Month: March 2020

Trillion Dollar Baby?

What will it take to wake the media up to the fact that the way our government is spending it won’t be long before we are a $1 trillion net debt baby?.

Our current federal liabilities (p.121) stand at $1.002 trillion (which is pre COVID19). Have the media bothered to look at the state of the budget accounts? Or are they too busy lavishing praise on rescue packages which have a finite lifespan.

We pointed out yesterday that the “revenue” line could be decimated by the disruption – huge cuts should be anticipated in the collection of GST, income, company and excise taxes. Not to mention huge rebates to be paid to now unemployed workers. On an annualized basis the revenue line could get thumped 30-40% if this continues for 6 months.

So on the back of an envelope, it is not very hard to work out that with a current $511 billion revenue line looking to fall towards the early to mid $300 billion mark against a projected expense bill of $503 billion a deficit of $150bn will open up. Throw on c$150bn of COVID19 stimuli arriving by June 30th and we get a $300 billion budget deficit. Our net financial worth would grow from minus $518 billion to negative $818 billion.

Rolling into next year, it is ludicrous to think that hibernated businesses will have resumed as normal. This means that the following year’s tax revenue line will look as sick as the previous period. The government will be torn shredding the expense line as unemployment shoots higher so assuming minimal budget cuts, it could face another $200 billion deficit taking it north of $1 trillion net liabilities in a jiffy.

Let’s not forget what the states may face. Severely lower handouts from the federal government via GST receipts which will balloon deficits, a trend we’re already seeing.

The states currently rely on around 37-62% of their revenue from the federal government by way of grants. The balance comes through land/property taxes, motor vehicle registration, gambling and betting fees as well as insurance and environmental levies.

All of those revenues lines can dry up pretty quickly. 40% of state budgets are usually spent on staff. Take a look at these eye watering numbers.

NSW spends $34 billion on salaries across 327,000 employees.

Victoria spends $27 billion across 239,000 public servants.

Queensland uses 224,000 staff which costs $25 billion per annum.

WA’s state workforce is 143,000, costing $12.6 billion.

SA has 90,000 FT employees costing $8.5 billion.

Tasmania 27,000 setting taxpayers back $2.7 billion.

Just the states alone employ over 1.05 million people at a cost of $110 billion pa!! The territories will be relative rounding errors.

A lot of the states have healthy asset lines which are usually full of schools, hospitals, roads and land). These are highly illiquid.

Unfortunately, one of the golden rules often forgotten in accounting is that liabilities often remain immovable objects when asset values get crucified in economic downturns. When markets become illiquid, the value of government assets won’t come at prices marked in the books.

How well will flogging a few public hospitals go down politically to financially stressed constituents?? This is why gross debt is important.

The states have a combined $202 billion outstanding gross debt including leases.

Throw on another $150 billion for unfunded superannuation liabilities. Good luck hitting the “zero by 2035” targets some state have amidst imploding asset markets. It simply won’t happen. If only these liabilities were marked to market rather than suppressed by actuarial accounting. The WA budget paper (p.42) notes the 0.4% bump to the discount rate to lower the pension deficit figure. To be fair, they are far less outrageous than US state pension deficits.

How must the State Gov’t of Queensland be praying that Adani keeps plowing ahead? How Greyhound must regret terminating a contract to ferry construction workers to the mine? We doubt the incumbent government will have a climate change bent in the upcoming Oct 31 state election. See ya.

The trillion dollar federal debt ceiling seems like a formality especially as the chain reaction created by the states puts on more pressure for the federal government to inject rescue packages to prop up their reversal of fortune budgets. It is that trillion with a T headline that will get people’s attention.

In short, we ain’t seen nothing yet.

Only one you can’t stop crashing at your place during COVID19 is the economy

Warning Signs Investors Ignored Before the 1929 Stock Market Crash ...

Brace yourself.

COVID19 will be defeated but the cure is turning out to be way worse than the disease.

Unfortunately, the sad reality is that at the rate governments are tightening legislation to keep us in shut down mode, we are day-by-day staring at a great depression.

While some will praise governments for throwing the kitchen sink at the economy with all manner of stimulus packages, the relief will be temporary because all of the ammunition for a sustainable recovery had been depleted years earlier. It is like supplying an alcoholic on rehab with an all-you-can-drink open bar.

