recession

RBA should expect a dead cat bounce from the rate cut

The RBA has cut rates to a record low 1.25%. The irony here is people and businesses invest because they see a cycle, not because interest rates are low. Lowering rates will do little to spur investment, especially as the global economy cools.

Post the Hayne Royal Commission, the banks will likely pass on the full amount which will only impact margins and weaken them given the high reliance on wholesale funding.

The other problem the RBA faces is that banks have become so reluctant to lend post the RC that the net impacts of the rate cut will be negated by the unwillingness to lend at levels we have seen in the past given the penalties associated with it.

CM still contends that the Aussie banks tread a perilous path given their leveraged balance sheets. CM thinks part nationalization or worse is a real prospect if the slowdown is severe enough. The equity buffers are tiny relative to the real estate portfolio. All contained in the above link.

The rate cut is unlikely to boost confidence other than loosen the noose around stretched borrowers’ necks.

Paying someone to quit smoking on your behalf

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Jo Nova has put together an excellent piece on the Labor government’s plan to buy carbon credits overseas to atone for our CO2 sins. Buying air we can’t breathe is essentially like paying someone else to quit smoking on our behalf. How do we benefit?!?

Labor leader Bill Shorten may argue that the cost of doing nothing on climate change is a “charlatan’s argument” but CM costed it yesterday. Our CO2 emissions are equivalent to 0.000016% of the global total. No matter what we do our impact is nothing. What does tokenism get us? Zero. Zip. Nada.

Jo Nova wrote,

The 35 billion dollars we will spend on these useless, fraud-prone certificates is $35 billion we are taking out of the Australian labor market, or not spending on medicine, books or holidays in Bali. Angus Taylor, Minister for Energy, has noticed that this means $10b less tax will be paid too, which means less money for hospitals and schools.

There’s nothing wrong with payments to foreigners for real goods and services. But carbon credits buy us 0.0001C of theoretical cooling we don’t need and won’t be able to measure 100 years from now. It’s the dumbest deal Australia has ever made. Fraudsters and bankers will love it.”

Carbon credit markets have had a sketchy past. Hackers broke into poorly protected government and corporate carbon registries and swindled €3.7mn. So the credits we might buy to virtue signal may end up being fraudulent.

Carbon trading is a complete scam. As Jo Nova added,

“Independent modelling suggests the 45% emissions target of the Labor party will cost at least $264bn and as high as $542bn by 2030. The Liberal Party will “only” waste  $50 – $80b.”

All for absolutely nothing. When the economy tanks our politicians can brag about achieving lower emissions targets quicker because our climate policies will have accelerated the death of industry.

Parker Hannifin order book sets worrying tone

Parker Hannifin is a fantastic barometer to measure the health of global industrials. It is a leader in pneumatics, pumps, hoses, hydraulics, drives, valves, filters, separators, refrigeration, seals etc. It’s products find their way into almost every conceivable part of the manufacturing chain. Think of it as a massive hardware store for corporations. From Caterpillar earthmovers to automation in food factories. When Parker announces orders, we get a good window on how the state of the economy is doing. The Q3 numbers released today showed:

• Orders decreased 4% for total Parker

• Orders decreased 6% in the Diversified Industrial North America businesses

• Orders decreased 4% in the Diversified Industrial International businesses

• Orders increased 2% in the Aerospace Systems Segment on a rolling 12-month average basis

Because aerospace is such a long lead time business, orders can buck trends. Having said that, orders for North America and International were soft.

Forget that Parker beat on EPS print. It’s guidance is the same. The orders are a worry. Q4 hurdles look tough.

To infinity and beyond?

Several days before Enron went belly up, Goldman Sachs released a research report on the company titled, “As good as it gets“. Grandiose statements are often precursors to calamity.

When Barrons publishes articles with “The bull market has no expiration date” start running for the hills. Sounds like Barrons has channeled Buzz Lightyear from Toy Story who said, “to infinity and beyond.”

What happened to Greenspan’s “irrational exuberance“?

Remember his godlike status was such that markets would hang on his every word forcing him to eventually utter,

I know you think you understand what you thought I said but I’m not sure you realize that what you heard is not what I meant!”

