Have you ever wondered why MacroBusiness exists? Why it is necessary for a dozen thirty and (just) forty-somethings to get together and write their buns off about the Australian economy?
The first and most vital clue in answering the question is the ages of the MB team. At MB we are seasoned enough to have studied deeply and to have had the opportunity to compare that theory with the reality around us through good times and bad. That comparison has yielded an insight: that a yawning chasm exists between the world we were taught existed and the one that smashes us in the face every day.
The ages of the MB team is important for another reason too. How many post-baby boomer business and economics commentators can you think of in Australian business media? I can think of four: Jessica Irvine, Rob Burgess, Adele Ferguson and John Garnaut. Anyone else?
There aren’t any more for two reasons. The first is that the Australian Financial Review spent the last decade or so eliminating them. The AFR used to be the training ground for local business journalism. Under pressure from the internet, the paper’s baby boomer management sought to protect its margins though cost cutting (as opposed to forming a strategy). The biggest casualty of this was journalism itself, as the management assassinated its senior talent and plonked cheap and hapless juniors into the void to generate “churnalism”, a rehashing of press releases devoid of context and ideas. Not surprisingly, such a culture has left behind it a commentary and features crater. When the AFR stopped producing talent, there was none for anyone else to poach.
The next reason is related. Equally threatened by the internet, the surviving coterie of baby boomer commentators set about retarding competition in the ranks. The culture of Australian journalism is not about identifying and nurturing talent. It’s about recognising it and running it out the door. I’ll bet a penny to the pound that one of the primary talents of each of the four young commentators I mentioned above is managing up.
In the regular run of sleepy Australian life, none of this really matters. We can read the same old dross, from the same old writers, and go back to sleep in the sound knowledge that she’ll be right.
But when crisis arrives, suddenly, it matters a lot. Crisis brings change and if that change is going to be for the better, you need ideas, analysis, hard data, imagination and judgement.
And boy, was there a lack of it on display over the weekend as the Wall St crash quivered through the lazy jelly of baby boomer responses. Boomer commentators queued up to pronounce two things: Australia is different and you should buy shares.
What a steaming pile.
Let’s begin our assessment with the doyen of baby boomer clap trap, MB’s arch nemesis: Gittins!
Is it possible for a country that is the envy of the developed world to talk itself into recession? I don’t know. But it seems we’re about to find out. It won’t be easy, of course. It’s a question of whether our increasingly negative perceptions can overwhelm the reality that our economy has a mighty lot going for it. Let’s start with reality, then move to perceptions.
Note the sophistry at work here. Rather than open the question of the economy and people’s perceptions of it up to examination, Gittins immediately frames the question as one of pessimists versus reality. In his first paragraph Gittins! has shut down the inquiry and presupposed his own conclusion. This is some form of idle middle class demagoguery, not an argument. Back:
The Europeans, and now the Americans, are rightly worried about their yawning budget deficits and huge levels of government debt. Their problem is, the more they do to reduce deficits the more they weaken their economies, at a time when they’re already pretty weak. By contrast, our budget deficit isn’t particularly big and our level of government debt is laughably small.
Part of their problem is the money they spent bailing out their banks – many of which still aren’t back in full working order. By contrast, we’ve had no problem with our banks.Despite their weak economies, the Europeans and Americans have been worried about the rising cost of rural and mineral raw materials. But what’s a problem for them is income for us. The prices we’re getting for our exports have rarely been higher.
As a consequence of this boom, the mining companies are spending mind-boggling amounts building mines and natural gas facilities. Were we in our right minds we’d have no trouble accepting that, since you and I live in the same economy as the miners, a lot of this income and spending rubs off on us. Instead, the incessant talk about the alleged ”two-speed economy” has allowed us to imagine that, while the miners are doing well, the rest of us are stuffed. Retail sales are flat? See, I told you I was doing it tough.
