My good mate Jonathan Rochford of Narrow Road Capital has compiled a brilliant summary of the recent madness in markets, politics and economics. One could be forgiven for thinking it is a lot like satire. Link here.
Can the media and shadow politicians get a grip? Since when should taxpayers complain when the government makes a huge error in our favour? We can pretty much stake our lives on the fact that 99% of government programs end up way more expensive than initially budgeted for. French Submarines anyone? NBN? We should be looking at the JobKeeper revision as a massive positive.
The federal government estimated that the JobKeeper program would initially cost $130 billion. Now it appears they overestimated it by $60 billion. That was driven by the idiosyncrasies of who would be eligible at the employer end – from the self-employed to big business and everything in between.
Given the limited time window, forgive the Treasury and Tax Office for not landing estimates on target. It is ridiculous to expect they could estimate such a fluid piece of legislation.
The unwelcome arrival of COVID19 and the sudden stay-at-home orders that ensued hardly gave a generous window of opportunity to apply Japanese level precision engineering to the process.
Our only criticism lies with the drip feed approach to restarting the hibernating economy. As we mentioned yesterday with respect to the 50 US states, so many appear to be copying each other rather than making bold data driven decisions based on facts not consensus.
The reality is that the Treasury will need to make many more multi billion dollar mistakes in the spirit of JobKeeper to help mitigate the damage caused by the looking trillion dollar deficits.
Perhaps the $60 billion saving can be redeployed to building a bullet train from Sydney to Melbourne. A 20-yr project that is just the type of infrastructure spending which ticks so many boxes – relieving pressure on the state capitol cities, housing, assist a growing population and provide lots of jobs.
Pew Research has put together an interactive map showing the level of unemployment in the US by state. It is eye opening especially as we pointed out that 99.8% or people aren’t infected and 99.99% of people haven’t died from coronavirus in the US.
Michigan currently has a quarter of the workforce unemployed. We can understand why Governor Gretchen Whitmer has 1.2 million angry natives.
Pennsylvania also has 25% unemployment to deal with. Relative infection rates in the state are marginally higher than the national average but death rates are 30% lower.
Nevada has 23% unemployment. Should we be surprised when the Mayor of Las Vegas wants to open the economy up? Nevada has a COVID 19 death rate of 1/3rd the national average.
California has 18% unemployment or an estimated 3.6 million. Once again, quelle surprise that Governor Newsom is copping flak.
New York, the epicenter of infections/deaths has 16% unemployment or 1.5 million.
On the other end of the spectrum, South Dakota is faring best at 8% unemployment. It has infection rates around 25% lower than the national average but death rates 1/10th the national average.
Flipping the data the other way, Montana has a death rate 18x less than the national average but suffers from 17% jobless.
Calculated risk taking is a must to avoid further economic damage. America’s culture is founded on risk taking not bailouts. The natives are restless and demanding their governors wake up. The risk/reward balance has tipped.
Small businesses employ 50% of all Americans. The Small Business Administration (SBA) distributed 1.4 million loans worth $350 billion under the Paycheck Protection Program (PPP). It has now run dry. Small businesses are seeking these loans which stipulate the funds must be directed to pay employees coping with coronavirus. Typically, House Speaker Pelosi and Senate Minority Leader Chuck Schumer are trying to stuff unrelated partisan pork into the bill in order to back it.
To sustain small businesses, which employ half the country, the SBA is requesting another $250 billion. Yet Pelosi and Schumer want to use the crisis to ram in more unrelated regulations to the PPP with:
While all of these items may have a place in a separate debate, surely helping half of the country’s employment providers stay alive is the bigger issue. Never mind Pelosi was happy to parade herself on late-night TV in front of her $24,000 refrigerators while the bill is delayed. We don’t begrudge anyone owning nice things, but the optics of a freezer full of $13 ice cream punnets is hardly reflective of the crisis.
It wasn’t long ago that her party wanted to stuff a laundry list of ridiculous unrelated items to the $2.2 trillion emergency stimulus last month including airline emissions standards, corporate board diversity and wind/solar subsidies.
Now that 22 million Americans are out of work, should we be surprised that 3,000 people were protesting in Lansing, Michigan demanding the economy be reopened? Or the 100s of people in Raleigh, North Carolina.
Do they have a point?
Here is the latest data outlining infections as a percentage of the state populations. The average infection rate across the US is 0.2044% of the population. That means that 99.8% of people haven’t caught it. While social distancing is proving effective, one has to wonder whether the economy can be reopened quicker than the lid on Nancy Pelosi’s ice cream.
