Regulation

A gem on how to work our way out of the coming economic crisis

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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?

Surely lightning can’t strike twice, RBA?

The video posted here is of then Treasury Secretary Hank Paulson who steered the US financial system through the GFC. He is speaking to the Financial Services Committee in 2009. Perhaps the most important quote was the one that world central banks failed to heed –

Our next task is to address the problems in the financial system through a reform program that fixes our outdated financial regulatory structure and that provides strong measures to address other flaws and excesses.

Central banks across the globe honestly believe in fairytales to think they have learnt the lessons of 2008 or 2000 for that matter. Sadly they continue to use the only tool they possess – a hammer – which would be great if every problem they encountered was actually a nail.

When will people realise that had central banks practised prudent monetary policy over the past 20 years, they would possess the ammunition to be able to effectively steer the economy through Coronavirus? Everything the RBA and government are deploying is too little and too late. They never ran proper crisis scenarios and are now scrambling to cobble together an ill-contrived strategy wasting $10s of billions in the process all at our expense.

Central banks only have one role – to support markets with consistently sound monetary policy that creates confidence in the marketplace. Not run around like headless chooks and make knee-jerk responses and follow other central banks off a cliff like lemmings to disguise their own incompetency. The willful negligence displayed by our monetary authorities needs to be recognised. The RBA has got the economy trapped in a housing bubble of their own creation.

So when the RBA talks about, “Australia’s financial system is resilient and it is well placed to deal with the effects of the coronavirus” it couldn’t be further from the truth.

While it is true to say that Australia is relatively more healthy than other economies in terms of the percentage of GDP in national debt, the problem is we rely on the health of our foreign neighbours. 37.5% of our exports go to China. What is the first thing that will happen when our trading partners suffer economic weakness at home? Nations that exercise common sense will look to push domestic production and supply so as to boost their local economies. It is a natural process.

Sadly the RBA, APRA and ASIC have been too busy convincing us that climate change was a priority rather than getting businesses to focus on sensible commercially viable shareholder-friendly strategies. Some groups like the AMA have been encouraged to parade their climate alarmist virtues on breakfast TV.

Unfortunately, instead of focusing on fireproofing our establishments from ruthless cutthroat overseas competitors, our businesses and commerce chambers waste time on chasing equality and diversity targets instead of striving to just be the “best in class”.

Sure, we may have certain raw materials (that the lunatic Greens and Extinction Rebellion protestors will do their best to shut down) that China or other nations will rely on, our service sector weighted economy will be crushed. Almost $250bn, a fifth of our GDP, derives from exports.

Just look at Australian business investment as a % of GDP dwindle at 1994 lows. Mining, engineering, machinery and even building investment are nowhere.

That means our ridiculously high level of personal debt will become a problem. It stands at 180% of GDP as recorded by the RBA on p.7 of its Chart Pack. Most of this debt is linked to housing. Housing prices should crater should coronavirus not be solved in short order. Delinquencies will surge. Families that are funding a mortgage with two incomes may end up being forced to do in with one. Then we cut our gym memberships, Foxtel and stop buying coffee from our local cafe. It is the chain reaction we need to be wary of.

That will work wonders for banks with 60-70% mortgage exposure and precious little equity to offset any ructions in housing prices. If you thought Japan was bad after its bubble collapsed – you ain’t seen nothing yet. By the time this is over we could well see Australian banks begging for bailouts. Note that cutting interest rates further kills interest rate spreads and smacks the dollar which hikes the cost of wholesale funding which these banks heavily rely on.

Yet our RBA knows that it must choose the lesser of two evils. It needs to keep the bubble inflated at all costs because the blood that would come from bank failure is just not worth contemplating. Maybe if they had listened to Hank Paulson they might have been able to hold their heads high rather than showing off, the fool’s version of glory.

Milton Friedman once said,

The power to determine the quantity of money… is too important, too pervasive, to be exercised by a few people, however public-spirited, if there is any feasible alternative. There is no need for such arbitrary power… Any system which gives so much power and so much discretion to a few men, [so] that mistakes – excusable or not – can have such far-reaching effects, is a bad system. It is a bad system to believers in freedom just because it gives a few men such power without any effective check by the body politic – this is the key political argument against an independent central bank.

How right he was. When the economy tanks, await the RBA and government pointing fingers at each other when both failed to avert the coming crisis which had been so bleeding obvious for so long.

Batten down your hatches.

Get ready to buy Boral & ABC rather than watch a market swim in concrete shoes

Governments rarely have imagination during crises. Usually, it involves chucking uncosted cash around. How many projects have we seen run way over the promised budget? Submarines anyone? NBN?

