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CM on Sky

https://www.skynews.com.au/details/_6102427118001

CM appeared on Sky News to discuss the situation with our banks, the potential risks from the recommendations of the Hayne Royal Commission and the issue of mortgage stress.

Qantas’ 2050 zero-emissions nonsense

Woke? The only way Qantas can cut net CO2 emissions to zero by 2050 is to cease operations. In what world does CEO Alan Joyce AC think he is somehow ahead of the aerospace technology curve? In any event, it’s highly unlikely he’ll be CEO in 2050.

Joyce said the Qantas and Jetstar will cap net emissions at their current level from next year, cutting it gradually over the next 30 years. A big pronouncement but by sheer virtue of upgrading an ageing fleet (phasing out 747 Jumbos) the efficiency targets are a walk in the park, not some tremendous virtuous milestone. Burning less fuel is good for the airline’s bottom line. Lower fuel burn means fewer emissions.

The ultimate irony is that aircraft manufacturers are doing their utmost to “carbonize” the fuselage and wings in order to save weight (Boeing 787, 777X, A350, A330). Even the next generation engines are featuring extensive use of carbon derivatives because of the fuel efficiency benefits that are created by them. Put simply, even in 2050 carbon and fossil fuel derivatives will be major source materials for future planes. Maybe in Joyce’s mind, that won’t count.

Aerospace technology is utterly amazing. To think that a 650t Airbus A380 can take off, fly 12 hours and land in complete comfort. Or that one fan blade on a 777 jet engine can theoretically suspend a locomotive from it without snapping such is the tensile strength. Now we can fly 19 hours nonstop. 30 years ago, half that distance was achievable.

Bio-fuels exist. However, if the airports across the globe don’t provide bio-fuels then his zero emissions pledge is shot. According to the IEA, aviation biofuel (aka sustainable aviation fuel (SAF)) is forecast to be 20% of all aviation fuel by 2040, from 5% in 2025.

The IEA stated,

SAF are currently more expensive than jet fuel, and this cost premium is a key barrier to their wider use. Fuel cost is the single largest overhead expense for airlines, accounting for 22% of direct costs on average, and covering a significant cost premium to utilise aviation biofuels is challenging…Subsidising the consumption of SAF envisaged in the Sustainable Development Scenario (SDS) in 2025, around 5% of total aviation jet fuel demand, would require about $6.5 billion of subsidy (based on closing a cost premium of USD 0.35 litre between HEFA-SPK and fossil jet kerosene at USD 70/bbl oil prices).

For commercial aviation to be a success, cost is always a factor. Great advancements like the Concorde died because of sustainable economics, not because of the accident. The vaunted Boeing Sonic Cruiser died at the concept stage because airlines couldn’t accept the commercial economics afforded by those higher speeds. So we have been stuck at 900km/h for decades and for decades to come.

Yes, there have been talks of electrically-powered planes (several developmental prototypes exist) but the technology to make them fly 10,000km at 900km/h with 300+ passengers on board won’t be met by 2050. Airbus intends to

make the technology available to fly a 100-passenger aircraft based on electric and hybrid-electric technology within the 2030s timeframe.”

Don’t buy into the malarkey that 10% of Qantas passengers carbon offset their travel. If one does the math, less than 3% of miles are actually covered by such virtue signalling. Either way, more than 90% don’t care to pay for their carbon offsets.

Bloomberg confirms the bleeding obvious

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Nothing like a 77-yo former New York Mayor Mike Bloomberg coming off the top buckle and body-slamming the current list of Democrat primary candidates Hulk Hogan style. So hopeless is the current field running that Bloomberg’s long-time advisor, Howard Wolfson said,

Mike is increasingly concerned that the current field of candidates is not well-positioned” to defeat Donald Trump.

The question remains whether Bloomberg actually runs. If he doesn’t, he has literally thrown the present lot straight under a bus. Precious thanks to their campaigns. No doubt he will see how the reaction is before committing to the run. He will be 78 if he runs.

Yet, what record did Bloomberg leave behind in NY? Recall current Mayor Bill DeBlasio heaped scorn on Bloomberg for turning the city into one for the haves and the have nots. The argument that when he left office in 2013, 31% of the residents spent more than 50% on rent. That was a higher figure than when he took office.

One thing to bank on if Bloomberg wins the primary and challenges in November 2020, make sure you back up the truck on renewables investment when the polls all point to him doing a Hillary repeat (i.e. coronation) and sell just before the election result because it will be a fully priced sector before that date.

Mike Bloomberg is a climate alarmist of the first order so he’d likely re-sign the Paris Accord. Note that his own company has a dedicated Bloomberg NEF site for all things in clean energy.

ASX listed stocks linked to the renewable space include,

Infigen Energy (IFN) – Wind

Great Cell Solar (DYE) – Solar

Quantum Energy (QTM) – Solar

Solco (SOO) – Solar

M Power Group (MPR) – Solar

Carnegie Clean Energy (CWE) – Wave

ReNu Energy (RNE) – Biogas, Solar

Petratherm (PTR) – Geothermal

Black Rock Mining (BKT) – Graphite used in energy storage

Pacific Energy (PEA) – Biogas

Alterra Ltd (1AG) – Sustainable agriculture

ABC MD issues an apology with a feather duster

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Good to see it took the ABC three days to come up with this response to the diabolically toxic Q&A program which hosted an expletive-laden show with a bunch of feminists. Pathetic. The producer will be hit over the knuckles with a feather duster.