Our feckless RBA has just embarked on QE, a mission that has failed every other central bank that has tried it. The velocity of money has been falling for decades. Who will be given access to borrowing at zero interest rates when the economy is in freefall? Which banks will lend against properties that will likely implode in value? 50% down? To think of all the reckless “first home buyer” schemes that loaded young people at the top of the property market. The RBA has been complicit. Not wanting to put pressure on the government to reform, it just kept cutting rates to keep housing afloat. It was totally negligent in its duty even though it will signal its role as a rescuer of last resort.

When will banks be forced to mark to book the value of mortgages on their balance sheet? Equity is thin as it is. 15-20% equity buffer to mortgages is pretty wafer-thin. They need to do this immediately so we can properly assess risk. Forget stress tests by APRA. They’re meaningless. Our housing market will collapse with higher unemployment. 50% falls from here are possible. Remember there will be hardly any buyers. Prices fell up to 90% in Japan after its property bubble popped.

Worse our regulators have been asleep at the wheel chasing financial institutions on their commitment to climate change, the absolute least relevant metric to save them from here. It shows how complacent they became.

Australia has made some interesting crisis policy choices. For instance, PM Scott Morrison is trying to pass rent moratoriums where landlords suspend payments from tenants until things return to normalcy. It is not enshrined in law yet. In principle that is a nice gesture even if the government is subsidizing the banks for forgone interest due to short term loan repayment moratoriums. Let’s assume this continues for 6 months. Apart from the astronomical size of the subsidy, who will ultimately end up sacrificing the 6 months? Landlords? It won’t be the tenants.

Shouldn’t landlords be free to choose whether they are prepared to forgo rent or not as a purely rational business proposition? Shouldn’t a landlord be free to enforce a rental agreement? Will contracts matter anymore?

At some stage, the free market must be allowed to function and the government will hit a tipping point of weighing stopping economic armageddon by allowing businesses to function and the marginal risk of infections. The people will be crying for this if shutdowns remain.

Landlords may be labelled un-Australian or worse but in 6 months time, if unemployment has surged to nose bleed levels well above the 6% we saw during GFC at what point will disposable income be able to support a daily coffee at a cafe?

A cafe might soldier on for a further 3 months on skeleton staff before realising that they can’t cover costs. A landlord would be well within reason to demand that early cancellation clauses and fees are enforced.

Then what of all the invoices to coffee suppliers, bakeries who provide muffins and croissants and utilities? Who misses out? What about the invoices of the coffee supplier? Will the bakery get called on by its flour supplier to pay upfront for future deliveries when it has no operating cash flow, instead of the long-standing 60-90 day terms? That happens overnight. It isn’t a managed outcome. Cash is king.

The question is why hasn’t the government taken advice from the banks on business lending so it can better assess the risks involved from those that deal every day with small companies?

We can’t just shut an economy down for 6 months and expect a return to normal when it is all over. Unemployment rates are likely to surge well above 10%.

As we wrote in an earlier piece, there are 13.1 million Australians employed as of February 2020. Full-time employment amounted to 8,885,600 persons and part-time employment to 4,124,500 persons. Retail trade jobs come in at a shade over 1.2 million jobs. Construction at 1.15 million. Education 1.1 million. Accommodation/restaurants /bars etc at 900,000. Manufacturing another 900,000. Noticing a trend in our employment gearing?

We can fudge the unemployment figures however we like. We can pay $1,500 a fortnight for 6,000,000 workers to pretend they still have a job. That is $18bn a month. The PM can talk about how this will help us bounce on the other side. If it continues for just over 6-months can the budgeted $130 billion will be spent. This is separate to NewStart payments too.

Yet, will people lavishly spend or pay down debt and economise as best they can? We think the latter unless moral hazard has truly sunk in.

What people need to understand is that our Treasury expects to raise $472.8 billion in taxes for FY2019-20. Throw in sales of services, interest and dividend income and that climbs to a total of $511 billion. Expenses are forecast at $503 billion. In the following three years Treasury anticipates $490.0 billion,  $514.4 billion and $528.9 billion in taxes. Expect those totals to be cut significantly.