Handing out $750 cheques to 6 million struggling Aussies in the hopes they’ll spend it is a bit of a wing and a prayer strategy. Maybe those struggling will just use it to pay down debts of previous consumption rather than ignite a new spending splurge.

At some stage, large-scale infrastructure spending will return to the headlines to stem the economic slowdown. Look at the state of national infra spending forecasts in the chart above.

Bridges to nowhere. Tunnels, highways, schools and hospitals. New projects to get people back to work. It happens pretty much every downturn. So why should we expect anything different?

A read of the latest infrastructure report states quite clearly there are 4 areas to address:

  1. Population growth has become a major point of contention in infrastructure debates. In our largest cities, ageing assets have been put under growing strain, with rising road congestion, crowding on public transport and growing demands on social infrastructure, such as health, education and green space.
  2. Energy affordability has also deteriorated over recent years. A steep rise in network costs has driven energy bills 35% higher over the past decade, and up by 56% per unit of electricity consumed in real terms.
  3. In telecommunications, the nbn rollout continues to face challenges. In the 4.8 million households in which it has activated, services have not met the expectations of many users.
  4. In the water sector, the past four years have seen mixed results. Many metropolitan utilities are increasing the sustainability and quality of their services through innovation, supporting the liveability of our cities. But many regional areas are suffering from growing water security fears as large parts of the country are in drought.  

Cement companies play straight at the heart of three of these four distinct areas. Roads, rail, hospitals, schools, dams and so on. In the energy space, whatever direction we take (solar, wind, coal, gas or nuke), cement, asphalt and aggregates will be required to achieve it.

Bellwether Boral (BLD) is perhaps best positioned to benefit as it makes railway ballast, asphalt, cement, concrete. Boral shares have yet to be kicked as hard as others. Boral hit a GFC low around the $1.92 mark. It stands at $3.00, 33% above that level.

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50% of Boral’s Aussie revenue comes from NSW, the state with by far the healthiest balance sheet and the biggest infrastructure projects. 50% of revenue is Australian based with another 38% coming from the US which has huge infrastructure needs. 25% of group revenue comes from roads, highways, subdivisions and bridges. Good leverage.

Adelaide Brighton (ABC) has been bludgeoned in this market meltdown and $1.35 is the level it hit at the pits of the GFC in 2008. If it starts to sink below that level, it will start to look interesting again. If you look at the chart you can see it has slid from almost $7 in 2018 to its current price of $2.24.

Adelaide

A read through ABC’s last set of results points to the difficulties in the market for its cement and aggregates business. It has also embarked on a rationalisation program before all of this coronavirus hysteria.

We hold no positions in ABC or BLD as yet but will look to accumulate should the market continue its sell-off towards these 2008/9 lows.

The national government is out of options but to build out locally. They have already used the bushfires excuse to ditch the budget surplus plans so might as well push a bold infrastructure plan to save us all!  The best plan would be a high-speed rail project which addresses real long term needs of Australians.

Girls smarter than boys so why lower hurdles to force gender quotas?

It is kind of ironic that UTS thinks that lowering the ATAR requirements to get more girls into STEM fields makes sense. What happened to independently minded girls who want to pursue their interests as individuals rather than try to rig admissions to push ideological quotas?

Isn’t that what International Women’s Day is all about? To create equality of opportunity?

Forget that the average ATAR score for girls is 71.1, higher than boys at 67.8.

Could it be that girls and boys tend to like different things?

A Scandinavian study conducted across 470,000 subjects showed that while girls from nations that had pro gender equality policies in place qualified as well if not better than boys to do STEM, simply chose not to elect to study it. It had the exact opposite outcome of what was expected.

There is a reason why 99% of bricklayers are men and 80% of nurses are women.

Sensibly, Pymble Ladies College (PLC) principal Kate Hadwen openly said,

We don’t need it, do we, girls? No…It’s outrageous. The thinking is to try and encourage girls into STEM. But I just think that it’s absolutely saying women need help. We don’t need help. We’re great as we are, thanks very much.You have to earn your place there… I’m a believer in that.”

By all means, tell girls the virtues of what a STEM degree might bring in terms of a job and remuneration but leave it to them to pursue it if they feel it is of interest.

PLC 1 – UTS 0

Central banks use coronavirus as a convenient cover-up

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Where would we be without central banks? The Reserve Bank of Australia (RBA) has trimmed another 25bps of the cash rate to 0.5%, an all-time low and the fourth cut in 9 months.  It is amazing how central banks can shape-shift from climate scientists to doctors.

