The nation’s top two economic advisers, Glenn Stevens and Ken Henry, yesterday warned the public to prepare for a series of short and long-term sacrifices as the economy returns to normal, with interest rates to rise rapidly and tax reform to leave some people worse off.
Front page The Australian 16/10/2009 by George Megalogenis.
Business hit as dismissal claims soar: Unfair dismissal applications almost doubled in the first few months of the Rudd government’s new work-place relations regime, prompting business to warn the rise will drive up costs and create a disincentive to hiring new staff.
Treasurer Wayne Swan hit back at coalition accusations that his spending pressured the Reserve Bank to raise interest rates, declaring yesterday that interest rate rises had nothing to do with fiscal policy.
Pgs 1, 7 of The Australian Financial Review 20/10/2009.
Australia didn’t have a financial crisis. The US did. No bank failed in Australia. No bank needed capital. No bank needed to be nationalised. No bank even made a loss. You ought to assess the fiscal stimulus that’s been undertaken against the mid-year forecasts. What they will show is that the Treasury over-estimated the economic downturn. What was undertaken was low-quality spend – $900 cheques that are now all gone and what have we to show for it?
Peter Costello’s last press briefing upon his parliamentary exit, The Australian 20/10/2009.
Politics is a story of conflict. In Australia, it is the Labor-Liberal conflict. For the media, conflict is the story that counts. For history, however, national progress is measured by the opposite test – where Labor and Liberal agree. Such agreement, rarely a story, is the foundation of all national progress. Australia rose phoenix-like from the ashes of the early 1990s recession to enter a low inflation growth cycle of such robust resilience that it became the longest economic expansion in the nation’s history. In the fifteen years to 2007, real income per head rose more than 40 per cent and real wealth per head more than doubled. This shifted the nation’s political culture towards markets, aspiration and enterprise while it generated an anxiety that Australia was losing its egalitarianism and social conscience.
Paul Kelly "The March of Patriots, the struggle for modern Australia" October 2009.
Is the United States bankrupt? Many would scoff at this notion. Others would argue that financial implosion is just around the corner. This paper explores these views from both partial and general equilibrium perspectives. It concludes that countries can go broke, that the United States is going broke, that remaining open to foreign investment can help stave off bankruptcy, but that radical reform of US financial institutions is essential to securing the nation’s economic future. The paper offers three policies to eliminate the nation’s fiscal gap and avert bankruptcy: a retail sales tax, personalized social security, and a globally budgeted universal healthcare system.
Introduction to Professor Laurence J Kotlikoff’s essay in The Federal Reserve Bank of St Louis Review July/ August 2006.
JUMPING OFF THE BUS, BUT STILL AT THE BUS STOP WAITING FOR THE NEXT BUS TO COME ALONG
We have just moved to 25% cash across our portfolios including our published portfolio ‘Cactus’ where our cash balance stands at 32%. Good trading and investment is a peculiar balance between the conviction to follow your ideas and the flexibility to recognise when you have made a mistake. The problem with today’s markets, vis those of the nostalgic past, is that markets have many more participants, are more globalised, often driven by computer programs, entry and exit costs are cheaper than ever, there is an excess of bad behaviour including rampant spin from gifted professional pundits and the companies themselves. Additionally, the ASX once it became a public company became less robust in policing bad behaviour and ASIC is always behind the curve as it is under-funded and its personnel under-trained and lacking in experience, this all adds up to one word …..’volatility’. We have long believed that a trading mentality must accompany an investment mentality if you wish to out-perform the general indices.
Having called the March rally and jumped on the bus with a measure of gusto (though we ignored most of the banks for nearly all of the time), we now find ourselves in the position where we simply do not know what is going on. So: time to pause, reflect, get off the bus, sit on the sidelines, have a breather, wait for earnings and the economy to catch up with the market. "When too many people are doing the same thing the market will adjust. Buy when others are despondently selling. Sell when others are greedily buying". Markets do not go up forever and the current bounce, in our view, has had the potential to tire for most of the past 8 weeks. But it hasn’t as the FOMO factor came into play …. fear of missing out. So we have tired ahead of the market but with technical indicators partially, or potentially, confirming our view.
Additionally, we are not enjoying the macro. The policy failings of the current government and the opposition response of attacking the man rather than the policy means that taxpayers and consumers are ill-prepared and ill-informed. Also, the American macro is unsound and that’s still the world’s largest economy, despite rapidly retreating from its dominance.
Now we may be wrong, but we feel that we must follow our view, for good or ill. We may be premature. We may be absolutely wrong. Keynes (a kindred spirit communicating from the grave with Messrs Rudd, the US Congress, Geithner, Pelosi, and Obama) said "Markets can stay irrational longer than you can stay solvent." At this moment we are so excessively solvent that our excess of conservatism may be a problem. Time will tell. Anyway, we can always jump back on the bus as we still can afford a ticket.
PETER WALSH
…..was the Finance Minister in the Hawke/Keating government and wrote an excellent book "Confessions of a Failed Finance Minister" in 1995. He retired in 1993 and has only occasionally ventured into print since then. Writing in the AFR on 10/12/2003 he said: "All countries which accumulate debt and habitually run big current account deficits are vulnerable. And for many centuries societies have been susceptible to irrational booms, South Sea Bubbles, tulip bulb booms, and dot-com busts. But no central bank can offset the cascading effects of bad government policy."