This is all fine, but my question for Gittins! is, who gives a pile? The entire framing of the issue is a ridiculously limiting construct that encourages you to draw only one emotive and predjudiced conclusion: that those on the receiving end of the economic adjustment are whining bludgers. Gittins! then uses this rhetorical trick to draw a vast conclusion about capitalism itself:
Alternating waves of optimism and pessimism – ”animal spirits” – do much more to explain the swings in the business cycle than it suits most economists to admit. And because we’re such herd animals, we tend to contract these moods from one another – even from our cousins on the other side of the globe.
Give me a break. There’s no history. No evidence. No examination of how contemporary capitalism might have evolved from earlier versions. We, apparently, have no stock market. No connection to the global economy, over half of which has dissolved into crisis. There’s no debt here to sensibly pay down. There’s no price paid in our institutional structures for that debt. There’s no questions around China and, apparently, it isn’t connected to Western markets either. There’s no Chinese dependence here.
I don’t care if Gittins! agrees with me on any of the questions surrounding these issues. However, I do care that perhaps Australia’s most senior economic commentator would rather engage in myth-making drivel about ‘battlers versus bludgers’ than do some research and contribute to the greater understanding.
But there other ways of shutting down thought that are both less and more subtle. Let’s look at less first. From Michael Pascoe:
One more time for the dummies: we are not part of the US economy. Every day, the US matters less and Asia matters more. The American-centric mindset that a recession in the US means a recession in Australia is hopelessly out of date. It hasn’t for the past two and shouldn’t for the next.
The arch folly of American politics is compressing into a few years a historic sea change that should have taken decades. The downgrading of Washington’s credit rating merely reflects that reality – and just helps make us look even better.
Leaving aside the disruptive impact on financial markets and concentrating on the real economy, America’s impact on Australia is filtered through Asia – a buffer that grows stronger every year.Nearly 40 per cent of China’s exports went to the US in 2001. Now that figure is down about 20 per cent and falling as a matter of policy. The China Daily runs stories about exporters diversifying, targeting markets in Brazil, India, Egypt, anywhere other than the US. It’s an entirely obvious strategy as two-thirds of the world’s growth already comes from outside the G-7, the ”old world” major industrialised nations.
What’s more, Beijing knows it has to flick the switch from exports to domestic consumption to maintain the strong economic growth it needs for social stability. That’s officially spelt out in the latest five-year plan. And, unlike the US, China is actively pursuing the required economic reform instead of just talking about it.
I’ve noted before that Pascoe has a single commentary technique that he deploys willy nilly. No matter what the business or economic anxiety du jour, Pascoe takes the opposite angle. If the papers declared the Easter Bunny a fiction, Pascoe would lambast them and fiercely defend its existence.
That’s all fair enough. It’s often entertaining. But, again, when it comes to real crisis, readers surely deserve more than kneejerk contrarianism. The lack of evidence or even considered thought in the above piece is spectacular.
But more sophisticated and subtle commentary can also lead astray. Peter Hartcher of the SMH wrote a forensic assessment of the crisis with some excellent material but it also ventured up the garden path:
What is the new theme? In effect, the private debts of the failing banks became the public debts of governments. The crisis proved that there is no such thing as private debt. Risky transactions are not just a danger to the people and companies borrowing too much money. They turn out to be a danger to us all. “In financial crises, private debt becomes eventually public debt,” as US economists Carmen Reinhart and Ken Rogoff have observed. And then on top of this, governments spent more to stimulate their economies and prevent a new Great Depression.
The extra debt that these crisis-era decisions have loaded onto the taxpayers of the world’s developed economies is about $US18 trillion ($16.9 trillion), or it will be by 2015 on the current trajectory, according to an estimate by the International Monetary Fund. For perspective, this is bigger than the entire annual output of the US economy, which is about $15 trillion.
