#shanewarne

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)

Wider World created by Warner

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To be honest my elder brother sounded more sincere when he apologized in front of my parents after smashing my orthodontic brace-filled mouth 35 years ago. Dave Warner’s media appearance showed next to no contrition. Sure there were tears. References to the stress on his family and how he’d be lost without them. Indeed, had he considered his family before deciding to cheat then he’d never have to run a rearguard action to protect them. That doesn’t condone the actions of social media thuggery on family members but there was absolutely no surprise in the fast pace bouncers peppered at him from the press gallery, all of which he dodged with the same insincerity for someone whom apparently “only ever wanted to bring glory to my country!” Strange way of showing it.

At least in Steve Smith’s case he projected absolute authenticity in his admission of failure. Bancroft was just a startled bunny in the headlights. Warner seemed to be begging for forgiveness in that at some point might allow resumption to expand his property empire in Maroubra than pleading to restore the lost glory back into the ‘game.’

Warner typifies the ‘win at all costs’ mentality cultivated from the top of Cricket Australia. It isn’t just his two teammates that have worn this failure of leadership. Magellan has already pulled $20m in sponsorship, countless others will follow and the upper hand in negotiations over broadcast rights has all but vanished. That means that Cricket Australia will have $100s of millions less in the kitty to pay players, develop kids at tender ages to sustain the game in the future and draw crowds. Less for facilities, less for promotion, less for match bonuses. Less, less, less. Cricket Australia needs a total overhaul too.

Cricket to Aussies is like Rugby Union to Kiwis. It is on another level to other sports. Our hall of fame includes the likes of Bradman, Spofforth, Trumper, Woodful, McCabe, Morris, Simpson, Border, Waugh, Ponting, Taylor, McGrath, Warne…the list goes on. Were Buck Shelford, Sean Fitzpatrick, Jonah Lomu or Richie McCaw found guilty of bringing the All Blacks side into disrepute through blatant tampering they’d be publicly hung, drawn and quartered with their heads tossed into the mud pools of Rotarua. The New Zealand media would not be calling on people to give any cheater a ‘fair go.’ That is the irony. Most of these elite sportsmen have had way more than a fair go but it wasn’t enough. Otherwise there was no reason to cheat.

Some in the Aussie media now cry out for leniency. They made a mistake, apologized…all lessons learnt. Then again it isn’t any surprise that the media is also short on ethics much of the time. Go back to bed like it was just a bad dream. Talk about being ‘role models’ for kids?!? Most Aussie fans won’t view it that way. Talks of two years in the penalty box and then Steve Smith can resume the captaincy shows how shallow the thinking is. While he may have shown himself to be a sincere individual he most certainly proved he has no place leading the team ever again. He should refuse to take it on if he ever plays again.

One has to question whether the bowlers knew something was up. It is not a question of being complicit in the crime rather a fast bowler spends 6 minutes every over staring at the ball in his walk back to his mark, polishing one side on his trousers, checking the condition of the rough side to consider what type of delivery to bowl. Every. Single. Ball. A bowler usually has 5 to 6 overs a spell so at least half an hour to study the curious round object in his hands. Bat strikes leave particular types of marks as does the pitch and fence. So a sandpaper mark should look rather ‘manufactured.’ Certainly surprising that this would go unnoticed.

In any event, this is not the last we’ve heard form this fall out. Warner should never be able to play for Australia again. He neither represents the country, takes pride in the honour of donning a ‘baggy green’ and most certainly has a very weird way of bringing glory to his country. The only one that matters for Warner is himself.

Mason Crane – perhaps the brightest spot in a bleak Ashes tour

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CM was fortunate enough to hear the tale of cricket player Mason Crane via his parents Nick and Alison at the 5th Ashes Test in Sydney where Mason played his first ever game for England.

His parents said they had never been a cricket family but their only son Mason fell in love with the game in the 2005 Ashes series. At only 8yo he idolized Australian legendary leg spinner Shane Warne. They said he used to watch DVDs of Warne’s bowling action every morning while eating breakfast and told them “I’m going to play for England”. He stayed focused on his career until he got his chance this weekend.

On Day 3 when he got to bowl a proper spell his parents were understandably nervous. CM said that would vanish once he took a wicket. Indeed test cricket is as much a mental game as it is physical and given on Day 4 he bowled in 40 degree heat the test was even more severe.

As emotions go, he got the wicket of Khawaja for 171. While he ended up with figures of 1-193 from almost 50 overs, Mason revealed proper grit, something lacking in many of his teammates this series

After meeting with Nick and Alison today the relief on their faces was self-evident. Truly proud parents. CM said for them to enjoy the anonymity for now because before they know it the media will be calling for his story. There can be no doubt that he will be a player the English side would be stupid to ignore for a future as a full-time spin bowler.

The press is saying the English team management will do a huge post mortem on the disastrous 4-0 drubbing by the Aussies. While negatives are everywhere, Mason was probably the only real “positive takeaway.”

One can never find the answer by merely looking at the problems but focusing on the solutions. Mason Crane looks to be that solution in years to come. Good teams unite in adversity. Finger pointing and wailing over who is to blame doesn’t help. Acknowledging failure and embracing sensible strategy will win out every time.

Best of luck Mason!!