#royalcommission

Time we investigated and audited the fire services’ senior personnel

Trust The Guardian to publish a piece from Michael Mann, of hockey stick fame, to dish a sermon on the connection of bushfires with climate change as he prepares his studies in Australia. Perhaps he can cut his trip short by first paying a visit to the Australian Institute of Criminology which will tell him that 85% of bushfires are caused by humans – accidentally, suspiciously or deliberately lit. Watch the media wax lyrical about his pontification.

David Marr has also written a puff piece in The Guardian which has nothing to do with bushfires and everything to heap on a conservative prime minister, Scott Morrison to push the climate narrative. There is a reason he is a regular on the ABC Insiders program.

Marr wrote,

We know the sight by heart: corrugated iron on a low pile of ash with a chimney left standing. Another house gone. And the pattern of bushfires is part of our lives too.”

Anyone with a beating heart feels a sense of sorrow at the destruction of 1,000 homes and the tragic loss of nearly two dozen lives, but some perspective is needed.

The 2009 Black Friday bushfires in Victoria saw 173 deaths and over 2,000 homes destroyed.

The Great East-Japan Disaster of 2011 caused the destruction of 374,000 homes and the deaths of over 16,000 people.

Still none of these statistics will help those who have lost loved ones. We need to focus on what caused the problems in the first place. In Iapan’s case Mother Nature was to blame. In much of these recent bushfires, arsonists are to blame. Don’t let that get in the way of the climate change narrative.

Negligence is a big factor. Does this look like a well maintained fire trail to you? The only way you can tell is by the sign marking it.

But don’t let poor forest management get in the way of a climate change agenda, as Marr does here,

One of the duties of a leader is to find the words in times like these. So many have died. So much has been destroyed. But how can Scott Morrison speak to the experience of the country if he can’t admit we are living through unique times? He says instead: “We have faced these disasters before.”

Yes perhaps they are unique times where Marr can honestly believe that reducing our already minuscule emissions is somehow more important to mitigating bushfires than actually removing the aging fuel loads from the floor. Easier to blame ScoMo.

While we can’t sing the praises of the brave men and women fighting the blazes high enough, we must reflect on the upper management within the fire services for some spectacular own goals.

Take the Gullen Range Wind Farm built around Bannister. Despite local RFS officials raising concerns that the erection of these wind turbines would take Crookwell airstrip out of action for fire fighting duties (because the water bomber aircraft would not be able to get sufficient height to clear them), the head honchos overruled them.

We’ve mentioned in earlier posts that the Boeing 737 water bomber is a white elephant because it can only operate out of 4 airstrips, limiting its usefulness outside of political happy snaps to say we have one. Were it perfect for the job, one imagines the extent of the fires would have been less.

So in order to defeat the side effects of supposed climate change, advice from climate alarmists led to the construction of barriers to prevent mitigating them.

The saddest part from the bushfire disaster is that fingers will be pointed incessantly at climate change being the largest factor when human negligence of another kind is actually the problem, including those people entrusted to prevent them in the first place. Not the actual fire fighters but the senior management.

Blaming everything on climate change is the biggest cop out.

FNF Media recommends the key fire service senior management be audited for their actions, practices and communications in the years leading up to this. So much was preventable. There should be no sacred cows. In the aftermath of the disaster, we can take our time to work out the best way to prevent such fires occurring down the line instead of expediting tax payer dollars to buy equipment that might be unfit for purpose.

Westpac reported a 40% increase in home repossessions

Mortgages Westpac

Don’t get CM wrong – this is still the law of small numbers.  Westpac reported this week that it repossessed another 162 properties in the latest fiscal year.  That is a 40% increase. While it is but a dribble compared to the 100,000s of total loans outstanding it is none-the-less a harbinger of things to come. Westpac made clear, “the main driver of the increase has been the softening economic conditions and low wages growth.”

The current status of 90-day+ delinquencies has been rising over time. As have 30-day +. While nothing alarming, the current economic backdrop should give absolutely no confidence that an improvement in conditions is around the corner. We are not at the beginning of the end, but at the end of the beginning.