On average across the developed countries, the new debt mountain is the equivalent of 37 per cent of their annual economic output, or gross domestic product. When all that is finished piling up in four years from now, it will mean that the developed nations will owe an average amount equivalent to 110 per cent of their national economies’ GDP.
“It would be naive to expect that all these debts will be repaid,” the international economist Ken Courtis said last year.
Much better and quite right. Not too many assumptions and opening up the vital question about the role of private debt, “there is no such thing as private debt” is a fine and provocative line.
Hartcher goes on with a quality piece about the converging forces that are driving the crash and produces material I have not see elsewhere. But then we move to implications for Australia:
Where does this leave Australia? Hastening to reassure the public yesterday, the Treasurer, Wayne Swan, said: “Australians should never forget that our economic credentials are among the strongest in the developed world.”
Is he right? One telltale sign was that, instead of the traditional international reflex to dump Australian assets in a crisis, this time the world reacted differently:
“When the problems with Greece and the US debt ceiling intensified in the last couple of weeks, the general response was to move money into something else less risky, and Australian government bonds looked pretty good with a AAA credit rating,” says HSBC economist Paul Bloxham.
“So there were some flows into Australian bonds, and that pushed the Australian dollar up to its recent record high. We were a safe haven. When the US increased its debt ceiling, investors decided they didn’t need us as much,” and the price of bonds and currencies moved accordingly.
This is something of a revolution – the words “safe haven” and “Australia” appearing together in public.
Is it just the China effect? In part, yes. A currency strategist for the bank UBS, Mansoor Mohi-uddin, said last month that the Australian dollar had actually emerged as one of three currencies being regarded as a better bet than the major global benchmark currencies of the US dollar, the euro and the yen.
These three, the so called G-3 or group of three major currencies, were losing favour, he said, to the S-3, or the three “shadow currencies” that allowed investors exposure to the big economies, but more safely.
The S-3 are the Swiss franc as a safe proxy for investing in Europe, the Canadian dollar as a low-risk route into the US economy, and the Australian dollar as a secure way of investing in China. By investing in the Aussie, you could benefit from China’s growth, but without the risks of China’s problems of governance, growing local government debt worries and its fixed currency.
As Deus Forex Machina has illustrated, the Australia, ‘safe haven’ meme is seriously overblown. For instance, during the recent safe haven rally that Bloxham discusses, the Australian currency badly lagged the yen, gold, Swiss franc, even the Canadian loonie and NZ dollar.
Moreover, Hartcher and his sources are confused. A safe haven currency and a growth currency are very different beasts. One goes up when growth wavers, the other goes down when growth wavers. Guess which one the Aussie is?
The evidence that Australia is a “safe haven” is thin at best and certainly insufficiently strong to hang an ‘Australia is different’ argument upon it.
But that’s speculative stuff and it’s a good discussion to have, even if underdeveloped. What comes next from Hartcher is worse:
So Australia represents China without the risks, in this view. Yes, the Aussie took a hit in the past few days, but a senior official said privately yesterday that it was much smaller than anyone in officialdom had expected. And here’s a key reason, apart from China or the mining boom, that Australia is seen in a relatively positive light.
At its worst point, Australia’s cumulative federal net debt is blowing out to a projected $107 billion, or 7 per cent of GDP, in 2011-12.
This is remarkably modest by international comparison. The US economist David Hale observed: “Most other G-20 governments are deeply envious of Australia’s fiscal situation.”
I can only ask, what happened to the interesting and provocative “there is no such thing as private debt” statement? Australia has private debt at 154% of GDP. Yet somehow, in the space of several paragraphs, it’s ceased to exist.
I don’t know why, but the absence then leads Hartcher’s analysis into the bushes:
And Australia’s banks are sound and profitable. None of this happened by accident. Australia’s politics worked in creating the good policy that has made Australia a standout economy in the world. The Hawke-Keating and Howard-Costello governments collectively spent 23 years reforming the economy, a bipartisan project of opening it to the world, making it more competitive, improving its systems and institutions. Why didn’t any Australian banks collapse? Two central reasons are that Keating imposed the Four Pillars policy, and Costello created the new prudential regulator, APRA.