Maybe Barrons forgot that Buzz also said, “this isn’t flying! It’s falling with style.” Unfortunately there will be no grace when this bubble pops.

Thanks to SM007 for the flag.

$14bn shock for Shorten. Not $100m

Image result for bill shorten ev

Let’s face it, pre-election budget boasting is a beauty contest we can do without. Fanciful promises guarantee we will not end up in surplus. Shorten’s speech was loaded with mistakes. Let’s cut through some numbers.

The Coalition put forward the following on Tuesday.

What escaped many in the Frydenberg budget of Tuesday is that to fund the 16.8% jump in tax receipts on 2018/19, individual taxpayers will still see their pockets hit +18.4% in aggregate even after including the ‘generous’ rebates. Superannuation tax collections will jump 43% in 4 years time.

NDIS spending is targeted to be 92% higher by 2022/23 than last year. Medicare +24%, public hospital assistance to the states +21%, aged care services +27%. For all the celebrations of lowering pharmaceutical rebates for one wonder drug from $120,000 to $6.50, the reality is spending in this segment will fall 18.4% in total. The family tax benefit will squeak 4% higher in the next 4 years.

As written on Tuesday, the revenue projections of the government are unrealistic as we stare at a slowing world economy. German industrial production in March cratered to 44.1 and China’s auto sales continued a 7-month double-digit slump in February.

Analyzing the Labor response

Shorten claimed NDIS was cut A$1.6bn to get a surplus. Under Frydenberg’s budget, NDIS for 2019/20 will rise A$4.5bn. Out to 2022/23, it rises to over A$24bn.

The Opposition Leader also made reference to A$14bn in cuts to public schools. Note the funding to public schools on 2013/14 was A$4.8bn. In 2018/19 it was $7.7bn and projected in 2022/23 to be A$10.4bn. 

$200mn to renovate nursing campuses in Australia won’t achieve much. The John Curtin Medical Research School at the ANU cost $130mn alone.

Shorten made reference to bushfires being caused by climate change. Fire & Rescue NSW notes that 90% of fires are either deliberately or accidentally set. A Royal Commission after the horrible Black Saturday bushfires showed that policies which restricted backburning reduction targets were to blame for the larger spread of fires, not climate change. In 2013, Tasmania learned none of the lessons with similar policy restrictions preventing the Tasmanian Parks & Wildlife Service to complete more than 4% of all the 2.6m hectares it manages. The reef is not being damaged by climate change and floods and drought are no more frequent or severe than a century ago.

While climate alarmists will relish the prospect of 50% electric vehicles (EV) and cut emissions 45% by 2030 to save the planet, a few truths need to be considered:

1) our own Chief Scientist, Alan Finkel, has admitted that no matter what Australia does to mitigate global warming our impact will be zero. Naught. Nada. Putting emotion to one side, is there any point in spending $10s of billions to drive electricity prices?

2) South Australia and Victoria have already beta tested what having a higher percentage of renewable energy does or rather doesn’t do for sustainable and reliable baseload power. Both states have not only the highest energy prices in Australia but the world. These stats are backed up in Europe. The EU member states with a higher percentage of renewables have steeper electricity prices than those with less. These are facts.

3) Consumption patterns matterLast year Aussies bought only 2,200 EVs. In 2008, SUVs made up 19% of the new car sales mix. Today they make up 43%.
In 2008, c.50m total passengers were carried on Australian domestic flights to over 61m today. The IATA expects passengers flown will double over the current level by 2030. These are hardly the actions of people panicked about cataclysmic climate change. Or if they are, they expect others to economize on their behalf.

Qantas boasts having the largest carbon offset program in place yet only 2% of miles are paid for, meaning 98% aren’t. 

4) Global EV production capacity is around 2.1m units. While rising, it is still a minor blip on 79 million cars sold worldwide. Add to that, auto parts suppliers and car makers are reluctant to expand capacity too fast in a global auto market that is slowing rapidly.