So if ScoMo’s JobKeeper rescue package for workers goes beyond 6 months, that is equivalent to 27% of annual tax revenues. That doesn’t take into account the slug to tax collections of lower GST and vastly lower income tax for individuals and corporates. That is just at the federal level.

Note, states such as NSW have recently waived payroll taxes for small businesses in a  $2.3bn stimulus package. We shouldn’t forget that the NSW Government is the largest employer in the Southern Hemisphere at 327,000 staff.

We remind readers that according to the RBA small businesses employ 47% of the workforce. Medium enterprises employ 23%. That is 70% of the entire workforce who are most at risk from a slowdown.

In 2019-20 income tax collections will make up $220 billion. Company tax was forecast to generate $99.8 billion. GST $67.2 billion. Excise taxes (petrol, diesel, tobacco etc) $44.7 billion. This data can be found on page 21 here.

Local cafes are reporting a 60~80% fall in revenue. Pretty much all casuals have been let go. It is a bit hard to survive on coffee when a lot of stores aren’t stocking pastries for fear of spoilage.

It is not hard to assume a scenario where government income taxes fall to $160 billion (-28%) due to mass layoffs. One assumes many people will be able to get a tax rebate come June 30th. So this number may end up being conservative on an annualised basis.

Company tax could plunge to $40 billion annualised due to the drastic fall in revenues as customers change the manner of contracts and reign in their own spending. Anyone that thinks that business will resume as normal is crazy. The ripple effects will be huge.

Excise taxes may drift to $35 billion as people cut back on drink (currently $7bn in tax revenue), are limited in places to drive negating the need to fill up (currently $18bn in total tax take). The $17 billion in tobacco excise may weather the storm better than most.

GST could fall to $50 billion. People just aren’t spending much outside of food. Massive retail discounts will not make much difference. GST will be the best indicator of how much the economy has slowed. Even if we start to see a massaging of the GDP numbers, GST won’t lie. It will be the safest indicator.

If our assumed tax revenue sums to $285 billion annualised from the budgeted $472 billion that equates to a 40% haircut.

Trim the ‘other revenue’ column to $30 billion from $39 billion and we have $315bn. Will the government then chop away at the $503 billion in expenses? All of the stimuli doesn’t arrive at once but a lot of it in relatively short order. Surely a $300~400 billion deficit is a fait accompli?

We should also anticipate forward year tax revenues be cut c.30% for several years after. The question is when does the government realise that it must cut the public service and scrap wasteful projects like French submarines and other nice-to-have quangos? We won’t see a budget surplus for decades.

We must careful not to fall into the trap Japan finds itself in. It has a US$1 trillion budget funded by US$600bn in taxes and US$400bn in JGB issuance. Every. Single. Year.

Nothing short of drastic tax and structural reform will do. Instead of behaving more prudently by cutting budgets when we had the chance, instant gratification created by governments desperate to stay in power has only weakened our relative position. Since 2013, the Coalition has been responsible for 46% of the total amount of all debt issued since 1854.

States should quickly realise that the $118 billion in federal grants going forward will also be curtailed. NSW will likely fare the worst because its financial position is by far the best.

If the government had a proper plan, it would be looking to what essential industries have been given up to the likes of China that we need to onshore. Medical equipment, masks or sanitiser. For cricketer Shane Warne to be converting his Seven Zero Eight gin factory to produce hand sanitiser shows how much of a joke our local manufacturing has become.

We must never forget that a Chinese government-owned company displayed the Communist Party’s mercenary credentials by (legally) buying 3,000,000 surgical masks, 500,000 pairs of gloves and bulk supplies of sanitiser and wipes. So not only was it responsible for covering up the truth surrounding the virus in the early stages of the pandemic, we openly let it compromise our ability to combat the virus when it hit our shores.

China has shown it doesn’t give a hoot for ordinary Australians. So why should we continue to fold to its whims and cowardly surrender our industries for fear it’ll stop dealing with us? It is nonsense. We have some of the highest quality mineral resources which it depends on. We can bargain. We have chosen to appease a bully.

Our Foreign Investment Review Board (FIRB) needs to be far more vigilant to prevent takeovers by Chinese businesses. We should openly accept the way China conducts business practices and recognise that it is often incompatible with ours when national security is at stake. Surely this crisis has highlighted the true colours of the political system in Beijing.