Former President Ronald Reagan once said of the three phases of government, “if it moves, tax it. If it keeps moving regulate it. If it stops moving, subsidize it.” How is that relevant to the banks?

We have already had the government fold and attach a special bank tax on the Big 4. Phase 1 done. Now we are in the middle of phase 2 which is where knee-jerk responses to the Hayne Banking Royal Commission (HBRC) where banks will be on the hook for the loans they make. That is a recipe for disaster that could bring on phase 3 – bailouts.

Sound extreme? How is a bank supposed to make a proper risk assessment of a customer’s employability in years to come? Can they predict with any degree of accuracy on the stability of candidates who come for loans? The only outcome is to cut the loan amount to such conservative levels that the underlying purpose gets diluted in the process and prospective home buyers have to lower expectations. Not many banks will look positively at taking several loans on the same property with different institutions. That won’t work. SO loan growth will shrink, putting pressure on the property market.

What is the flip side? Given property prices in Sydney hover at 13x income (by the way, Tokyo Metro was 15x income at the peak of its property bubble), restrictions on further lending against loan books that are on average 63% stuffed with mortgages (Japan was 41.2% at the peak) won’t be helpful. A property slowdown is the last thing mortgage holders and banks need.

While equity continues to rise at Aussie banks, the equity to outstanding mortgages has gone down since 2007 i.e. leverage is up. If banks saw their average property portfolios drop by more than 20% many would be staring at a negative equity scenario. Yet, it won’t be just mortgage owners that we need to worry about. Business loans could well go pear-shaped as the onset of higher unemployment could see a sharp increase in delinquencies through a business slowdown. A concertina effect occurs. More people lose their job and a vicious circle ensues. It isn’t rocket science.

Of course, Australia possesses the ‘boy who cried wolf‘ mentality over the housing market. Yet it is exactly this type of complacency that paves a dangerous path to poor policy prescriptions.

In Japan’s property bubble aftermath, 40% of the value of loans went bang. 17% of GDP. $1.1 trillion went up in smoke. It took more than 10 years to clean up the mess and the aftershocks remain. Accounting trickery around the real value of loans on the balance sheet can hide the problems for a period but revenue tends to unravel such tales. 181 banks and building societies went bust. The rest were forced into mergers, received bailouts or were nationalised. Now the Japanese government is a perpetual debt slave, having to raise $400bn per annum in debt just to fill the portion of the $1 trillion budget that tax collections can’t fill.

The problem  Japan’s banks faced was simple.  If a neighbour’s $2m home was repossessed through mortgage stress and the bank fire sold it for $1.4m, the bank needed to mark to market the value of the loan portfolio for that area by similar amounts. In doing so, a once healthy balance sheet started to look anything but. Extrapolate that across multiple suburbs and things look nauseating quickly.

This is where Aussie banks are headed. This time there is no China to save us like in 2009. Unemployment rates in Australia never went above 6% after the GFC in 2008/9, unlike the US which went to 10%. We weathered that storm thanks to a monster surplus left by the Howard government, which we no longer have.

Sadly China has had 18 months of consecutive double-digit car sales decline. Two regional Chinese banks have folded in the last 3-4 months. China isn’t a saviour.

Nor is the US. While the S&P500 might celebrate new highs, aggregate corporate profitability hasn’t risen since 2012. The market has been fuelled by debt-driven buybacks. We now have 50% of US corporates rated BBB because of the distortions created by crazed central bank monetary policy, up from 30%. Parker Hannifin’s latest order book shows that customer activity is falling at a faster pace.

Nor is Europe. German industrial production is at 10-year lows. The prospects for any EU recovery is looking glib. Risk mispricing is insane with Greek bond spreads only 1.8% higher than German bunds.

What this means is that 28 years of unfettered economic growth in Australia is coming to an end and the excesses built in an economy that believes its own BS is going to leave a lot of people naked when the tide goes out.

