THE DISTILLERY: Spin-bowling bears
The bear is back today with a string of comments reflecting rising anxiety about the global recovery, though from this column’s view-point it has as much to do with the spin cycle as it does the business cycle.
First up is John Durie of The Australian who has a solid take on the danger posed by China’s investment-led recovery. According to Durie, “Yu Yonding, a former member of the Chinese Central Bank Committee, has highlighted a series of issues for China in a recent speech. These start with the danger of asset bubbles, over-capacity, looming problem loans and inefficient infrastructure investment. Professor Yu was delivering the annual Richard Snape memorial lecture in Melbourne on Wednesday night. He also warned of another problem – the value of China's $US2.3 trillion ($2.5 trillion) in foreign exchange reserves. Given the inevitability of a devaluation of the US dollar and increased inflation when the US economy improved, it was clear the value of those reserves will be slashed...Professor Yu's problems with China centre on over-capacity, which was hidden by strong export growth that ended with the financial crisis. Over the past couple of years, investment spending has increased by 50 per cent in an economy growing at an 8 per cent rate, which means the capital-to-output ratio is a bit over six times. This compares with the ratio of 4.1 between 1991 and 2005, and 3 in Japan, which suggests the investment is both in overdrive and not very efficient.”
Durie then speculates that “such hiccups must have some impact on the thinking of Australian economic managers such as Glenn Stevens” and wonders if it could help prevent a December rate hike.
Kudos to Durie for taking on China. Australia needs much more of this. But on that theme, why must we wait until some boffin gives a speech in Australia? These arguments have been well known around the world since the GFC (and some well before). For instance, Justin Lin at the World Bank has been arguing this line ceaselessly, with much international press coverage. Running the line that this is a revelation and may, as the headline suggests, help “prompt an RBA rates rethink” is pure spin.
A more genuine development supporting bearishness is the Dubai meltdown, covered by Malcolm Maiden of The Age. He does a good job of connecting the threatened default with local businesses including a scoop. “DP World...has a comfortable niche alongside local competitor Asciano in the biggest container ports: Brisbane, Sydney's Botany Bay, Melbourne, Adelaide and Fremantle. Separately, DP has teamed up with Chris Corrigan's Kaplan Funds management in Australian Amalgamated Terminals, a port joint venture with Asciano that handles general cargo and motor vehicles. The AAT joint venture was approved by the ACCC, but ACCC chairman Graeme Samuel would like to see a third player established in Australia's biggest ports alongside DP World and Asciano, and Queensland, NSW and Victoria are all planning to make it happen. DP World's problems are an unwanted complication...Another Dubai World offshoot is Nakheel, the property developer that led the astonishing property boom in Dubai that has crashed so spectacularly (Dubai property prices are down about 50 per cent since the global crisis erupted), and is a joint-venture partner in the Middle East with Australia's Leighton Holdings....Toll Holdings...has been contacted to see if it is interested in acquiring Dubai World assets in the region...Assets on the block do not appear to include DP World's container ports, and Toll would not be interested in them anyway. Sources say, however, that Toll is examining the possible acquisition of DP World maritime assets.” They had better move fast if Maiden is right; he predicts an Abu Dhabi bailout. Barclays is less sure, which makes this a big deal for the global risk trade and reflation.
The bearish tone continues back at The Australian where Matthew Stevens has a well researched piece on the details of the ATO grab at TPG profits. The piece is too detailed to excerpt fully but has the following passage that will leave TPG and other Cayman flunkies cold. The ATO reckons “Australian sourced business profits ultimately derived by a tax haven entity may be taxable in Australia. These long-standing principles will be restated in a taxation ruling in the next few weeks." And according to Stevens, “That...paragraph has been received with bemusement and irritation by tax professionals if only because the tax treatment the rest of the statement foreshadows does not reflect past rulings and, what's more, has come right out of the blue. Again, the TPG deal provides the most irrelevant pointer to that fact. I mean, if private equity's income from the sale of shares was routinely treated as revenue rather than capital gain, why would a relatively senior and comparatively conservative participant in that space, such as TPG, embrace the additional risk of ATO penalties by structuring the deal as it has?The interesting thing here is that the ATO is said to be following a familiar tactic in presenting its redrafting of the rules as an exercise in consistency. That is 'the modus in this sort of situation', a senior tax lawyer said yesterday. ‘Change of direction is routinely presented as a clarification of what has always been'."
Glenda Korporaal completes The Australian’s cheery attitude with a weak condemnation of Telstra. The first half of her piece is a repeat of Ian Verrender’s insight published yesterday that the ETS will delay the Senate debate on the Telstra bill. The second half goes nowhere but up The Australian’s proverbial. “As of next week, many broadband customers [will] get faster speed plans and higher data allowances for the same price while excess-usage charges would be removed on most plans. Thodey described the new charges as the largest overhaul of Telstra's broadband pricing in five years. If he wanted any customer feedback, the announcement provoked a storm of responses on The Australian's website”.
Apparently this ‘storm’ was “Fifteen responses...posted within a few hours of the story appearing on the website, fiercely debating the merits of Telstra's broadband packages over others.” Is this really a solid basis for analysis? On the bright side, I guess we now know The Australian has at least 15 readers. Though thinking about it, the fracas may have been just one protesting again and again. Perhaps Paul O’Sullivan?
Continuing the theme of weak, self-serving drivel, is The Australian Financial Review’s editorial, which comes out in favour of the Ripoll Report. “The committee was wise not to adopt radical proposals for legal ban on commissions and fees”. Not stopping there, it also implies the suggested new fiduciary duty is going too far. “The issue is whether this can be done without shouldering the cost structures and litigation risk that make traditional fiduciary professionals such as lawyers and accountants too costly for average citizens.”
In a word, poppycock! In what universe can punters not afford an accountant? In what universe do they not pay them for their services? How many people would use an accountant if they were funded by the ATO, financially motivated by the product producer to ignore possible tax savings? This is simply another AFR sop to financial services advertisers. As this column has mentioned yesterday, the only actual market research it has ever seen on the issue, conducted by Colmar Brunton and published in The Australian, screamed a willingness across all client levels to pay for uncompromised advice.
Not that research will always save you. Look no further than the AFR’s Chanticleer this morning. Alan Jury argues that “consumers and businesses have already made up their minds – they want less gibbering...and more action” on climate change. On consumers he’s safe enough with Roy Morgan research which demonstrates “a reduced but still significant concern about economic issues and a resumption of growing concerns about environmental issues.” But Jury also cites new research by law form Norton Rose which “polled 114 executives involved in all aspects of environmental, sustainability and climate change issues in business spanning 32 countries.” The survey concludes “70 per cent of the businesses think the US government’s position is the most significant barrier to an agreement being successfully negotiated at Copenhagen...44 per cent considered BRIC countries...as being most significant after the US.” The research goes on, but to this column’s chagrin there is little credibility in arguing such outcomes from a small base of managers with a clear predisposition toward climate change mitigation.
Stronger evidence of business’ commitment to climate change mitigation is its support for the ETS, argues John Roskam in an AFR op-ed. He points out that “...in the lead up to the 2007 federal election it was the influence of the business lobby on Howard that convinced him to sanction...an ETS...Business has stayed staunchly behind at ETS”. According to Roskam, this is despite Australia’s reliance on coal and Treasury’s difficulties modeling the scheme.