Car sales in China have fallen for 7 straight months. In Feb 2019, sales fell 13.8% on the back of January’s -15% print.  Dec 2018 (-13%), Nov 2018 (-13.9%) & Oct 2018 (-11.7%) according to the Chinese Association of Automobile Manufacturers (CAAM). The US and Australian car markets are under pressure too. 

5) So haphazard is the drive for EV legislation that there are over 200 cities in Europe with different regulations. In the rush for cities to outdo one another this problem will only get worse. Getting two city councils to compromise is one thing but 200 or more across country lines?

Without consistent regulations, it is hard for makers to build EVs that can accommodate all the variance in laws without sharply boosting production costs. 

6) Fuel excise tax – at the moment, 5% of our tax revenue comes from the bowser. $25bn! Will Mr. Shorten happily give this up or do we expect when we’ve been forced to buy EVs that we will be stung with an electricity tax on our cars?

7) Norway is a poor example to benchmark against. It is 5% of our land mass, 1/5th our population and new car sales around 12% of Australia. According to BITRE, Australia has 877,561km of road network which is 9x larger than Norway.

Norway has around 8,000 chargers countrywide. Installation of fast chargers runs around A$60,000 per unit on top of the $100,000 preparation of each station for the high load 480V transformer setup to cope with the increased loads.

Norway state enterprise, Enova, said it would install fast chargers every 50km of 7,500km worth of main road/highway.

Australia has 234,820km of highways/main roads. Fast chargers at every 50km like the Norwegians would require a minimum of 4,700 charging stations across Australia. Norway commits to a minimum of 2 fast chargers and 2 standard chargers per station.

The problem is our plan for 570,000 cars per annum is 10x the number of EVs sold in Norway, requiring 10x the infrastructure.

While it is safe to assume that Norway’s stock of electric cars grows, our cumulative sales on Shorten’s plan would require far greater numbers. So let’s do the maths (note this doesn’t take into account the infrastructure issues of rural areas):

14,700 stations x $100,000 per station to = $1,470,000,000

4,700 stations x 20 fast chargers @ A$60,000 = $5,640,000,000 (rural)

4,700 stations x 20 slow chargers @ A$9,000 = $846,000,000 (rural)

10,000 stations x 5 fast chargers @ A$60,000 = $3,000,000,000 (urban)

570,000 home charging stations @ $5,500 per set = $3,135,000,000 (this is just for 2030)

Grand Total: A$14,091,000,000

Note that Shorten pledged $100m to EV charging stations around Australia to meet his goals. Even if he was to skimp on 2 fast and 2 slow chargers per stand, Aussies taxpayers will need to shell out $6.5bn. At least he could technically cover that with repealing $6bn in franking credits.

Norway’s privately run charging companies bill users at NOK2.50 (A$0.42c) per minute for fast charging. Norway’s electricity prices are around NOK 0.55 (A$0.05c) per kWh to households.  In South Australia, that price is 43c/kWh. So will Shorten subsidize an EV owner charging in Adelaide at the mark up a private retailer might charge? 

What about subsidies to EV buyers? If we go off Shorten’s assumptions of $3,400 per EV at 570,000 EVs per annum, the tax payer will fork out $1.94bn a year.

Will there be a cash-for-clunkers scheme?  If the plan is to drive internal combustion powertrains off the road, existing owners may not be emboldened with the decimation in the value of their existing cars. Let’s assume buyers are irrational and accept $3,000 per car (Gillard offered $2,000 back in 2010) trade-in under the scheme. That would amount to $1.73bn.

8) Making our own batteries! While it is true Australia is home to all of the relevant resources, sadly we do not have enough cobalt to make enough of them.

Australia is home to only 4% (5,100t) of the world’s cobalt. 60% of the world’s cobalt comes from DR Congo which has less than satisfactory labour laws surrounding children. If we want cheap EVs, we have to bear that cross of sacrificing children to save the planet. It can’t be done any other way.

Li-ion batteries consume around 42% of the globe’s cobalt supplies. Cars are 40% of that. The rest being computers, mobile phones, etc.

9) Automakers have set up their own battery capacity to supply internal production. Given our terrible history in automotives, we should not expect them to line up to buy our batteries.