Switching to COVID 19 deaths, the national average is 0.0101% of the population. New York, which we lambasted for the insane advice handed out by its Health Commissioner Oxiris Barbot has 7.6x the national average. Wyoming, while less densely populated than NYC, has 0.03x the national average.
Michigan has a death rate of 0.02%, twice the national average. Its infection count is 0.293% or 50% higher than the national average. North Carolina might have a bigger argument to make. It has a 0.0015% death rate (0.1x the national average) and infections at 0.0542% (0.25x the national average) of the state’s citizens. Why aren’t governors looking to reopen their economies sooner, which is their decision, not Trump’s, to make?
These people rightly want the governors to start opening the economy so they can work. Jobs, jobs, jobs. Never cross an American and their belief in “rights”. We think this once again plays straight to Trump’s reelection. People are seriously frustrated and when they join the unemployment queue they are through with partisan politics.
FNF Media has always thought protests would eventually happen. The risks of contracting coronavirus versus the reward of having a job and feeding a family are now front and centre. They would undoubtedly settle for social distancing guidelines while working instead of remaining in lockdown.
We added Australia’s own state/territory data in those previous charts (yellow) which shows just how minuscule our infections and death rates are. We really need to be looking at easing restrictions sooner, rather than later. These statistics should make us all think.
Over three decades ago, the Japanese introduced a TV programme titled, ‘Za Gaman‘ which stood for ‘endurance‘. It gathered a whole bunch of male university students who were challenged with barbaric events which tested their ability to endure pain because the producer thought these kids were too soft and self-entitled. Games included being chained to a truck and dragged along a gravel road with only one’s bare buttocks. Another was to be suspended upside down in an Egyptian desert where men with magnifying glasses trained the sun’s beam on their nipples while burning hot sand was tossed on them. The winner was the one who could last the longest.
Since the Japanese bubble collapsed in the early 1990s, a plethora of think tanks and central banks have run scenario analyses on how to avoid the pitfalls of a protracted period of deflation and low growth that plagued Japan’s lost decades. They think they could do far better. We disagree.
There is one absolutely fatal flaw with all arguments made by the West. The Japanese are conditioned in shared suffering. Of course, it comes with a large slice of reluctance but when presented with the alternatives the government knew ‘gaman’ would be accepted by the nation. It was right.
We like to think of Japan, not as capitalism with warts but socialism with beauty spots. Having lived there for twenty years we have to commend such commitment to social adhesion. It is a large part of the fabric of Japanese culture which is steeped in mutual respect. If the West had one lesson to learn from Japan it would be this. Unfortunately, greed, individualism and self-entitlement will be our Achilles’ heels.
It is worth noting that even Japan has its limits. At a grassroots level, we are witnessing the accelerated fraying of that social kimono. Here are 10 facts taken from our ‘Crime in Japan‘ series – ‘Geriatric Jailbirds‘, ‘Breakup of the Nuclear Family‘ and the ‘Fraud, Drugs, Murders, Yakuza and the Police‘ which point to that old adage that ‘all is not what it seems!‘
These pressures were occurring well before the introduction of Abenomics – the three arrow strategy of PM Shinzo Abe – 1) aggressive monetary policy, 2) fiscal consolidation and 3) structural reform.
Since 2013, Abenomics seemed to be working. Economic growth picked up nicely and even inflation seemed like it might hit a sustainable trajectory. Luckily, Japan had the benefit of a debt-fueled global economy to tow it along. This is something the West and Japan will not have the luxury of when the coronavirus economic shutdown ends.
However, Japan’s ageing society is having an impact on the social contract, especially in the regional areas. We wrote a piece in February 2017, titled ‘Make Japan Great Again‘ where we analysed the mass exodus from the regions to the big cities in order to escape the rapidly deteriorating economic prospects in the countryside.
Almost 25 years ago, the Japanese government embarked on a program known as
‘shichosongappei’ （市町村合併）which loosely translates as mergers of cities and towns. The total number of towns halved in that period so local governments could consolidate services, schools and local hospitals. Not dissimilar to a business downsizing during a recession.
While the population growth of some Western economies might look promising versus Japan, we are kidding ourselves to think we can copy and paste what Nippon accomplished when we have relatively little social cohesion. What worked for them won’t necessarily apply with our more mercenary approach to economic systems, financial risk and social values.
Sure, we can embark on a path that racks up huge debts. We can buy up distressed debt and repackage it as investment grade but there is a terminal velocity with this approach.
The Bank of Japan is a canary in the coalmine. It has bought 58% of all ETFs outstanding which makes up 25% of the market. This is unsustainable. The BoJ is now a top 10 shareholder of over half of all listed stocks on the index. At what point will investors be able to adequately price risk when the BoJ sits like a lead balloon on the shareholder registry of Mitsui Bussan or Panasonic?