The Australian government needs to focus on more deregulation, tax and structural reforms. Our record-high energy prices, ridiculous labour costs and overbearing red-tape are absolutely none of the ingredients that will help us in a downturn. We need to be competitive and we simply aren’t. Virtue signalling won’t help voters when the whole edifice crumbles.

All a low-interest rate environment has done is pull forward consumption. It seems the RBA only possesses a hammer in the tool kit which is why it treats everything as a nail. It is time to come to terms with the fact that further cuts to the official cash rate and the prospect of QE will do nothing to ward off the inevitable.

Pain is coming, but the prospects of an orderly exit are so far off the mark they are in another postcode. Roll your eyes at the stress tests. Stress tests are put together on the presumption that all of the stars align. Sadly, in times of panic, human nature causes knee-jerk responses which put even more pressure.

Banks.png

The Aussie banks have passed their best period. While short term news flow, such as a China trade deal, might give a short term boost, the structural time bomb sits on the balance sheet and while we may not get a carbon copy of the Japanese crisis, our Big 4 should start to look far more like the rest of the global banks – truly sick. The HBRC will see that it becomes way worse than it ever needed to be.

Complacency kills.

Major climate scientific paper is withdrawn

climate report.png

CM is shocked! Really? A major scientific paper, which claimed to have found rapid warming in the oceans as a result of manmade global warming, has been withdrawn after an amateur climate scientist found major errors in its statistical methodology. Who’d a thunk?

The authors sheepishly said,

Shortly after publication, arising from comments from Nicholas Lewis, we realized that our reported uncertainties were underestimated owing to our treatment of certain systematic errors as random errors. In addition, we became aware of several smaller issues in our analysis of uncertainty. Although correcting these issues did not substantially change the central estimate of ocean warming, it led to a roughly fourfold increase in uncertainties, significantly weakening implications for an upward revision of ocean warming and climate sensitivity. Because of these weaker implications, the Nature editors asked for a Retraction, which we accept.”

Clearly, some 4-folds are smaller than others.

Nicholas Lewis said after the retraction that,

“This is just the latest example of climate scientists letting themselves down by using incorrect statistics. The climate field needs to get professional statisticians involved up front if it is going to avoid this kind of embarrassment in future”.

Dr Benny Peiser, director of the Global Warming Policy Forum, said

Climatology is littered with examples of bad statistics, going back to the infamous Hockey Stick graph and beyond. Peer review is failing and it is falling to amateurs to find the errors. Scientists in the field should be embarrassed”.

The larger question from CM is, aren’t the data supposed to be the foundation against which billions of taxpayer dollars are being allocated to save the planet?

CM holds that the scientific community should be held to the same standards as bankers. When bankers commit fraud, individuals face millions and financial institutions billions in fines and jail terms. If scientists have absolutely no repercussions for making dud predictions based on manipulated or homogenised figures, is it any wonder the outcomes tend to be overwhelmingly overstate warming?

If climate scientists were offered an amnesty period of 6 months to come forward and retract bogus claims or face proper sanctions if caught for fiddling the numbers, imagine how much of the published works would be aggressively ratcheted down. Whistleblower laws in the US now incentivise the whistleblower in the millions. Surely there are many scientists in the climate change community who fear speaking out. For the scientists who claim their work is peer-reviewed and flawless, they have absolutely nothing to fear by such legal frameworks. Yet watch them howl at the moon at the mere entertainment of the prospect. That will tell us all we need to know.

Maybe a scientific/educational Royal Commission makes a lot of sense too. The horror stories would undoubtedly dwarf the banks given such loose governance.

Those selfish evil banks?

As is the case with nearly every rate cut, the media stirs up the fact that most of the major Aussie banks haven’t passed on the full 0.25% rate cut. As one can see from the RBA chart above, net interest margins are at the lowest level in 20 years. The banks, as much money as they might be making, are doing it very tough. What people often overlook is the fact that Aussie banks are 40% funded by the wholesale markets, meaning they need the benevolence of foreign and domestic institutions to buy their paper to lend. With a softening Aussie dollar that puts added pressure on funding margins.