Given the recent three rate cuts were unrelated to coronavirus and have failed to stimulate the economy as hoped, the pandemic has allowed the RBA to continue its limited ammunition under the context of rescuing us.

We aren’t supporters of ever more rate cuts, truth be told. Yet if central banks want to keep the disco ball spinning, why bother with a sissy 0.25%? If the RBA wants to jolt the economy back to life it would have been better to go straight to zero. Show the markets they are serious rather than drip-feed to the inevitable.

No doubt we will get the usual song and dance from politicians goading banks into passing on the full rate cut to customers. This time banks will probably fold on the back of the Hayne Royal Commission even though the truth is their funding costs won’t fall by the full amount meaning profit will be forgone for the sake of keeping up appearances.

Think through the logic. Last month, China PMI plunged to 35.7 from 50 in January, the lowest reading since January 2005  38.8 during the 2008 Global Financial Crisis.

Australia’s next economic print will be awful. Pushing through a miserly 0.25% won’t put a spring in people’s step unless they see a cycle. Personal credit growth is negative and at levels not seen since the GFC. Housing and business credit growth are at 6-yr lows. Money velocity is slowing. Business investment is at 1994 lows. Nothing to see here.

The economy needs proper industrial, structural and tax reform. After 28 years of untrammelled growth, Australia needs to realise that the complacency bred over that period will come back to haunt if we don’t wake up from the sleep walk.

As Jonathan Rochford of Narrowroad Capital said,

“When it comes to central banks, I would prefer to believe it is a combination of groupthink, an unwillingness to take career risk by speaking the truth and a willingness to either ignore or disregard counter-evidence that has resulted in the detrimental decisions since the financial crisis. However, the increasing amount of evidence, often produced by central banks themselves, points to central banks being more culpable than gullible.”

Don’t believe the hype. Coronavirus has given another excuse to cover up failed central bank policy alongside climate change green swans.

Heathrow jettisons reality for religion

Forget economic planning for the next 20-30 years. Drag up the non-binding Paris Climate Accord (of 2015) and use it as an excuse to hobble economic growth by claiming the third runway at Heathrow Airport is illegal. Forget the fact that passenger growth is a true underlying reflection of travellers’ true feelings about climate change. When it comes to offsetting one’s own carbon footprint by electing to pay a penalty, the truth is that 98% of people couldn’t care less.

Stopping Heathrow’s 3rd runway follows a dangerous path. Surely councils can see airport expansion benefits the community more than impedes it. Why do councils fall for tales of doom spewed by activists who often haven’t the first clue about what they are protesting about other than what they have read in The Guardian or heard from Hollywood star Emma Thomson who flew in from NY to tell them to panic?

Officers at Uttlesford District Council in Essex had recommended the approval of proposals to increase London Stansted Airport’s passenger cap to 43mpa in 2018 from 35m. However, the council’s special planning committee members rejected the scheme in January 2020.

Bristol Airport applied to the North Somerset Council to expand capacity by 30% in 2017, to keep up with the faster than expected demand. It was recommended for the jobs that would be created but the council rejected it, despite assurances the airport itself would be net-zero emissions in its operations.

While the activists may well rejoice at stopping the expansion, some fast facts about Heathrow Airport should send chills down the spines of Westminster:

  1. Currently operating at 98% capacity with 473,000 flights a year (capped at 480,000). It was 350,000 in 1991.
  2. Civil Aviation Authority notes Heathrow handled 80.9m passengers in 2019 up from 63m in 2002 and 40m in 1991. 
  3. Heathrow handles 50% of all London’s flights and 27% of all UK flights.
  4. Heathrow estimates 30% for business, 35% for holidays and 35% for visiting friends and relatives.
  5. 65% of passengers are going to the UK. 35% use Heathrow as a hub to connect.
  6. 76,000 are employed at Heathrow Airport.
  7. Heathrow is the 7th busiest airport in the world.

Demand is growing. Moreover, Britain’s population is expected to swell from 66m today to over 73m by 2045, the largest country in Europe.

The simple thing is facts don’t matter. Despite today’s modern fleet of aircraft burning 15-20% less fuel and spewing far lower emissions of planes even 10 years old, hysteria wins the day.

By the International Air Transport Association’s (IATA) own admission, global air travel in totality is only 2% of man-made CO2 emissions. That is to say that all air travel is responsible for 0.00003% of CO2 in the atmosphere. Heathrow makes up 0.1% of all commercial flights globally.

Not to worry, IATA has got behind the movement to do its bit for climate change too. In a two page flyer, it covered the idea that we reckless passengers must consider our carbon footprint but at the same time help the U.N. raise $40bn in taxes, sorry ‘climate finance,’ between 2021 and 2035.