If the current financial fears turn into GFC mark II, Australia has tremendous firepower to bring to bear on any slump. With official interest rates at 4.75 per cent, the Reserve Bank has lots of scope to cut rates to stimulate growth. And with the federal government in healthy fiscal shape, the government can use its spending power to do the same. Why? Because the central bank and the government have been repairing their policy armoury in the past couple of years.
Now, I agree with Hartcher’s conclusion, that Australia is better placed than other Western nations in the event of another crisis. But it is very important that we understand why that is the case. The low public debt that Hartcher cites is important for the simple reason that our banks remain deeply unsound. Australian ADIs still carry half a trillion in offshore wholesale debts. Any extended freeze, like that during the GFC, will make it impossible to roll over that debt, despite the fact that they’ve extended their maturity profiles. That is unless the government guarantees them again. So, we effectively have a private banking system with the taxpayer carrying the risk.
To me, that sounds like a difference in degree from our northern hemisphere cousins, not a difference in kind.
The final voice in the weekend’s chorus of baby-boomer denial is John Durie of The Australian who embarks on the strangely mainstream ‘contrarian’ approach to share investment, buy whenever the market dips:
There are reasons why stock prices should fall but they are overdone as far as Australia is concerned.
But that is not unusual when fear sets in.
The fact is Australia is in fundamentally better shape than the US or Europe and has the justifiable hope that the Chinese government can maintain growth.
That GFC rout sent most stocks to their all-time lows, which makes you wonder what carnage will happen at these levels.
BlueScope yesterday closed at 96c a share compared to its GFC low of $1.70 and its 52-week high of $2.55 a share.
Billabong closed at $5.28 compared to $5.81 in the GFC and its 52-week high of $9.10.
Meanwhile, reports that Greg Wooley, Geoff Dixon, Mark Carnegie and Peter Gregg having cashed in on Global Aviation and are about to roll the dice again on a fleet of planes leased by RBS are a touch premature.
But that hasn’t stopped some dreams about maybe having another run at Qantas.
After all, Qantas closed at $1.69 yesterday compared to the management buyout price in 2007 of $5.45 a share.
Other stocks to break their GFC lows included Fairfax (82c) OneSteel ($1.50), Perpetual ($22.04) and Toll at $4.16.
A cashed-up raider could make merry at these levels.
Bell Potter lamented the market is totally indiscriminate, given Australia leads the OECD in terms of GDP growth, unemployment levels, interest rates and terms of trade, yet its bourse has fallen more than most.
Then get out the chequebook and chase some bargains.
But what to buy?
This column spoke to the aforementioned strategists and Evans and Partners’ Mike Hawkins and received the following advice:
Buy quality, big-capitalisation resources, avoid domestic cyclicals, buy mortgage-based banks such as Commonwealth Bank and Westpac, defensives like Transurban, Woolies and Wesfarmers and structural leaders such as CSL and Brambles.
Most of all, don’t sell unless you need to and hang in for the ride.
No acknowledgement of the greater bear market structure the Western world is caught in. No analysis of why it’s in it. No assessment of alternative returns versus risk. No understanding that the volatility we are seeing is the new normal, nor that, as such, the stock market is now a no go zone for anyone but active traders. Just the same dated rubbish of buy and hold when the market dips.
That may make sense some time in the next decade or so, but believe me, we aren’t there yet.
So, that’s why MB exists. We are not so old as to have been institutionalised, nor have we spent so long in a job that all passion for it is gone. We aren’t so jaded that we dedicate much of our energy to keeping down competition rather than flourishing from its challenge. Nor have we become so bored that we endlessly repeat platitudes rather than unleashing intellectual curiosity upon unanswered questions. We are not bloody baby-boomers.