That leads us to Japanese companies. Many are seriously cashed up, have a favourable exchange rate and have a long-standing history of partnering with local businesses. We should be prioritising our relationship with Japan and look to have them invest in our inevitable capital works programs – specifically high-speed rail. It is the type of project that has meaning for the future and a long enough timeline to turn an economy around.

People need to be prepared for the reckoning. There is no point softening the blow. The brutal truth will eventually arrive and we will have only put ourselves in an even weaker position with the policy suite enacted so far. Time to be rational about risk/reward. Whether we like it or not, the minimum wage will need to be cut substantially in order to get the jobs market alive again. Don’t worry, unemployment will be so high that people will demand minimum wages are cut because it is far superior to the alternative!

(Time to ditch your industry super and start shovelling your superannuation into gold)

Uncomfortable truths about Hate Crime in America

Total HC by race

The FBI has a treasure trove of data on hate crimes, broken down by race, type of crime, city or state it occurred, motive and so on. The positive out of all of it is the overall trend of hate crimes has fallen dramatically since 1996 in absolute and relative terms. As always, we present the data without emotion. The figures published here are reported by the FBI. The Census Bureau is used for any population data.

As we reported in the previous post, the mainstream media is desperate to paint a narrative that anti-Asian hate crimes are about to go through the roof. Who might be behind it?

Race

The FBI data would suggest that a likely culprit of anti-Asian hate crimes might be whites, who make up c.75% of the population and totalled around 54% of hate crime offenders in 2018. Black Americans make up 13% of the US population but in 2018 were responsible for 24% of all hate crimes. Unknown races made up 12.9% and mixed races made up 6.9%. Asian-Americans are responsible for only 1.3% of offenders of hate crime, below their 5.8% representative population.

Offenders by Race

Over time, if we boil down hate crimes by race as a percentage of the overall representative populations, which doesn’t take into account repeat offenders, we can see clearly that not only has hate crime fallen in absolute terms it has plummeted in percentage terms too.

The FBI stats would tell us that Black Americans are twice as likely to commit hate crimes as White Americans as a percentage of their respective representative populations. That would be a narrative inducing headline, wouldn’t it? In absolute terms, whites still commit hate crimes at over 2x the rate of blacks and 42x that of Asians. However, the more important way to look at the data would be to say that as a % of hate crimes, over 99.98% of Black, White and Asian Americans are not in this cohort. Period.

Where does racially based hate crime usually occur? One could easily twist the data on that too.

HC Cities

One could argue that Elloree, South Carolina has 511x the race-based hate crimes of the national average. Springfield and Calhoun Falls, South Carolina would seem to support the data that South Carolinians are unhinged. Or do they? If we look at South Carolina as a state, hate crimes are more or less the same as the national average. What we did note from the stats is that the populations of Elloree, Springfield and Calhoun Falls were 652, 488 and 1,925 respectively vs a state population of 5.08 million.

We might say that a more densely populated area like Seattle (3.4mn residents) is 20x more racist than the national average. Or Washington DC at 10x. Decatur, Texas is 13x more racist per head of population but the State of Texas is below the national average. Is it a fair reflection? Probably not. The data can tell whichever story one wanted to paint. Would the media tread carefully here?

By state, the FBI data suggests the District of Columbia would seem to home to the highest percentage of all hate crimes for a state/district in America, even though as a % of the resident population, 99.96% of the citizens there are not. We can see how easy it is to paint narratives.

Republican

For the sake of comparison, we coloured the states by 2016 presidential election results. It would seem there were more Democratic-held states (blue) than Republican-held states (red) that were above the national average for hate crimes as a % of the resident population. It is not a very valid comparison but we often only hear that only Republicans are unabashed racists. Although one might argue that DC hate crimes are still committed by Republicans, even though party affiliation is not taken by the FBI. Perhaps it should!?

Race

The places where race-based hate crimes were committed threw up some interesting statistics. 25% were committed at or around the home. 20% on a highway, alley or street. 8% were unknown. Most other cases were reported at public venues such as schools, supermarkets, convenience stores or gas stations. Race hate crimes are even reported in prisons.

Religion

When religious hate crimes are committed, most are unknown. Not surprisingly, 15% occur outside a place of worship.