The Carbon Offsetting & Reduction Scheme for International Aviation (CORSIA) is the vehicle which the UN’s International Civil Aviation Organization (ICAO) intends to liberate us from our sins and help fund the waste so endemic in the NY based cabal. Wherever the UN is involved expect a sinister agenda behind the virtue.

All airlines have been required to monitor, report and verify their emissions on international flights since Jan 1, 2019. Operators will be required to buy “emissions units” from the UN. If one asked the UN would it prefer emissions to be cut or taxes to be raised, it would select the latter every time.

What of the UN IPCC summits going forward? How will activists, government officials and observers manage to get to upcoming climate conferences if their ability to fly is curtailed? Best allow for expansion to ensure their vacuous jollies remain uninterrupted, especially after Greta Thunberg’s efforts caused a 50% rebound in attendees at Madrid.

Forget fears of Brexit hurting the economy. Just let green councils run amock based on religion. The ultimate irony will be when airlines, bursting at the seams, request to put on larger aircraft to cope with the growth that has been restrained by the infrastructure.

The realities of crowdfunding & the evils of social media

No doubt many of you will have seen the viral video posted by the mother of Quaden Bayles, a child with dwarfism who was allegedly bullied at school.

Famous actors, sports stars and media personalities rallied in support of the disabled kid. If only the same could be said of over 90% of the 256,700 people that shared his GoFundMe page instead of contributing themselves. That’s right, in today’s virtue signalling world, appealing that you care about social justice is enough.

Although the ugly side of social media is never far away. It didn’t take long for trolls seeking to demonize anyone by dredging up the past and drawing conclusions in haste. Digital footprints have a half-life of infinity.

Some suggested that his mother was abusing his skills as an actor, influencer and model to make some extra money by boosting his profile. If this was a stunt, which we sincerely hope it wasn’t, that would be an even more despicable act at the hands of those who should be protecting his best interests.

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Ultimately, 9-yo Quaden Bayles should simply not be in the firing line. Sadly he will be collateral damage as a growing number have taken upon themselves to savage him and his mother. That is not to condone any alleged deceptive behaviour but it throws up the growing dangers of social media. An exponential number of people seem so desperate to have their profiles go viral that they are resorting to ever more extreme actions to achieve it.

The GoFundMe account to support Quaden has amassed c.US$455,000 from 20,100 people for him and his mother to go to Disneyland. As doubt to the authenticity of the bullying claim does the rounds in cyberspace, the mother is being attacked for using his disability to raise some quick cash via GoFundMe. The facts don’t show that.

First, she didn’t ask to set up the GoFundMe account. Comedian Brad Williams did. Second, the organiser clearly stated that “after all the flights, hotel, tickets, and food is paid for, any excess money will be donated to anti-bullying/anti-abuse charities.

We won’t bother to make some sort of woke comment to condemn bullying of any sort because that should be the default setting for anyone with at least two brain cells. There are no points for publicly broadcasting one is against attacking a child with a disability. Or without one for that matter.

Still in this day and age, we should never underestimate the actions of some who gladly look to hijack a “trending” cause for their own social media exposure.

Hollywood is a great example. How so many actors and actresses came out and rallied behind the #MeToo movement despite Harvey Weinstein being the worst kept secret in movies. Celebrities rushed to condemn his actions on Twitter despite wearing black ball gowns with the surface area of three postage stamps held together with dental floss to protest sexual assault. That’s right, when it comes to career progression and fame, expedience by remaining silent trumped principle.

If people wish to part with their money on GoFundMe we think they bear all the personal responsibility of doing so. At the very least, GoFundMe should consider a 7-day cooling-off period where the money is held in trust such that the impulsive have an avenue to reverse a decision if any misrepresentation which changes their decision crops up. The cross-jurisdictional nightmare of charging a fundraiser for potential fraud makes it too complex, much less for the generally small average size of individual donations.

Today, social media is judge and jury. People are smeared before getting a chance to prove their innocence. For all of the video footage and pictures of Quaden Bayles dressed in designer fashion several years prior to his emotional plea this week, it doesn’t automatically cancel out the chances he was bullied by his peers who probably don’t know any better. He may have given as good as he got. He is only 9-yo. It is ultimately irrelevant. We know bullying has dreadful consequences, sometimes fatal. It shouldn’t just come down to seeing a video of a disabled kid before we do something about it.

Unfortunately, the lessons about the dangers of bullying so many demand kids are taught aren’t practised by the very adults on social media who should know better.