I’m sorry, but the economy is still getting worse

The jobs euphoria is widespread today. It comes from the top, from The Australian:

The Prime Minister yesterday hailed the drop in the jobless rate as evidence Australia was adjusting to the end of the mining boom, while acknowledging that the monthly figures “bounce around”.

“The economy is in transition and it is transitioning very well,” Mr Turnbull told the Knowledge Nation 100 event in Sydney, co-sponsored by The Australian.

He said the fall in the jobless rate to a 19-month low was the result of the entrepreneurship and innovation of millions of Australians who were seizing new opportunities. “The mining boom may have receded … but the ideas boom is the boom that can continue forever; it is limited only by our imagination and our commitment,” he said.

Lot’s of economists and journalists follow the line and it seems unnecessary to repeat it. I would very much like to believe in the spectacular job gains but alas I cannot. Despite the hoopla, the truth is that the economy is not improving, that interest rates have not bottomed, that the Budget is descending into crisis, that the currency will continue to fall, and that we will all continue to get poorer. How can I be so sure of this?

Well, you can read our special report on the matter to understand everything going on but the one key fact, the incontrovertible brick wall into which we hurtling, the cracked key stone of our exceptionalism, the liquefying bedrock of our foundations, has not changed and is getting worse not better. It is the iron ore price.

Why is this so important?

The iron ore price makes up one third of our terms of trade. With coking coal (which is pretty much part of the same trade) it is nearly half. It is iron ore that gave us the mining boom and it is iron ore that is taking it away. But we’re “rebalancing” the hopeful yell! Alas, we are not. National income is the key measure of our standards of living and it continues to fall along with iron ore. In the absence of income growth, we are leveraging not rebalancing, so that we can pretend for a little while longer that we are getting richer.

To understand this consider how the Australian economy functions. We derive income from the world largely via selling dirt. The most profitable dirt by far is iron ore. Even today, the vast majority of iron ore is immensely lucrative. That mining income is harvested by equity markets for dividends, by governments via higher corporate taxes, and by households via lower taxes and higher wages.

We then take that income and leverage it in global markets by borrowing heavily and dumping that money into super large mortgages. That is really all the Australian economy is, a giant iron ore securitisation product. If you add the Chinese leverage driving iron ore demand then we become a collateralised debt obligation. We don’t grow income via productivity and only painfully slowly via other exports. Thus the huge services economy cannot grow without the iron ore income and/or the leveraging to drive rising house prices. It is its lifeblood, as we saw in the 2010-11 period.

The key question, then, for the ‘rebalancing’ is not whether employment is growing or not in any given month or quarter, it is can the lost income be replaced and if not how much longer can you leverage up in the face of the falling income? Authorities have already shown their hand that they know the limit is near by overlaying low interest rates with macroprudential tools and running overly tight fiscal policy in the circumstances.

And the shelf life of the pretense is shortening every day as iron ore falls. As this stage of the illusion, nobody has priced where iron ore is today, let alone where it is going. Equity markets still have an average price of $50 embedded in analyst models. Ratings agencies are the same. Government budgets are assuming $55. All as well see the iron ore price rising into the future from here.

But iron ore is not going to average that next year. $35 is a better bet for 2016. $25 for 2017. $15 for 2018. With any recovery far away.

As a result Australia’s terms of trade will keep falling, all the way back to 2002/3 levels, if not lower:

dsfgw

And so, we will be able to do only a few things in response. We can increase leverage again and/or we can boost productivity and/or exports to substitute some of the lost iron ore income. There is nothing else.

There is not much hope of us achieving higher productivity growth. The political economy is so paralysed by vested interests that it is nigh on impossible. That leaves us with non-iron ore exports which are growing slowly but nowhere near fast enough as an income offset. LNG might have done it but it is an income black hole for as far as the eye can see. Thus as iron ore keeps falling next year we will again be forced to cut interest rates to both boost leverage and lower the dollar chasing more non-iron ore export growth.