Sexual

Most sexual orientation hate crimes occur at or around home or alleys and streets. Bars and nightclubs account for 5%.

Although hate crimes are naturally better borne out by motives. As we can see in this chart below, c.70% of hate crimes are driven by actual offences – assault, vandalism, robbery, burglary, car theft, larceny, murder or rape. 30% is based on intimidation which could range from name-calling, racist bill posters to threats of violence.

Yet does a white carjacking a black or vice versa have the primary motive of race or theft? Is race sometimes not a factor but happenstance? Is the motive to steal a Ferrari or take the car because of the occupant’s skin? Yet the victim may point to the race of the perpetrator when filing the report.

Type

It is too easy to twist the data on hate crimes.

Is it possible COVID19 hate crimes will get a separate section in the 2020 FBI data series? Will there be a tidal wave of anti-Asian crimes as a result of Trump calling it the “China virus“?

We don’t think it is lost on most people where the virus originated but at the same time, we would also imagine that racists didn’t need any assistance to form bigoted views. Their narratives had plenty of ammunition to work with before Trump or the mainstream media mentioned it.

The better way to look at hate crimes is that they have fallen since 1996 when FBI data collection began. Whites now commit 48% fewer hate crimes as a proportion of their population cohort on a relative basis and 43% on an absolute basis. There has been a 37% relative and 18% absolute drop in hate crimes caused by blacks and 77% and 49% respective decline in Asian perpetrated hate crimes.

In aggregate there has been a 43% relative and 30% absolute decline in all hate crime offenders since 1996. Yet the media would have it that hate crimes are surging to unprecedented levels. Simply not true.

No wonder Jussie Smollett needed to stage a hate crime hoax.

Let us not forget when claims of racist hate crimes backfire.  An issue over alleged racism started when a student from Oberlin College was caught shoplifting two bottles of wine from Gibson’s Bakery while trying to buy another with a fake ID. Allyn Gibson, son of the owner chased down the shoplifter but was attacked by his accomplices. The perpetrators claimed racial profiling by the store. Oberlin College’s Dean of Students, Meredith Raimondo, joined in student protests calling Gibsons a “racist establishment.” It was then that Oberlin ended all business with the bakery (which had been an ongoing supplier to the college since 1885). Flyers were printed and the store attacked.

Oberlin College in Ohio was sued for defamation and charged $44.2m in damages. It was awarded by the court to Gibson’s Bakery for unsubstantiated claims of racism.

Which begs the question, just how severe were the hate crimes reported by the FBI, were they prosecuted and how many were thrown out for the lack of evidence or being unsubstantiated? That is not contained in the published FBI data.

Anti-Asian hate crime stats to date. A COVID19 surge ahead?

As with almost everything, the mainstream media want to whip up a story that anti-Asian hate crimes could surge during the current pandemic due to Trump calling it the “Chinese virus“. Never mind that the mainstream media used the term itself until it became more fashionable to turn it into a dog whistle to attack the president. Forget context and perspective when chasing clickbait.

Hate crime in America has fallen from 9,861 incidents in 1997 to 7,120 in 2018. These are official FBI stats. We’ll have to wait till November 2021 to get the official 2020 aggregated hate crime statistics unless the FBI release an interim statement.

The Hill noted,

“The FBI is assuring the public that investigating hate crimes remains a top concern amid the coronavirus outbreak.

The agency updated its guidance on COVID-19 to note that “protecting civil rights and investigating hate crimes remain a high priority for the FBI.” The update comes amid growing warnings about hate crimes targeting Asian Americans over the coronavirus.

The bureau added in an intelligence report obtained by ABC News this week that “hate crime incidents against Asian Americans likely will surge across the United States, due to the spread of coronavirus disease … endangering Asian American communities.”

According to the FBI, anti-Asian hate crime has fallen from a peak of 527 in 1996 to 148 incidents in 2018. In 2018, Asians were 0.00071% likely to suffer a hate crime relative to the Asian American population. Technically, one could argue there was a 13% surge on the 2017 figure. Why didn’t the media drum up a story on that?

After the 9/11 terrorist attack, anti-Islamic hate crimes surged from a trough of 22 before the incident to 481 in 2002. At last count, there were 188 hate crimes against the Muslim community in 2018, or 0.0076% of the representative population in America, a 31% fall on 2017.

