David Llewellyn-Smith
THE DISTILLERY: Hike hiatus
This column has consistently maintained the line that the RBA would rather talk about raising rates than actually do it – that is, jawbone. The analysis of commentators today both confirms and throws doubt on this thesis.
Commentary is unanimous that yesterday’s small shift in the RBA statement is a shift to a more dovish stance. Michael Stutchbury of The Australian reckons “Stevens may even push the pause button on further rate rises until February”. Ross Gittins of The Sydney Morning Herald agrees, saying “rates may not rise again this year”. Malcolm Maiden of The Age says “the Reserve has not decided on a several-month sequence of rate rises to mirror the five consecutive rate cuts”. Stephen Bartholomeusz of Business Spectator sees an “[RBA] not particularly concerned at this point about a too-rapid recovery”. Most commentators also acknowledge that housing is a major concern to the RBA.
Tim Colebatch of The Age is more circumspect. He observes that the RBA added “only four new sentences” to last month’s statement. According to Colebatch, “we can expect more rate rises but [the RBA] gives no hint of when they might come. Most Reserve watchers expect a third rise next month, then a fourth in February.” He sees the RBA statement as “nicely enigmatic”. So it's now ‘wait and see’.
In this column’s view, moral hazard is abroad in housing and the market is pinning its ears back. The softening of rhetoric is enough to let it run. Paradoxically therefore, further rate rises are now more likely.
However, another inevitability is that the US balance sheet recession and the fiscal spending aimed at alleviating it will at some point trigger a large equity market sell-off, either on the back of a dollar crisis – a point made today by Desmond Lachman of the American Enterprise Institute in an Australian Financial Review op-ed today – or, opposingly, a reversal of the great risk-reflation trade – a point made by Nouriel Roubini in the Financial Times recently. So, which comes first, housing blow-off and rate rises, or equity market reversal? Who’d be a central banker in the Casino Age.
On the subject of hot money, the Lowy Institute’s Stephen Grenville offers an op-ed in the AFR looking into Brazil’s new capital controls. According to Grenville, Brazil’s “2 per cent tax on foreign portfolio inflows ... had the immediate impact of halting the rise in equity prices and the exchange rate.” Grenville recalls that the “Brazilian policy is variant on an old theme ... Usually foreign investors are required to deposit a proportion of the inflow in an unremunerated government account. Australia’s Variable Deposit Requirement in the early seventies was just one example.” He goes on to relate how Thailand also engaged similar policy “when faced by excessive capital inflow in 2006 ... but financial markets complained loudly enough to have the measure revoked.” Grenville concludes that this time around “the Brazilians may be able to give it a fairer test” because “our faith in the market’s price discovery capabilities” has been “shaken”. Grenville emphasises that the secret of success for such a measure “is to see it as a temporary counterweight ... to excessive flows”. Grenville’s objectivity and empirical openness is deeply refreshing. The only criticism to make here is that Brazil’s imposition of the tax has coincided with a global hiccup and threatened reversal in the global risk trade emanating from New York. This should be factored in to any assessment of the tax’s efficacy.
Also in the AFR, economics editor Alan Mitchell strikes an angry tone in his assessment of the Rudd government’s productivity agenda. According to Mitchell, Rudd’s education revolution has morphed into an “emergency job-creation program ... his promise to raise the quality of infrastructure investment is starting to sound like a bad joke”. Mitchell advises Rudd to heed “the independent advice of the Productivity Commission”. Similar arguments were made last week in The Australian. However, despite his tone, Mitchell brings greater objectivity to this critique by setting it in the context of productivity, rather than that provided by last week’s BCA report. Worth a read.
The pick of the corporate comments today is by Adele Ferguson, who does not mince words in her assessment of Leighton’s remuneration structure, which is “not aligned to shareholders' interests.” According to Ferguson, “Besides the element of greed in the salaries paid to the senior executives and directors, a less obvious, albeit serious, problem is the impact these salaries are having on the rest of the construction sector.” Not even Wal King, who is in a “league of his own” is spared. “For instance, on termination, he is entitled to a fixed retirement benefit of $12.6 million, another $4.9 million in consideration for agreeing to a three-year restraint period after termination, and up to $5 million on achieving satisfactory transition to a new chief executive and leadership team by the end of next year. Given King is 65 and has worked with Leighton his whole career, the chances of him moving to another company are slim. And why he gets $5 million for doing his job and achieving a satisfactory transition to his replacement is anybody's guess.” This column agrees completely and can only reiterate that the assumption that executives require alignment is at the root of instruments that end up fleecing shareholders. The owners of the business should remunerate through salary and assume alignment as with every other employee in the world.
In other comments, Matthew Stevens and John Durie of The Australian both take on banks with mixed success. Durie looks at Westpac from several fronts and contends that Gail Kelly “wants the deposit guarantee wound back as quickly as possible”. This column is sure she does. But what will she do about Westpac’s dependence on the other guarantee of wholesale funds and what will she do if the credit markets seize again? Stevens examines ANZ’s claims that its wholesale costs are increasing, by looking into the cost of its retail funding, which seems a little odd. Finally, Bryan Frith examines Amalgamated Holdings' return to the much fairer renounceable rights issue.
Note: Apologies to Michael West of The Sydney Morning Herald, who did in fact publish the meat of his Myer float critique on October 9, a fact missed by this column.
David Llewellyn-Smith is the co-founder and former publisher of The Diplomat magazine. He runs a media business and communications consultancy in Melbourne and co-authored The Great Crash Of 2008 with Ross Garnaut.
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