Perhaps these documentaries should be rebroadcast to the schools? Climate change has natural origins. What a novel idea lol.
Also refreshing is that, finally, august institutions like the Actuaries Institute predict that the "impact on private insurance premiums will be marginal over the next 60 years" (Submission to the Australian Senate reported in The Australian 26th April 2013). Actuaries are the very professionals who advise insurers on the quantification of risk.
After the taxpayer funded hysteria of dams running dry, the Gold Coast being swamped, and the hugely expensive electricity guzzling (coal fired) desalination plants being built around Australia, finally there is a dose of reality. i.e. those who underwrite property risk are being advised that, well, there is not that much risk after all. "Relatively small, when compared with inflation" actually.
Tuesday, 23 April 2013
INVESTING IN VOLATILE TIMES
Some of my readers have suggested that I am a "Contrarian". This may well have been technically true in the past, but it is obvious that the themes developed in these blogs are now becoming widely held views. Perhaps that is why there is exponential growth in the number of visitations to this site from some 15 countries.
From an Australian perspective, it is well worth reading the lastest article from Michael Knox, Chief Economist at RBS Morgans and someone I have enormous respect for. He writes on the fiscal consolidation occurring at most levels of government in Australia, and the need for the Australian Reserve Bank to reduce official interest rates by at least the amount implied by reductions in Australian GDP derived from fiscal consolidation. In practice, this could amount to further official interest rate reductions of 0.5-1.00%. ("An IMF View of the AustralianBudget:Cuts in the budget deficit mean interest rates have to fall further" April 22nd 2013)
From an international perspective, it is also well worth reading an article published in Money Morning (www.moneymorning.com.au) entitled "Uncle Ben has a problem". This deals not with the price of money but its velocity of circulation. The impact of declining velocity of circulation is similar to a credit squeeze: there is less economic activity per printed dollar and less tax revenue for governments. This is US data but its impacts are twofold: it is likely that the velocity of circulation of Australian dollars is also falling and, since the US is an international reserve currency its behaviour affects all non-autarkic economies.
The result clearly is, and is going to be: deflation. The demand for money of itself is high, the demand for spending it is low. This deflationary environment is yet to reach Australian shores in a big way, but it could.
Basically, the velocity of circulation of US dollars is approaching levels last seen in the recessions of 1983 and 1991.
What does this mean for investment? Well, there are always opportunities in volatile times, and great corporations have been founded in such times. It also means that the wealth creation strategies of the past decades may not repeat themselves.
From an Australian perspective, it is well worth reading the lastest article from Michael Knox, Chief Economist at RBS Morgans and someone I have enormous respect for. He writes on the fiscal consolidation occurring at most levels of government in Australia, and the need for the Australian Reserve Bank to reduce official interest rates by at least the amount implied by reductions in Australian GDP derived from fiscal consolidation. In practice, this could amount to further official interest rate reductions of 0.5-1.00%. ("An IMF View of the AustralianBudget:Cuts in the budget deficit mean interest rates have to fall further" April 22nd 2013)
From an international perspective, it is also well worth reading an article published in Money Morning (www.moneymorning.com.au) entitled "Uncle Ben has a problem". This deals not with the price of money but its velocity of circulation. The impact of declining velocity of circulation is similar to a credit squeeze: there is less economic activity per printed dollar and less tax revenue for governments. This is US data but its impacts are twofold: it is likely that the velocity of circulation of Australian dollars is also falling and, since the US is an international reserve currency its behaviour affects all non-autarkic economies.
The result clearly is, and is going to be: deflation. The demand for money of itself is high, the demand for spending it is low. This deflationary environment is yet to reach Australian shores in a big way, but it could.
Basically, the velocity of circulation of US dollars is approaching levels last seen in the recessions of 1983 and 1991.
What does this mean for investment? Well, there are always opportunities in volatile times, and great corporations have been founded in such times. It also means that the wealth creation strategies of the past decades may not repeat themselves.
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