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.

THE US WILL LEAD THE WORLD OUT OF RECESSION

The United States has long been the home of post-WW2 technical innovation, entrepreneurship and venture capital. In part, this was generated by the huge military R&D investments of that war and a post-war influx of hundreds of thousands of engineers and scientists from the United Kingdom and Germany. The boom of the 1950’s was led by the application of military R&D to consumer products and, for most people, the advent of readily available credit. This was the period of Harold Macmillans’ “You’ve never had it so good” and the German “Wirtschaftswunder” (economic miracle).

This culture in the United States is there today, if somewhat buried by excessive government spending, intervention, and the advent of the welfare state.

But, the culture will resurface (this is the only way growth to reduce Federal debt can occur), and it will do it on the back of its traditional skills supplemented by:

·         Cheap Energy – yes energy at a fraction of Australian or European energy costs;

·         Competitive devaluation of the US dollar;

·         The world’s best intellectual property regime;

·         New manufacturing technologies;

·         Strategy designed to repatriate the innovation and production of high end products;

·         Cost inflation in China and other BRIC’s.

When?

2014 onwards.

www.millhouse.co