We’ll probably be able to do this without facing the consequences until markets seize up again in the next global shock. Though as we record in our special report, we do not think that it will achieve much given the limited scope for further leveraging is now pretty obvious to all.

Once the end of cycle event comes, and the world accepts that iron ore is forever stuck at $20 and below, then the great superstructure of leverage that we have built upon the $120 iron ore price floor will also tumble.

David Llewellyn-Smith

Comments

  1. Spot on! And….it’s not just us….

    Despite a ceaseless propaganda campaign declaring all is well with the U.S. economy, the Status Quo is fragile – and voters know it. Not only do they know the economy – and their financial security – is one crisis away from meltdown, they’re also fed up with all the official gerrymandering of data to make the economy appear healthy….enabling more debt does not reverse supply-demand imbalances or create income out of thin air. As a result, piling on more debt is not a solution; it’s simply a politically expedient method to forestall the crisis, while guaranteeing the eventual repricing will be even more severe because the debt load is now so much larger…. (Real household) income as a percentage of GDP has been falling for decades. How can an economy support additional debt if earned income is declining as a percentage of economic activity? It can’t.…Voters sense this fragile, debt-dependent economy is one repricing away from implosion, and they’re uneasy for good reason. Voters are rightly angry that the official statistics mask or manipulate this reality, for if we can’t face reality then we have zero hope of solving any problems.

    http://charleshughsmith.blogspot.co.nz/2015/12/the-american-dream-is-over-and-voters.html

    • “… if we can’t face reality then we have zero hope of solving any problems.”

      And there you have it.

      • But reality varies depending on who you talk to which brings us back to vested interests. No one wants to pay more tax themselves and no one wants a benefit cut.

  2. “dividends, ……, and by households via lower taxes” – Lost my job, great news look at that great dividend in terms of lower taxes I’m getting.

  3. Possibly the best indicator of just how crook things are is the exchange rate.

    How so you say? It is still nice and high.

    If the prices for our largest exports are tumbling that means that our trade partners need to acquire fewer $AUD to acquire them. And it is not just iron ore and commodities. We are pumping out very ugly trade deficits month after month.

    Clearly volumes are not filling the price decline gap.

    The value of a currency of a country with our rapidly deteriorating trade performance should be falling fast but it is not and THAT is a problem.

    So why is not falling? Why is it not reflecting the wind going out of our balloon?

    Pretty simple. Our trading partners are working their butts off to stop it falling AND our shmucks in Canberra – on both sides – are standing by letting them or actually applauding the process.

    Mercantalism takes two to tango and both Robb and Wong are simply begging for mercantalist dance partners instead of telling them to take a hike – pathetic.

    The idea that we can resist this economic warfare with interest policy has been revealed as a delusion – target rate at 2%, a goat choking stonker of a trade deficit every month and the currency is floating at 73 cents. Don’t forget that our trade partners/rivals are already toying with NIRP.

    Nothing less than direct action to wind down the unproductive capital inflows will be effective to defend our economy from the deliberate direct and indirect attacks by the central banks and governments of our trade partners/rivals.

    I appreciate that letting go of the myths regarding neoliberal purity on capital flows is difficult but we must do it. There is no reason for any further delay in take action on the big three.

    1. Whole sale offshore borrowing for residential mortgage operations.

    2. Mere transfers off shore of asset ownership.

    3. Off shore sales of govt securities.

    We are taking hundreds of billions in total of upward pressure on our exchange rate and NONE of it is productive. By that I mean adds to the productive capacity of our economy.

    Taking action will immediately start the process of adjustment where our exchange rate begins to reflect our trade performance. If we do not fix the adjustment mechanism now we are simply making the future pain much much worse.

    • ErmingtonPlumbingMEMBER

      “Taking action will immediately start the process of adjustment ”

      Yes but no politician wants to be another Keating, reviled for stating a simple truth “the recession we had to have”. How long ago was that now?, I know people who still blame him personally for the 91 recession! As though it was his words that caused it!