Nissan spent around A$770m on a battery plant in Sunderland. Panasonic plowed $2.8bn into the battery plant that supplies Tesla.

10) Australia has no real homegrown industrial scale EV battery technology. If we bought in a technical license, that will only make our production costs prohibitive on a global scale. Our high wage costs would add to the improbability of it being a sensible venture.

All in, Shorten’s EV plans could cost Australians well over $20bn with c.$4bn in subsidies ongoing.

11) Green jobs – according to the ABS, jobs in the renewable sector have fallen from the peak of 19,000 in 2011/12 to 14,920 in 2016/17. The upshot is that green jobs in the renewable sector are not sustainable.

In short, Mr. Shorten’s budget reply was extremely thin on detail. Especially with respect to climate change. The LNP has plenty of ammunition to prosecute the case on his wild costing inaccuracies (as outlined above) yet will they have the gumption to fight on those lines. Saving the planet is one thing.

Loading a stretched grid with EVs and increasing the proportion of less reliable power sources looks like a recipe for disaster. We need only look at consumption patterns to get a true sense of how ‘woke’ people when it comes to global warming. South Australians and Victorians are already living the nightmare of renewables.

This election is about one thing – individual pocketbooks. The electorate needs working solutions, not electric dreams.

Debunking Modern Monetary Theory (MMT)

Corp Profit

While the Dow & S&P500 indices grind back higher thanks to the US Fed chickening out on a rate rise in because the economy can’t handle it, many people still overlook the fact that core US profitability has tracked sideways since 2012. 6 years of next to nada. Sure one can boost profits by adding back unrealistic  “inventory adjustments” but the reality is plain and simple. If you search for inventory adjusted earnings they’re still marginally growing but there in lies the point. Real profits aren’t.

Record buybacks fueled by cheap debt is the cause for ‘flattered’ earnings. No growth in E  just falls in S.  EPS growth can look spectacular if you ignore 50% of US corporates have BBB credit ratings or worse.

The latest lexicon is “modern monetary theory” (MMT). The idea that the central banks just manipulate markets in perpetuity. Austerity is no longer needed. Central banks print money and extinguish debts the same way. Seriously why bother with taxation? The question is if it is meant to be a sure winner, why aren’t we all living in 5 bedroom mansions with a Mercedes Benz and a Porsche in the driveway? Why not a helicopter?

Logically if central banks can buy our way out of this debt ridden hellhole, why is growth so anemic? Why is European GDP being cut back? Why is German industrial production at its worst level since 2009? Why does Salvini want to jail the Italian central bankers? Why does the Yellow Vest movement in France carry on for its 15th consecutive week? If MMT works why would the EU care if the UK leaves with No Deal? MMT can solve everything for unelected bureaucrats in theory. Even £39bn can be printed

Last year the US Fed announced it had stopped reporting its balance sheet activity. In 2006 it stopped reporting M3 money supply. Curious timing when inside 2 years the world was flung into the worst recession since 1929. Transparency is now a danger for authorities.

The question boils down to one of basic sanity. All assets are priced relative to others. It’s why an identical house with a view in a nice neighborhood trades at a relatively higher price than one in a outer suburban back lot. The market attributes extra value even if the actual dwelling is a carbon copy. It is why currencies in banana republics trade by appointment and inflation remains astronomical. Investors don’t trust their ability to repay debts unless given extremely favorable terms. Market forces at work.

To put the shoe on the other foot, if all countries adopted MMT why bother buying bonds for retirement? The interest is merely backed by a printing press. Best consume 100% and save zero. The government has moved beyond moral hazard and hopes no one will notice

Take a look at Japan. It has $10 trillion in outstanding debt which is 2x its economy. The Bank of Japan owns 60% of that paper bought through a printing press. The market for JGBs is so manipulated that several Japanese mega banks have handed back their trading licenses because it has become worthless to be on that exchange. The BoJ thinks it can make whatever prices it chooses. The ultimate aim is to convert all of the outstanding debt into a zero coupon perpetual bond with a minor ‘administration’ fee in order to assign some value to it. To the layman, a zero coupon perpetual means you get no interest on the money you lend and the borrower is technically never required to pay the borrowed amount back. Such loans are made by parents to their children, not central banks to politicians (although one could be forgiven to think their behaviour is child like).