Anti-Native American hate crimes trended at a very low level out to 2010. Since then they’ve surged from a low of 44 cases to 154 under Obama and at last count under Trump sit at 194 in 2018.

Anti Hispanic hate crime has fallen from a peak of 636 in 1997 to a trough of 299 in 2015 to 485 at last count.

Anti-Semitic hate crimes remain the highest among all religions in America. They have drifted down to a low of 609 in 2014 from the peak of 1,182 in 1996 but in 2018 saw a resurgence to 838 or 0.0147% of the representative population.

As a % of the black population, Anti-Black hate crimes have fallen from 0.0131% to 0.0046% of their racial background. In 2018 hate crimes fell 4% on 2017 to 1,943 incidents. In 1996 this figure was 4,469.

Why didn’t the media run the narrative of Zika or Ebola causing a surge in anti-African American crimes given those viruses were named after places in Africa? Surely any old excuse will do for foaming at the mouth racists.

As a % of the total population, anti-white hate crimes have slid from 0.00052% in 1996 to 0.00024% in 2018, up from 0.00016% in 2011. The media would never run a narrative that hate crimes against whites have jumped since 51% since 2011.

However, what would a surge in anti-Asian hate crimes entail in the media’s mind? With the law of small numbers, any surge won’t require much in absolute terms.

As of 2018, statistically one was 8x more likely to suffer an anti-LGBT attack than an anti-Asian hate crime in America.

In a world where smartphones are everywhere (aka amateur news reporters), it is surprising that despite this, the mainstream media hasn’t unearthed one grainy picture of a racist wailing at Asians over COVID19. Could it be the media might have to stage a Jussie Smollett hoax to drum up the narrative?

Marvel’s New Warriors – Safespace and Snowflake

SandS

Just when we thought we had heard it all in the world of identity politics, Marvel has decided to introduce five new (social justice) warriors – including Snowflake and Safespace. Marvel notes that,

“Psychic Twins. “All twins are psychic, but we’re psychic-er.” Snowflake, a cryokinetic, can materialize snowflake-shaped shuriken projectiles for throwing. Safespace can materialize pink forcefields, but he can’t inhabit them himself, the reflex only works if he’s protecting others. They’re hyper-aware of modern culture and optics, and they see their Super Heroics as “a post-ironic meditation on using violence to combat bullying.” They’re probably streaming this.

“Snowflake and Safespace are the twins,” the writer says, “and their names are very similar to Screentime; it’s this idea that these are terms that get thrown around on the internet that they don’t see as derogatory. [They] take those words and kind of wear them as badges of honour.”

“Safespace is a big, burly, sort of stereotypical jock. He can create forcefields, but he can only trigger them if he’s protecting somebody else. Snowflake is non-binary and goes by they/them, and has the power to generate individual crystalized snowflake-shaped shurikens. The connotations of the word ‘snowflake’ in our culture right now are something fragile, and this is a character who is turning it into something sharp.

“Snowflake is the person who has the more offensive power, and Safespace is the person who has the more defensive power. The idea is that they would mirror each other and complement each other.”

Not to worry, to help our anxious teens, Marvel has also introduced:

Screentime – a Meme-Obsessed super teen whose brain became connected to the internet after becoming exposed to his grandfather’s “experimental internet gas.” Now he can see augmented reality and real-time maps, and can instantly Google any fact.

Trailblazer – a group home and foster kid who is volunteering at a senior centre. Her “magic backpack” is actually a pocket dimension with seemingly infinite space, from which she can pull out useful or random objects—it’s not always under her control. She claims to get her power from god, but “not the god you’re thinking of.”

B Negative – is the goth kid. When he was a baby he got a rogue lifesaving blood transfusion. He has a bad attitude.

Will this be the Gillette moment for Marvel? Are there enough triggered millennials who will flock to the new comic series? Would Disney invest in a movie which moved from classics such as The Incredible Hulk to a movie based on Snowflake and Safespace? We wrote about the box office failures of movies that went woke here.

Disney bought Marvel in 2009 for $4 billion. Since then it has generated $18bn in Marvel comic-based movies. They made a bundle out of Pixar too.