      No body wants to be that guy.

    • Brilliant post. I owe you a beer.

      Until we rethink the concept of capital as some infallible and purely good entity this sort of nonsense will plague us in our increasingly globalised economy.

      • We were warned that exactly this would happen at the time the FFFFFEFR was introduced. Former Head of Treasury John Stone was very clear about this at the time – everyone ignored him.

    • It isn’t just a few dozey clowns from the ‘peanut gallery’ anymore!!!!!
      From Links yesterday – my post in relation to the Link to the AFR
      Hostility to foreign investors is rising – The AFR
      In the second part of this article.
      “Hélène Rey, a professor at the London Business School, contends that the impact of Fed policies on global markets has become so potent that emerging markets have become largely powerless in terms of coping with the large investment flows that pour into and out of their economies.”

      This whole baloney exists because we all UNQUESTIONINGLY modern economic theories that come out of the U.S. that are all based what suits the US and on the USD being the world’s reserve currency. Neither the economic theory nor the practical outcome is actually applicable to small economies. Actually it is not even applicable to the US – it just takes a very cvery long time for the damage to become apparent.
      The open Capital Flows and FFFFFEFR has to go!

      • doesnt matter if economic theory suitable or practically applicable, it drives sentiment, and that is all that matters.

    • Totally agree. The next questions are:
      What happens if nothing is done on these things by our leaders?
      How long before we nothing much left to sell, be it assets or government securities?
      How long before our triple AAA goes out the window and the banks (and the debt holders) find their funding costs start to soar, a la Emerging Markets?

    • One word – Bacon

      All the comments are great – my only concern is that to fix what ails us, even if the vested interests were eviscerated, our ability to act was destroyed 20 years ago. We do not value intellectual pursuits in this banana republic and in so doing have created so few thinkers and true analytical minds, we do not have sufficient human resources to fix this. Thus if one set of vested interests is removed, a new set of snouts will be pushed into the banana trough and all chances of a structured solution will again disappear in a different direction. Thus my one word – Bacon. We need to hire the pig farmers of Australia to placate those with their snouts in the public trough and lead them to greener pastures in the process producing some of the world’s best bacon and pork products we can export to China to even out the ToT.

      And, as the old saying goes, when given lemons make lemonade, here is a little recipe I tried in the US which would go nicely with the output of our clean-up:

      https://www.youtube.com/watch?v=0LDsk75q2Xw
      http://www.completelydelicious.com/2013/07/the-ultimate-banana-split.html

      Happy hunting and enjoy in moderation 🙂

    • One small problem is that the governor does not get advice like that from his holy book. Mr Stevens is a steady-as-she-goes, religious and conventional kind of chap. He observes the old maxim of “moderation in all things”. The essential thought is found in the work of the Greek poet Hesiod (c.700 bc), ‘observe due measure; moderation is best in all things’, and of the Roman comic dramatist Plautus (c.250–184 bc), ‘moderation in all things is the best policy.’

      Someone should update Mr Stevens with the more modern version of that maxim:
      “Moderation in all things, especially moderation.”
      ― Ralph Waldo Emerson

    • no doubt you are correct in an orthodox sense, but what would be to happen the moment Australia admits its no longer open for business. more to the point we’re hardly a sideshow in the series of political economic systems that are currently unravelling around the world. Chimerica as HH points out, but also the faustian US-Saudi pact, (and with it seemingly the rest of the Middle East and very possibly key aspects of the EU). I mention this not to detract from the points you have raised, which make perfect sense within the logic of the system that have organised our lives previously. but those are probably done and its no longer clear what makes sense. more productivity, yes of course. but why in a saturated world? Australia’s system may be coming to an end, but that’s the story globally. we’re all going to get burned and the outcomes will probabaly be perverse. Reusa is right, doe maar relaxed!

  4. Great comments from all three above. Stick to your guns houses – you’ll be proved right.

    Just as a matter of interest does anyone know whose the counterparty for the banks cross currency swaps – they would have a lot to gain by keeping the dollar higher?