Yet the backdrop remains the same. Consumers are tapped out in many countries. Lulled by a low interest rates forever mentality, even minute rises to stem inflation (real is different to reported) hurt. My credit card company constantly sends emails to offer to transfer balances at 9% as opposed to the 20% they can charge if I don’t pay in full.

APRA recently relented on interest only mortgages after demanding it be tightened to prevent a housing bubble getting bigger. Now mortgage holders hope the RBA cuts rates to ease their pain.

Like most new fads, MMT can’t remove the ultimate dilemma that Milton Friedman told us half a century ago. Inflation is always and everywhere a monetary phenomenon. One can’t hope that putting money in the hands of everyone can be sustainable.

The one lesson that we should have learnt from GFC was that living at the expense of the future has rapidly diminishing returns. All we did was double down on that stupidity.

Do we think it normal that Sydney house prices  trade at levels the Japanese property bubble did in the late 1980s? Do we realize that we hold as much mortgage debt than Japanese banks did for a population 5x our size? Do we think that our banks are adequately stress tested? When an economy like ours has avoided recession for a quarter century, it builds complacency.

MMT is nothing more than a figment of the imagination. It preys on the idea that we won’t notice if we can’t see it. Unfortunately behind the scenes, the real economy can’t sustain the distortions. The French make the best modern day example of  a growing number of Main Streeters struggling  to make ends meet.

Central banks monkeying around with MMT smacks of all the same hubris of the past. It is experimental at best and reckless at worst. Markets can be manipulated for as long as confidence can be sustained. Lose the market’s trust and all of a sudden no amount of modern day jargon  can overcome what economists have known for millennia.

If you flood a global economy with cash at 5x the rate the economy can feasibly grow then it will ultimately require bigger and bigger hits to get the same bang before the jig is up. It’s a Ponzi scheme. Bernie Madoff got 120 years jail. Why not the central bankers?

So what is the best asset out there? Gold. It can’t be printed. It requires effort to discover it and dig it out of the ground. Of course the barbouros relic deserves to be consigned to the dustbin of history. If that were so Fort Knox might as well leave the gate open. The more it is hated only makes this contrarian investor want it more.

EU – 1.3m abortions, 5m births p.a.

DivMarr

Eurostat statistics on abortion reveal that Germany, France, UK, Spain and Italy alone terminate a combined 760,000 fetuses per annum. Across the EU-28 there are 1.25mn terminations. Without getting into a debate on abortion rights, the pure statistical number points to 20.4% of fetuses never make it out of the womb alive. Every. Single. Year. At that rate over 10 years that is 12.5 mn children that could have added to EU population sustainability do not occur but the EU seems to think embarking on mass migration is the only solution to plug the gap. Is it? Ironically child support is one area the EU is happy to cede control to individual Member States.

The fertility rate across the EU-28 is now 1.58 children per woman, flat for the last decade and down from 2.9 in 1964. Demographers suggest that a fertility rate of 2.1 is required in developed world economies to maintain a constant population (in the absence of any migration). The number of live births in the EU-28 peaked in 1964 at 7.8 million. In 2017 this had fallen to 5 million. There was a brief period (2003-2008) when live births in the EU-28 started to rise again, returning to 5.5 million by 2008 but the GFC sent it down again – as economic hardship tends to cause a decrease in births. So are economic incentives too low to cause a rebound?

France has the best incentives for children and the highest birth rate inside the EU at 2.0 up from 1.7 in the 1990s. Germany is around 1.4 drifting from 1.6 in the 1990s. The lives for child rearing French are eased by cheap health care, inexpensive preschools – for infants as young as 6 months old – subsidized at-home care and generous maternity leave. Mothers with three children can take a year off of work – and receive a monthly paycheck of up to €1,000 from the government to stay home. Families get subsidized public transportation and rail travel and holiday vouchers.