Will Boeing investors start to question their investment when the US Fed (we think it eventually gets approval to buy stocks) becomes the largest shareholder via the back door? Is the cradle of capitalism prepared to accept quasi state-owned enterprises? Are we to blindly sit back and just accept this fate despite this reduction in liquidity?
This is what 7 years of Abenomics has brought us. The BoJ already has in excess of 100% of GDP in assets on its balance sheet, up from c.20% when the first arrow was fired. We shouldn’t forget that there have been discussions to buy all ¥1,000 trillion of outstanding Japanese Government Bonds (JGBs) and convert them into zero-coupon perpetual bonds with a mild administration fee to legitimise the asset. Will global markets take nicely to erasing 2 years worth of GDP with a printing press?
Who will determine the value of those assets when the BoJ or any other central bank for that matter is both the buyer and seller. If the private sector was caught in this scale of market manipulation they’d be fined billions and the perpetrators would end up serving long jail sentences.
Can we honestly accept continual debt financing of our own budget deficit? Japan has a ¥100 trillion national budget. ¥60 trillion is funded by taxes. The remainder of ¥40 trillion (US$400 billion) is debt-financed every single year. Can we accept the RBA printing off whatever we need every year to close the deficit for decade upon decade?
In a nutshell, we can be assured that central banks and treasuries around the world will be dusting off the old reports of how to escape the malaise we are in. Our view is that they will fail.
What will start off as a promising execution of Modern Monetary Theory (MMT), rational economics will dictate that the gap between the haves and the have nots will grow even wider. Someone will miss out. Governments will act like novice plate spinners with all of the expected consequences.
In our opinion, the world will change in ways most are not prepared for. We think the power of populism has only started. National interests will be all that matters. Political correctness will cease. Identity politics will die. All the average punter will care about is whether they can feed their family. Nothing else will matter. Climate change will be a footnote in history as evidenced by the apparition that was Greta Thunberg who had to tell the world she caught COVID19 even though she was never tested.
Moving forward, our political class will no longer be able to duck and weave. Only those that are prepared to tell it like it is will survive going forward. The constituents won’t settle for anything else. Treat them as mugs and face the consequences, just like we saw with Boris Johnson’s landslide to push through Brexit.
The upcoming 2020 presidential election will shake America to its foundations. Do voters want to go back to the safety of a known quantity that didn’t deliver for decades under previous administrations and elect Biden or still chance Project Molotov Cocktail with Trump?
What we know for sure is that Trump would never have seen the light of day had decades of previous administrations competently managed the economy. COVID19 may ultimately work in Trump’s favour because his record, as we fact-checked at the time of SOTU, was making a considerable difference.
Whatever the result, prepare to gaman!
Jonathan Rochford of Narrow Road Capital has written a gem on the role of central banks in spawning this current crisis. An excerpt here:
“The rapid and widespread sell-off over the last four weeks is a textbook systemic deleveraging. Whilst the culprits are many; hedge funds, risk parity strategies and investors using margin loans have all been caught out, the underlying cause is excessive leverage across the economy and particularly the financial system. The timing of the unwind and the economic damage from the Coronavirus wasn’t predictable, but such a highly leveraged system was like a truck loaded with nitroglycerin driving down a road dotted with landmines.
Frustratingly, this inevitable deleveraging was clearly predicted. Rather than act to reduce systemic risks central banks encouraged governments, businesses and investors to increase their risk tolerances and debt levels.“
Naturally, it fits our own long-held view on central banks.
Jonathan adds some sensible actions which are contained in this link. The question remains whether governments will put principle ahead of expediency in the cleanup?
Overnight Apple fell 9.8% which equates to a wipe out of US$105bn in market cap. That is more than the value of Australia’s largest company, CSL at A$142bn ($89.2bn). In one session. Or 35x the value of Qantas.
Flipping through the latest RBA Chart Pack, it is no surprise that business investment keeps sliding off a cliff. As a % of GDP, it has slid from a peak of 18% off the short-term trough of 14% (GFC) to 11%, which now puts it at 1994 levels. It proves the old adage that businesses don’t invest because interest rates are low, they invest because they have confidence in the cycle.
Our government should be looking at this with alarm bells. It doesn’t take too much imagination to work out that political instability has played its part.
Australia was once regarded as the vanguard of political stability in the region which made it a sensible investment choice for domestic and international investors as a place to do business. There was a comfort in knowing that there wouldn’t be revolving door prime ministers and flip flops on policy positions. After all, much business investment takes years to get to the production stage.
The Howard years saw our business investment surge. Sensible fiscal policy was a feature too. While Rudd can be forgiven for GFC causing a slump in business investment it resumed until political instability put the mocker on business confidence.