Banks

We’ve written about this in previous dispatches. Aussie banks are in a far more precarious situation than we are often told. Global banks have already felt it. We are getting to the stage where we follow them into the morass.

As much as bashing banks has become a sport after the Royal Commission, bullying them into cutting rates by the full extent is actually making their position even weaker. The last thing Australia needs, on top of the ridiculous regulation set to follow the RC, is to force them to operate to the rule of the mob. Personal responsibility is what governments should be drumming home, not saddling the banks with more hoops. If people don’t like their bank that lent them millions for a home loan, switch banks! It is your choice.

BoM strikes again

BoM

Jo Nova has an interesting piece which describes the shameless behaviour of our Bureau of Meteorology (BoM). She notes,

The Streaky Bay information (site 018079) tells us it opened in 1865 but the site only has monthly data from 1926 and daily data from an even shorter period. The rest presumably hasn’t been digitized yet. As best as I can tell, the station metadata appear to mark this site as being at the post office from 1865 to 2018, and record the ground cover as becoming asphalt in July 1987. That means for 31 years the Australian Bureau of Meteorology knew the site was sitting on hot bitumen and couldn’t be bothered to move it? The BOM gets more than a million dollars a day, and claims there’s a dire crisis running, and they don’t even care enough to measure climate change properly? They’re not even trying.

If you click on the Streaky Bay information site link above you’ll be directed to a “page not found.”

Jo Nova demands a Royal Commission (RC) into the BoM. CM agrees. If they have nothing to hide, there is nothing to fear. People might claim it is a waste of money to host a RC on the BoM but the savings of that investment would far outweigh the billions spent on poorly derived data-driven expenditure on renewables.

Aussies pay more tax than Japanese and Shorten wants to raise them higher!

CM is repulsed by the confetti blowing promises being made ahead of May 18. This election is about cost of living to be sure. It is not about climate change and not about resettling refugees. Yet there has to be a limit on the free give away with a growing deficit. Where is the fiscal responsibility? Do politicians run their own household budgets like this? Not in a million years.

Our federal tax receipts are A$430bn this year. Did you know Japan collects $A750bn at the national level? So Aus is 1/5th the population and raises 1/2 the coin of Japan. Having said that the Japanese government must raise A$500bn EVERY YEAR to plug the national deficit! That’s what happens with poor fiscal management. So doing the math including the debt financing, we still raise 31% the revenues than the Japanese on 20% of the population. We might argue our economy is 1/4 Japan’s but we’re following an unsustainable trajectory. It’s insane. How can we tax people more? Yet that is what Shorten will do.

We can debate til the cows come home about how GST is funneled back to the states from federal coffers but we need to wake up to our relative costs! Our budget deficit is c.$600bn yet here we see Labor throw confetti promises around everywhere. $1.18bn in new aid to foreign countries over the next 4 years. PNG spent our aid money on 40 new Maseratis. Shorten pledged $1bn to acquire land to put the VFT in place. Surely the private sector can deal with that. $2bn for a Melbourne metro. We can go on and on.

Everyone seems like a winner until everyone becomes a loser. The sad fact is that we must wake people up to reality. We need to spend smarter, not chuck more money and hope it has impact. Neither government will see a surplus. Take it to the bank. The economic growth projections aren’t there. No matter who wins this election, the global economy is slowing and either party will be handed a basket case of economy controlled by external forces which includes a slowing US and China. It won’t be pretty. The question is who can best manage that? Not Labor. Climate change will be so irrelevant in this downturn.

It gets worse. The Reserve Bank and APRA are asleep at the wheel. Instead of navigating sensible policies to thwart the largest recession we will face in almost 30 years which will decimate housing, both are discussing climate change compliance reporting by corporates. Seriously? It is so telling they are focusing on the wrong message. Have they seen that the world’s central banks have printed $140 trillion in extra debt since 2008 and got $20 trillion extra in GDP. Shockingly poor returns. $7 of debt gets us $1 of GDP.