    • “Just as a matter of interest does anyone know whose the counterparty for the banks cross currency swaps – they would have a lot to gain by keeping the dollar higher?”

      I’d be fascinated to know more about this area. There’s a lot of talk about how the banks are fully-hedged and how it doesn’t matter for offshore funding if the dollar drops dramatically but no-one really seems to know much about who’s holding the risk. Can anyone here elaborate?

      • AB
        Edit: The Banks cannot hedge the currency without that hedge costing from the interest rate differential. It is just not possible!
        So those reports are just plain BS unless the RBA covers it for them through a swap with the Fed.

        The RBA had a paper saying that there was no danger – that equity and lending abroad basically equalled our borrowing in foreign currency so it cancelled out!
        Now two things about that
        1.Those holding the equity abroad are very likely going to be very different to those doing all the borrowing here. So you can’t just say they are equal and therefore cancel each other out – which the RBA does!!!!!!
        2. The numbers look dodgy anyway. We’ve had 60 years of continuous (bar 1979) CAD’s so our borrowings and asset sales to foreigners must be much larger that our lending and equity overseas. – by definition. (Unless all the foreign investors here are really dumb and all our lending and investing overseas is really really smart) I’d also question how the hell they would value foreign equity in this country.
        So in my view the RBA indulges in a lot of obfuscation on this topic which suggests to me that we are holding the bag on this through the RBA.
        Like you I reaally want to know from someone who actually knows – it seems to be one of the great mysteries!

      • There is at least one way that the hedging risk can be done that mightn’t cost the interest rate differential – the hedging is delayed at drawdown of the loan/sale of the foreign currency in the spot market, until such time as the future change rate has moved to allow a better future rate to be locked in.
        The risk, of course, is that the exchange rate never gets to a level that allows that ( time being the enemy etc) and that the exchange rate risk is left naked to the market rate at the time of maturity.
        It’s risky, but I’d wager we’ve all given it a go at some stage! (Taking a short dated Option to give the strategy time to work, also mitigates some of the risk, but that is an additional cost to the B/E of the whole exercise)

      • Flawse mate. does the RBA have any other purpose than to obfuscate? If indeed it has another purpose it is lost on me.

      • “The Banks cannot hedge the currency without that hedge costing from the interest rate differential. It is just not possible!”

        And that’s exactly what I would have thought flawse but the cost of hedging is never discussed. Presumably it’s higher in times of currency volatility and when the dollar’s likely to drop and lower when the opposite is the case. Who’s holding the currency risk?

      • Yes Janet – but that is gambling that they don’t do? Also i don’t think they ar that smart. I have a very very bright family member who has built a trading model. Given his ability I’d guess it is about as good as it gets – It’s right 54% of the time!
        Then you’ve got human error and bias ! (which he tries to eliminate in the model)
        Banks aren’t that smart!!!!

      • Banks aren’t that smart!!!!

        Banks and ilk lobbied to remove the social compact, in its charter, to focus on free market enterprise, its only concern is to itself in seeking capital improvements for its officers. With that observation I would add that the driving paradigm is the corner stone and not subsets of it.

        “The term neoliberal, which arises from the work of post–World War II economists such as Friedrich Hayek, Milton Friedman and others belonging to the “Chicago school” of economics and law, has little in common with what is usually thought of as liberalism. The important tenets of neoliberalism, Mirowski says, include such propositions as the following: “The Market” is a better processor of information than the state; “politics operates as if it were a market”; “corporations can do no wrong”; “competition always prevails”; the state should be “degovernmentalized” through “privatization of education, health, science and even portions of the military”; a good way to initiate privatization is to redefine property rights; “the nation-state should be subject to discipline and limitation through international initiatives”; “the Market . . . can always provide solutions to problems seemingly caused by markets in the first place”; “there is no such thing as a ‘public good’”; “freedom” means economic freedom within the Market. The book examines studies of the economics of science and discusses such topics as the U.S. government’s effort to manage scientific research, the emergence of intellectual property as a raison d’être of university life, the outsourcing of science on the global stage, and the harms that have accrued to academic science from its commercial transmogrification.