In order to stop the declining working population over time, imagine if Europe hypothetically put the onus back on consenting couples to take responsibility for their actions and makes abortions harder to access without compulsory consultation over options? Why not graphically show the entire process to get some sense of reality for both parties? You can gross yourself on this link.

Perhaps, in today’s electronic world, automatically deducting child support from fathers that run from responsibility might make sense? Why should the state pay for others’ lack of accountability? Even if the child is placed in foster care, why not wire child support to foster parents indirectly via the Ministry in charge of its administration? The population crisis is not going away in Europe. Why not provide more incentives to married/same-household couples?

Mathematically speaking the numbers are huge. Imagine if the million-plus fetuses every year had a vote to be raised with foster parents as opposed to being terminated, what they would choose? Consider the €23bn Merkel has spent on mainly economic migrants in the last 2 years being put toward preventing 200,000 abortions in Germany over that period? €115,000 to avert each one might have been better spent. That is a huge sum of money period.

CM is not advocating control over the womb but surely transparency in policy over individual responsibility is not a bad thing with respect to many issues, not just abortion. What level of economic incentives are required to prevent some couples/women choosing to terminate? Surely that plays a part in deciding to terminate. Consultation services with respect to the subject don’t seem too commonplace or at least structured in such a way as to prevent them.

According to Eurostat, since 1964 the divorce rate in EU-28 equivalents has doubled and the marriage rate has halved. For every eight marriages in 1964 there was one divorce, now there is one divorce for every two marriages.

The proportion of births outside of marriage now stands at 40%, from 27% in 2000 to less than 7% in 1964. 8.8 % of the EU-28 population aged 20+ lived in a consensual union (de-facto). In Japan the number of births out of wedlock is 25% according to the MHLW. The dynamics of the traditional nuclear family are fading.

51% of the Swedish population is now single household. 51%! While some is attributed to an aging population, 19 of the EU-28 members has a single household ratio of over 30%. 12 over 35%. By way of comparison, Japan’s single household ratio stands at 34.6% from 27.6% in 2000.

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To further analyse the new ways of living together and to complement the legal aspect, statistics on consensual unions, which take into account those with a ‘marriage-like’ relationship with each other, and are not married to or in a registered partnership with each other, can also be analysed.  Sweden (18.3 %) has the highest rate followed by Estonia (16.4 %), France (14.3 %) and the lowest in Greece (1.7 %), Poland (2.1 %), Malta (2.5 %) and Croatia (2.9 %).

Is employment a factor?  It is mixed. Eurostat reported in Germany, the fertility of non-employed women has increased and that of employed women decreased, while in Spain, the opposite occurred; in Greece, the total fertility rate (TFR) of non employed women fell below that of employed women, changing from a positive differential of about 0.2 average live births.

Is education a factor? Apart from Nordic countries (Denmark, Finland and Norway), Portugal and Malta, in general, women with lower education had higher TFR between 2007 and 2011. Eurostat state the fertility of women across the EU over the same period with a medium level of education dropped by about 9%, while the decrease for women with high or low education was less significant.

Eurostat argues that economic recessions have correlation to falling child birth rates. Apart from the direct impact of economic crises at an individual level, the economic uncertainty that spreads during periods of hardship seem to influence fertility. From this point of view Eurostat believes the duration of a crisis may play an important role and, the duration and the depth of the current recession are unprecedented in some countries. The agency states,

The expected relationship is that negative changes in GDP correspond to negative changes in the TFR, possibly with some delay, thus showing a high positive correlation at particular lags. The correlation with the TFR is relevant in Spain and Latvia without any lag; in Bulgaria, Poland and Romania with one year of lag; and in the Czech Republic, Denmark, Estonia, Greece, the Netherlands, Finland, Sweden, Iceland, Norway and Croatia with two years of lag. Taking the overall average across countries, a change in GDP is mostly positively correlated with a change in the TFR within about 19 months.”

Do we cynically argue that stagnant child birth rates aren’t just a factor of societal changes? Perhaps a truer reflection on the higher levels of poverty in the EU since GFC and the harsh realities for a growing number of people behind the growing levels of populism who are suffering greater economic hardship than statisticians are presenting to the political class? Hard decisions must be made before they are made by external factors.