Where is the bad policy – industrial relations, the stimulus package poorly targeted and badly implemented, the cash hand-outs – wasteful and extravagant, the proposed broadband network, the ETS scheme which will be a shambles and achieve little to nothing, and the rhetorical attacks on the ‘neo conservatives’, whatever that means. Sure George Bush was hopeless and John Howard got too close to Mr Bush’s view of the world, but Mr Rudd is indicating that he already is what John Howard became, without ever having been what John Howard was.
Q: What was Howard? A: A competent manager of the economy? Q: What did John Howard become? A: A reformer who lost the feel and the zeal, and instead wanted to be popular.
Mr Rudd is not showing any signs of being a competent economic manager and our debt loads are large and likely to get worse before they get better and possibly the debt reduction plan (the ‘exit’ strategy) will be conceived and implemented as badly as the ‘input’ strategy, the stimulus. An excessive government share of GDP squeezes out the private sector, particularly at the small business end – the dominant and sustaining employer group. Mr Rudd is taking wedge politics to a level of sophistication that is dangerously short-sighted and economically damaging.
Mr Swan says that fiscal policy has nothing to do with monetary policy and vice versa. He is indicating that he is an economic illiterate. A dopey Treasurer. But to show some fairness we should say that Mr Hockey is far from credible endorsement on the fiscal front and his platitudes on interest rates, jobs etc are confusing and confused.
Apart from ‘crisis’, ‘revolution’, and ‘fair’, our editor is not receptive to the word ‘tough’. Bob Hawke, Paul Keating, Peter Walsh, and John Howard steered Australia to its current position with some considerable assistance from John Stone of Treasury and Ian Macfarlane of the RBA. We have to be careful of regression under the current parliamentary team. But though the persons named provided steerage, the ship of prosperity has always been the Australian people. Subject to a properly constructed and pragmatic welfare system "No man is great enough, or wise enough, for any of us to surrender our destiny to. The only way in which anyone can lead us is to restore to us the belief in our own ability to take responsibility for our own lives." (source unknown)
STIMULUS, STIMULI, AND MISLEADING AND DECEPTIVE CONDUCT
We avoided a technical recession, so what? Our national debt was zero and the Liberal party and other pundits said it was going to $300 billion, encouraged by Messrs Rudd and Swan. It now looks like ‘only’ going to $200 billion. Mr Swan wants to be congratulated because he has saved us $100 billion. Jolly good. Exaggerate the recession, call it a ‘CRISIS’ ad nauseum, and then exaggerate your role. Sounds and looks more like ‘too clever by half” politics than sound economics.
GLENN STEVENS IS A GOOD CENTRAL BANKER
On 15 October he had, inter alia, this to say in an address given in Perth to the John Curtin Institute of Public Policy: "The Board is also conscious, though, that a risk-management approach requires policy to be recalibrated as circumstances change. If we were prepared to cut rates rapidly, to a very low level, in response to a threat but were then too timid to lessen that stimulus in a timely way when the threat has passed, we would have a bias in our monetary policy framework. Experience here and elsewhere counsels against that approach. "
"None of this is to say that the economy is, at this moment, ‘too strong’. It isn’t. "
"The point is, rather, that the very low interest rate settings were designed for a weaker economy than we are in fact facing. Plainly, the downside risks to which the Board was responding earlier have not materialised. This is not a problem. In fact, it is a very desirable situation. It is a welcome contrast to the experience of a number of other countries. It is simply something we need to recognise in setting monetary policy – which means not holding interest rates at very low levels when that is no longer needed."
MR OBAMA
… inherited an economy with a serious domestic deficit of $400 billion after Mr Bush inherited an economy with a budget surplus. In the year to 30 September 2009 that deficit is now $1,300,000,000,000 ($1.3 trillion). Now that deficit is said to be not serious because the economy is growing again. But the economy is only growing because of the stimulus package that has created the deficit. The US debate about raising taxes and interest rates has begun, and will accelerate. A bad war here and there, and a bad oil price, and a bad emissions trading scheme might just make matters more than a little difficult. We remain hopeful that Mr Obama’s swing to the left is just a necessary step in the long progress back to the centre. Debates about capitalism and socialism from the loonie left and the loonie right just means that too few of those involved have read Peter Drucker and/ or have mis-read Ayn Rand or David Stockman’s book " The Triumph of Politics, Why the Reagan revolution failed"
INFLATION, NOMINAL GDP, EPS and GROWTH
Earnings per share growth drives share price performance over the longer-term. Earnings come from real GDP plus inflation which is called nominal GDP. The multiple that we attach to EPS is derived from EPS growth, interest rates, and confidence. At the moment the debate on inflation also encompasses the view that deflation is more of a problem. A softer word for deflation is recession, and a harsher word is depression. We have avoided a depression through monetary policy and fiscal policy acting in an harmonic way. Inflation is a problem in Australia and deflation is more of a problem in America. We kind of like a bit (but not too much) of inflation…. house prices go up, asset prices generally go up, banks are eager to lend on enhanced values, wages are stable or growing etc. In relation to goods and services you can avoid inflation by saving or spending less. Global excess capacity should mitigate the impact of goods and services inflation but we will save an extended discourse on inflation for another day.
At the moment we think the expansion in Price Earnings Multiples exceeds the EPS growth potential for far too many companies. Refer to our Strategy section and our Stock Recommendations section. You will not see a large number of recommendations at current price levels. Either our macro settings and/ or our micro EPS settings are wrong, or too conservative, or prices are simply ahead of themselves. We believe the latter.