        Mirowski debunks the popular view that there is a linear, lockstep path leading from science and technology to economic growth, a claim that served as the mantra of those urging passage of the Bayh-Dole Act of 1980. The Act gave universities, businesses and nonprofits intellectual-property control of discoveries that resulted from federally funded research. In passing the legislation, Congress accepted the idea that American industrial progress was being hampered by the failure of discoveries to enter the marketplace. To allow wealth from discoveries to be realized, the Act turned the principle of capitalism on its head: “private risk yields private loss or gain” became “public risk yields public loss or private gain”—a form of “heads I win, tails you lose.”

        http://www.americanscientist.org/bookshelf/pub/a-neoliberal-economics-of-science

        Skippy…. yet some are mired down in the out put of the last 50ish decades and not the leading agency…

        PS. Vidal Gore coined it well…. propertarians…

    • Not sure what is happening now Sam (others might but I’ve never seen an answer on it yet) but two things
      1. At the time of the GFC the counterparty turned out to be us. The Fed and the RBA did a giant swap which was later unwound.
      2. The idea that Banks can magically turn their USD borrowings into A$ without any discount for interest rate differentials is baloney. I don’t think too many of us get quoted in A$ for our importing. So somebody is holding the s..t sandwich and given the semi-misleading utterances of the RBA on the subject of foreign borrowing denomination I have a vague suspicion that it is still us holding the bag.
      That might explain a LOT!!!!
      If anyone else has anything to offer on this please do – it’s a very crucial point.

      • Thanks flawse – yes – it is a very crucial point – the thing that strikes me the most about Glenn Stevens is that he never discusses potential risks – as any good banker would know – banking is all about risk management – economists are way too theoretical and lack any idea of what’s going on in the real world – my conclusion is therefore that the biggest risk this country faces are our financial statutory bodies – the RBA, APRA and the treasury for their inability to deal with the economies real risks.

  5. That is really all the Australian economy is, a giant iron ore securitisation product.

    LOL! Another classic from Mr Holes.

    • Big overseas funds treat Australia as a commodities hedge so it’s not even a joke – they can see things pretty clearly without the Aus MSM rose-tinted-glasses BS obscuring their view. They know full well how lame our political/economic direction is and that we have little else to offer than dirt and I’m sure they are watching the Aud and laughing.

  6. “We then take that income and leverage it in global markets by borrowing heavily and dumping that money into super large mortgages”

    Not quite the end of it! The money is used to fund large mortgages (and consumption) but the money keeps flowing. It doesn’t stop. It flows out into the economy of, basically, the largest cities. Through that city economy it flows to retail consumption much of which is imported. In fact it flows round and round until the whole lot is used up as imports (presuming the government keeps spending and doesn’t reduce its deficit in this process) Thereby arises the chronic and large Current Account Deficit and subsequent foreign debts and asset sales to foreigners.
    So the money that comes in initially goes to mortgages but it ends up buying imported, mostly consumption, stuff.

    • P.S.
      OR
      The Banks create the lending which runs round the economy ending up in imports and then they borrow the necessary funds to pay for all the imports.
      It’s a loop! Where does it start?

      • The shadow sector is manifold the traditional banking sector and largely unregulated, seems every thing is just a multiplier without much purpose except increase the size and velocity of it, slaves to it.

  7. reusachtigeMEMBER

    How about all youse perma-negs finally admit YOU ARE WRONG and start singing the joys of our proud and lucky Australian economy. It’s booming and it’s great. There’s so much opportunity in this nation especially now as it roars along. Investment opportunities are endless and you can get rich very easily especially at the expense of the sad perma-wrongs that just keep on losing and whinging about their always unattainable crash. You too could be happy like me if you just look at the bright side and find out how to get rich off the dumboes (who actually think they are smarter than everyone else but are actually not bright enough to get away from their whiney keyboards and go get rich through property)!