We have been running deficits ever since and cranking up the national debt (we wrote about it here) because it is clear we don’t have sensible free-market conditions to self sustain direct investment at anywhere the levels we need.
Instead, we kowtow to radical activists who try to stop investment in projects like Adani and conduct illegal secondary boycotts on businesses like Greyhound Australia and Siemens without repercussions.
Whether coal is evil or not is irrelevant. The problem is such activism, which is further supported by ideologically corrupted government environmental departments – that push their own agenda on granting approvals – doesn’t endear domestic industries or foreigners to invest in us. These are dangerous precedents. All of this tokenism when we only need look at the realities of what will happen down the line.
Don’t take our word for it. Even our domestic businesses are leaving.
Thanks to Australia’s ridiculous energy prices, Aussie company Bluescope confirmed the expansion of capacity in Ohio. In Feb 2019, the company CEO said, “much cheaper energy in the United States is a major driver of the company’s preparedness to invest in a $1 billion expansion in Ohio.”
In 2017, Tomago Aluminium reported, “We have to grow to be competitive and to be ahead of the curve, but when the spot price went to $14,000 [per megawatt hour] we had to take that load off. It’s just not sustainable. You can’t smelt at that price. We have had to curtail or modulate the load [on occasions] or we get hammered by the price…We cannot continue to keep paying those prices. We have to find a solution. The prices are crippling”
Unfortunately, 28 years of unfettered economic expansion has made us complacent. We think this economical miracle has no off-ramp.
None of this is remotely surprising.
Can we honestly say that the impact of higher electricity prices hasn’t been a factor in pushing away investment in engineering and manufacturing? So this mad push for renewables will not alleviate this pressure. Germany is the perfect beta-test crash dummy. It predicted flat prices. They doubled from those forecasts.
Yet our political class is playing with fire.
We never thought Australia was realistically going to have a surplus when it was announced. Secretly there must be a sigh of relief in Treasury that the impacts of the bushfires and coronavirus will provide a convenient scapegoat to miss those targets under the premise of ‘doing the right thing.’ And no that does not mean the government is glad those two catastrophes have happened from a humanistic approach.
We need proper reforms. We need to ditch these notions of political correctness in public policy. We are as unimaginative as many other governments around the world. Living on a low-interest rate fuelled debt bomb. Kicking the can down the road simply does not work. Why aren’t politicians convicting their cases with evidence rather than folding to ideological positions held by fringe dwellers on Twitter?
When we visited Israel on a business delegation in 2018, Israeli PM Benjamin Netanyahu uttered the only 4 words that mattered for investors – “we want your business.” The innovation nation knows what it is good at and is prepared to back it to the hilt.
It would be so nice if our government spent some time in Israel to discover that we have it all wrong. Because we are only storing up a rude awakening. When our economy does suffer from the eventual ramifications of all of that lack of investment, the public will be howling that they can’t pay their mortgages, that they can’t get decent jobs and they can’t keep the lights on. None of that would have been necessary if they had been more open to business.
The ultimate result will be that we’ll put ourselves deeper into debt to fund some monster infrastructure projects that will provide short term relief, not long term solutions.
The foreign investors that could have helped had we treated them in a more dignified fashion will just buy our assets at fire-sale prices instead. Then we’ll have another moment to howl at the moon.
That will be the true price of our complacency. Experience is a hard teacher. You get the test first and the lesson afterwards.
CM appeared on Sky News to discuss the situation with our banks, the potential risks from the recommendations of the Hayne Royal Commission and the issue of mortgage stress.
As the 10% consumption tax rate kicks in from October 1 in Japan from the current 8%, it is worth reflecting on the sorry state of consumer confidence. We are back below 2014 levels. While the sales of Japanese rugby jerseys and huge consumption of beer by gaijin at the Rugby World Cup may provide a brief respite, the trend remains distinctly negative.
Note that consumption tax has been the biggest portion of government revenue since 2014 and is on track to be 37% of the total in 2019, followed by individuals and the lazy corporate sector. Japan’s small-medium enterprises (SMEs) are the backbone of employment, comprising 70% of the labour force and 97% of all corporations. Yet 70% of SMEs pay no tax at all.
From an individual level, the top 0.7% of earners in Japan pay 30% of the tax bill, up from 20% in 1974. The bottom 50% have seen their tax contribution fall from 10% to around 2.8%. The top 8% pay around three-quarters of the total.
With Japan running a ¥100 trillion (US$1tn) national budget, the Ministry of Finance needs to sell ¥40 trillion (US$400bn) every year to plug the budget deficit. The hope is that the consumption tax will lower the dependence on having to debt finance to such extremes.