Yet our political system has only one pair of rose tinted spectacles where the prescription is 27 years out of date. They are equally as oblivious to the oncoming onslaught where our Aussie banks face a real risk of part of whole nationalization. Their position is as bad as the Japanese ahead of the collapse of their bubble.

Do not be fooled. CM personally believes that the Coalition is not deserved of government but the alternative is even worse. The last thing we need is to rest on that old Aussie saying of “time to give the others a go!” because this is a time when we can least afford change. It will be buyer’s remorse + alpha.

Before we rush to bash the bankers!

Bankers have worked hard to stay one rung above lawyers. Yet is anyone surprised? Before we embark on a “bash the banker” tirade, at what point do we cast aspersions on the regulators? If you leave a child unattended with a box of matches don’t be surprised if the house burns down.

None of this is new. Before the housing crisis engulfed America, a group of certified home appraisers raised the alarm in 2003 by signing a petition to present to Congress. They claimed many unqualified assessors were in cahoots with mortgage brokers to jack up property appraisals because of the higher fees that were attracted. What was done by the authorities? The square root of jack. So the $750,000 mortgage taken out was actually against a $500,000 property. $250,000 in negative equity before the new home owner moved in. Regulators could have clamped down but didn’t.

Charging dead people fees is of course a bit much and gouging advisory fees without actually offering service is poor form. However at what point does the customer bear some responsibility to accepting the status quo? Getting access to lower cost providers is/was always there but the opportunity costs were such that many just sucked it up. It wasn’t enough to devote time to when the half yearly check up came around.

CM was one of the ones that questioned the big bank superannuation advisor’s usury fees. So poor was the explanation that after minimal effort, a new advisor was found with fees cut in half and investment flexibility rising exponentially. We shouldn’t have been hanging out for a Royal Commission to whump the banks.

Indeed, should any laws have been broken then the perpetrators deserve to have the book thrown at them. If boards willingly accepted that certain divisions were deliberately acting in unethical ways then they deserve to be accountable.

Corporate governance is not helped by hiring a majority of independent directors. The US experience has shown that to be a failure. It is all about corporate culture. If boards have not been setting the highest standards why should we be surprised if the underlings follow suit. We only need look at the debacle that was Cricket Australia or the recent shenanigans at the ABC to see examples of a poorly run board leading to a culture beneath that ends up seeing staff “cheat” or making decisions that flagrantly contravene the charter.

Do we jail bankers for 25 years? Depending on the extent of actually “breaking the law” that maybe a deterrent. WorldCom CEO Bernie Ebbers was sentenced to 25 years based on nine counts of conspiracy, securities fraud and false regulatory filings to the tune of $11bn. Enron’s former CEO Jeffrey Skilling was convicted on 35 counts of fraud, insider trading and other crimes related to Enron and sentenced to 24 years prison and fined $45 million. Madoff 150 years, Stanford 110 years jail. This has not necessarily stopped corporate crime but it should throw a flag in the minds of those considering it. If the consequences are too soft then clearly the risks profile diminishes for the perpetrator.

Look at the advent of whistleblower laws in America. The SEC now encourages whistle-blowing by offering sizable monetary awards (10 to 30% of the monetary sanctions collected). Successful enforcement actions as a result of whistle- blowing has led to awards as high as US$30,000,000. As a result the SEC has seen a 10 fold increase in claims over the last few years. Would boards be more inclined to act ethically if whistleblowers were granted protections?

Plenty of ways to improve what has transpired but what the Royal Commission should make painfully clear is that consumers need to wise up and become more savvy about how they make choices. We can’t forever complain and wait for governments to rescue us when it is them in the first place not acting responsibly to ensure good behaviour.

The free market should be the first to benefit from filling this clear void. Tying up banks in more red tape and onerous regulation isn’t the way forward. All it will do is drive costs for compliance higher which will ultimately hit the consumer. The larger the institution, the easier such regulations will benefit their ability to squeeze the little guy!

Making the punishments for bad behaviour enforceable and putting the onus on boards to act ethically will make all winners.