    • Agree fully reusa, but you are looking into your crystal ball not your rear view mirror. But thanks for another classic ‘reusa’! love it!

    • Actually I’m starting to think Reusa is right…. Sadly..Perhaps MB attracts the same people with a negative bearish view that I have and there is a danger that I’m not seeing the whole picture and maybe Reusa is onto something..

    • “You too could be happy like me if you just look at the bright side and find out how to get rich off the dumboes (who actually think they are smarter than everyone else but are actually not bright enough to get away from their whiney keyboards and go get rich through property)!”

      Great comment Reusa (serious). Might not agree on the property piece, but working out how to get rich off the slugs is great fun. I am an admitted property bear (who owns a couple outright) but there is always a place for any asset at the right price. It is like the gold bugs or iron ore slugs or cow herds. There is always a time to buy and a time to sell and a time to hold. Knowing what to do when leads to joy in life. Hot day in Kirribilli, on the water tomorrow, was planning to go to Tassie but the test is a dud. Enjoy what you do, hope for the best and plan for the worst 🙂

  8. I get the feeling it’s all a little like a retail margin equites account….there’s no problem expanding your margin until one of two things happens
    – you exceed whatever magic number (ratio) has been assigned and your phone is ringing off the hook with a very insistent broker on the other end telling you to sell something NOW.
    – The margin broker exceeds whatever magic number has been assigned him by the bank and you discover that your securities have been used to guarantee his debts.

    thing is, with ever expanding debt, there’s no crises until there is a crises, at which point there’s often no solution. If you think you have a problem with foreign RE sales today just wait until Australia’s margin call comes, that’s when foreigner powers will demand the entire Pilbarra for another months worth of trinkets

    • I’m close with you on this yet have no dramas with quantities, only quality, w/ the caveat that its a time and space problem in the long haul acerbated by short term profit taking for a select few…

    • Im with you there CB. Just wait until the retail brokerages – commsec and the like revises their maximum lending ratios for the sacred dividend cows like Rio, Bhp and the major banks. That is the point where something snaps.

      Don’t know about the Pilbara. Perhaps our more enterprising creditors might have an eye on prime agricultural land or alternatively a reasonably sized water supply instead?

      • cee I did a bit of an estimate a couple of years ago and I forget the details but to cover one year’s CAD you’d have to flog the Darling Downs and all teh good ag land through central NSW and Victoria!!!!
        The stupidity over 60 years has been mind boggling!

  9. HnH – you should start an end of the world cult, and call it the Perma-bears.

    You underestimate the ability of an economy to re-invent itself.

    I work at a big 4 bank and I can tell you this. Bank funding costs are the lowest levels they have ever been. Bank profitability is at the highest level it has ever been. And all the banks are making money form the $A falling.

    Australia is the still the greatest country on earth, which is why everyone wants to live here, and whey house prices will keep going up. This trade has a long way to run yet.

    • Its the risk weighing that is the drama… mid to long and not short term profitability w/ long term wage suppression – deflation…

      Skippy…. one aw shit – can – wipe out a thousand attaboys due to tightly coupled thingy…

    • it’s not often that I say this: BUT you’re an idiot!
      the whole reason HnH talks about the ToT is that ToT is really a measure of the global economic barter system by which our Aussie cash flow remains somewhat balanced. Profits and Losses are made up numbers (especially wrt individual companies), get the right accountant and they can be any number you want them to be however accountants simply cant change the cash flow especially when the world looses interest in the handful of products that you produce. It will prove immaterial who is making profits and who is making losses IF our ToT collapses ….raising tide etc etc

    • Wow – you must be in a very junior position. Having consulted to the C-levels in US and Aus majors, FRBNY and most of the IB’s before seeing the light and working out that tracking people and things is more lucrative, my sources from DB to CBA to WBC to MQG are all highlighting this was the past and the future is not that rosy. Risks in the Australian economy have not be mitigated sufficiently and all 4+1 are looking to drive further costs from their structure. This says that, capital shortfalls aside, the NIM and other income sources are being squeezed hard and the room to cut costs is shrinking. Bank funding costs are low right now, as you would expect. The world narrative is still saying Australia has rebalanced from China to services. But the gaffs from Abbott and ABS are weighing on the nations credibility and CBA CDS (recommended watch from this site) are showing that the future costs of funding are not locked in at these rates. Roll into this a certain bank hiring over 100 debt collection specialists in the last 2 months, my inbox full of farms being offered in mortgagee distress (BEFORE THE EL NINO EVENT HITS HARD) and the slow motion train wreck in WA, in your position, I would be seriously looking around for a stable position in a non-FIRE sector to jump into when the banks start the next round of lay-offs and consolidations in around 6 months. IT and call centres already moved, branch rationalisation happening and next is the usual head office moves to smaller digs along with reduction in benefits, support staff and a large push to automation and outsourcing of non-core functions. This is the sort of rationalisation I consulted to the US banks on just prior to 9/11.

  10. ” … result of the entrepreneurship and innovation of millions of Australians who were seizing new opportunities …”

    Faaark me. I thought seeing the slug Hockey off would have put an end to this kind of rubbish. Sadly it seems that they kept the $400,000 a year BS merchants employed in the Dept of PMC. Anyhoo, having had some involvement in this sector in the past, I would guess that the true number of Australians actually devoted at this point in time to an entrepreneurial venture / startup etc that has actually gotten to the point where it has created a job would be less than 20,000. I am not saying that one day we could not have that sort of culture in this country and I hope that we do – because it is surely the only way out of the abyss – but for this to be already in place and involving ‘millions of Australians’ within a few months of a mining boom wind down?? WTF?

    • “Faaark me” Probably would have been enough:)

      Once/if we recognise we have a problem and then when we eventually possibly figure out what that problem is then it will take about 3 or 4 generations to fix it – even if it could be fixed!
      The answers lie back in time.

    • Malcom means one of two things:
      1) Innovative – taking two or more jobs to make ends meet and working longer hours for less pay
      2) Entrepreneur – someone on LinkedIn that does not have a real job. Like the coffee shop owner downstairs in my office building. No shit.

    • I don’t know many entrepreneurs in Australia, but when I have visited Cape Town, San Francisco I get a totally different vibe. Everyone here is talking about investing in property, it’s the only game in town. Why work hard when you can collect rent?

  11. $20 iron ore..really?..

    I can see it going lower in the short term, but most of the industry would be well out the money at $20. Would expect a pretty quick supply response and rebalancing.

    • Why do you expect a quick supply response? They are more likely to keep going in the hope that things turn around than stop as soon as they are losing 5 cents a tonne.

      • Because at $20 all except Rio and BHP will be losing much more than 5c and won’t have the balance sheet or funding sources to sustain it.

      • And I guess I think that all except BHP and Rio need to be losing way more than 5c a tonne – I think Gina and Twiggy both have to go broke. They’re not going to stop supplying any other way.

  12. Great post! I watch the relentless fall of iron ore every day now & wonder how much longer it will be until the consequences are visible to the wider public. Down a third since mid September & still everything is awesome…

      • I came across a MB post from 2012 where HnH and I were in agreement, the $120 floor was temporary, we discussed a decline to $80(!) and that the boom was all in the investment component – beyond that sure, volumes, but volumes subject to the vagaries of the global market (China) and hence beyond our control.

        We differed only in that HnH felt the Government should be engineering a post boom survival plan, I felt this was not really practicable. We both thought the boom had a couple of years to run. Noted that big miners were already implementing cost efficiencies with an eye to being securely placed post investment.

        $120 floor meme great while it lasted but should never have been the basis for Government budgets.

      • I remember hearing “Wait here is $20, please take it away” was the floor. I mean seriously, who wants a dirt floor – nothing but the best imported Italian marble tiles for my floor (and a mirror on the ceiling for those important moments)

  13. Guys you are all looking in the wrong direction. HnH has you focussed on the IO price and the coal price, which as you all agree is lower than a toads tummy, but which can go to pre 2000 levels cos our competition does not have the clip the ticket at every aspect of the bulk mining business and what the hell digging up dirt is not any sort of rocket science, even the lowest technology region can compete.
    The mining companies have to keep mining cos the equipment will deteoriate faster if it is idle and, there are contracts in place on a take or pay basis for nearly every activity in the logistics chain x mine to port of delivery. So mining will meander on, as farming has, until everyone associated goes broke. Say that takes 5 years, Brazil will be impossible to compete with by then.

    So what next. The killer that we cant hope to defend against is the march of technology and robotics.
    As machinery replaced the farm worker, automation will create hordes of unemployed from the service sector. Many say technology will replace 40% of workers in routine jobs in say 10 years.
    I was chipped about patents yesterday. In the old days one went to the Patents office and searched through endless files of microfilm to establish what prior art may be in existence. Took literally months. Today I have my Prior Art searches completed over night, from a firm in Seattle, and Google runs a site especially with /for Patent data base. In the legal field as well, precedent and relevant case files, takes an afternoon. Our latest Software offering Atlassian, will cause the loss of heaps of jobs.
    So lets say only 20% of persons are replaced in 10 years, add the 9% current and we have 30% unemployed. Add all those on some sort of pension and there is no one doing any productive work to bring in income.
    The mines may wind down slowly, but I predict the roll out of automation will accelerate, so some time in the next 5 years we are in crisis, assuming all is well now.
    Well everyone says the dollar will fall, that will save manufacturing and make out exports more valuable to the primary producers, miners, cept the rural regions are in drought, and the miners cant compete as their opposition has now introduced robotics.
    So now we have a low dollar say 55c. Everything the punters consume and use (include medicines and drugs) will go through the roof, in an era of falling incomes and job losses.
    I have no Idea of the answer, though as we progress toward disaster the options may be clearer, but what is certain is that disaster is ahead, within in 3 years. And I am sure Abbott knows this and is waiting to re-trounce Turnstile.

      • It’s not as simple as just calling an early election though – there are some practical issues that may well prevent one. The option that most people think of (an early DD) would lead to an effective two-year term which is not going to be what Turnbull is looking for.

        I’m willing to bet on no GST rise and no election before August next year.

        http://blogs.abc.net.au/antonygreen/2015/12/the-turnbull-governments-options-for-a-2016-election.html

        With less than twelve months until the next Federal election, it is worth looking at the timing options available to the Turnbull government.

        Under normal circumstances, and in line with practice at the last six Federal elections, the next election will be for the House and half the Senate and held sometime between early August and late November 2016.

        There are also options available for an election before August, but all of the early options run into timing problems created by the constitutionally entrenched fixed term of the Senate.

        A double dissolution re-sets Senate terms. A double dissolution held before 30 June 2016 would backdate Senate terms to 1 July 2015. The next half-Senate election after an early 2016 double dissolution would have to be held between August 2017 and May 2018.

        As a consequence, a double dissolution in the first half of 2016 would mean the government having only a two year term, having to call an early election in the first half of 2018 if it wanted to avoid House and Senate elections getting out of alignment.

        A government could still hold a House-only election at its normal time in early 2019, but this would be after a separate half-Senate election in early 2018. As I mentioned above, no government has dared to hold a separate half-Senate election since 1970.

      • OJ tells for sure, there is absolutely no doubt Turnstile is a hand puppet, but to whom.
        This discovery of Trunstile will be interesting. Helicopter Bishop may be the weak link.

        How about mining collapsing slowly, Whitehaven coal today, is now in serious trouble.
        1300 workers on the hook. Maybe the only thing keeping the joint open is the take or pay contracts.