Monday night’s episode of Q&A was presented in conjunction with The Wheeler Centre’s feminist ideas festival, ‘Broadside’. The intention of the program was to present challenging ideas from high-profile feminists whose expertise ranges across ageism, disability, Indigenous and domestic violence issues.

The ABC acknowledges that the program was provocative in regard to the language used and some of the views presented.

Q&A has always sought to tackle difficult issues and present challenging and thought-provoking content. However, I can understand why some viewers found elements of this episode confronting or offensive.

We have received audience complaints about the program, are assessing the concerns raised and will investigate whether the program met the ABC’s editorial standards.

Huh? Investigate whether it met editorial standards? Just read the transcript,

Some choice moments that have so much balance that even Mary Whitehouse would have accepted the content, are presented here,

MONA ELTAHAWY

“Well, you’re asking the person here who travels the world to say fuck the patriarchy, so I think that what we have to do is start seriously talking about dismantling patriarchy. And when I talk about patriarchy, I’m talking about a white-supremacist, capitalist, imperialist patriarchy…

I go online exactly to tell people to fuck off when they attack me, and I’m very well-known for it...

FRAN KELLY

And at this point, I will utter a language warning on the program, and remind our guests.

MONA ELTAHAWY

No, honestly, it’s… You know, this idea of respectability, this idea of civility, this idea of unity, all of these words, decorum, who invented those words? Those words were invented by white men for the benefit of other white men in systems and institutions that were always designed to be for white men. And they weren’t designed for women like you and me and so many others. Like you said, people of colour and gender-diverse people. They never imagined us in those spaces, and then we show up and we just ruin it for them….

And so those who abide by the system – and Barack Obama was part of the system and remains part of the system… I also disagree with his wife when she says, “When they go low, we go high.” No I fucking don’t. If you go low I’m going to come for you. So, no, I do not have the luxury or the privilege to sit there and be civil with people who do not acknowledge my full humanity. I refuse. Number one…

…So, for those who say, “Be civil,” for those who say, “Be polite,” I have an entire chapter on the political importance of profanity, and I remind them of a Ugandan feminist called Dr Stella Nyanzi who is currently in prison in Uganda because she wrote a poem on Facebook wishing that the mother of the dictator of her country had poisoned him, that her birth canal had poisoned him during birth. And when she was taken to court and doing her sentencing, she was video-taped in, because she’s known for her profanity, she stood there in the video, she took off her top, she jiggled her breasts and she said, “Fuck you, fuck you, fuck you!” In court!“…

…Nothing. For me, as a feminist the most important thing is to destroy patriarchy. And all of this talk about how, if you talk about violence, you’re just becoming like the men. So, your question is a really important one but I’m going to answer it with another question. How long must we wait for men and boys to stop murdering us, to stop beating us and to stop raping us? How many rapists must we kill? Not the state, because I disagree with the death penalty and I want to get rid of incarceration and I’m with you on the police. So I want women themselves… As a woman I’m asking, how many rapists must we kill until men stop raping us?

We all know what will happen. Assurances by the ABC it will never happen again until the next time which won’t be that far away. We were promised that when Q&A got in trouble over giving a platform to a man who pleaded guilty to threatening to kill ASIO and DFAT officers, Zaky Mallah who went on a rant against then conservative MP Steve Ciobo. Who could forget the “@AbbottLovesAnal” hashtag the show gladly allowed during the former PM’s term? A mistake, honest. Just like Triple J’s guide to blowjobs.

The ABC should be defunded and forced into the TVNZ business model of having to provide content customers are willing to look at and advertisers willing to support. If the organization is so confident it has an audience for its content, it should put its confidence where its mouth is.

If you want to look at why the ABC doesn’t need more money, look at the staff costs to income ratio. Despite plateauing between 2008 & 2011 it quickly exploded. It now sits at 46% of the government handout generated. That is $524mn on staff costs per year and rising. 4,939 staff grace the ABC. Funding per employee is $232,000. A decade ago it was $232,700. Is that what the management target for hiring? Give the ABC $2bn and presumably, it will have employment costs of $1bn.

Channel 9 must fight hard for every advertising penny but still manages a 29.1% staff cost to revenue ratio. $380m in staff costs on $1.3bn revenue. 3,310 employees convert to $392,750 in revenue per staff member.

Sevenwest Media raked in $1.62bn in revenue on staff costs of $395mn or 24%. The same cutthroat world of earning a living instead of feeling entitled to one. Seven West has 4,528 staff meaning it generates $357,800 in revenue per employee.

Maybe ABC should be forced to channel the New Zealand state broadcaster, TVNZ. After all ABC fawns over NZ PM Jacinda Ardern, all the time and she hasn’t demanded the state take TVNZ back to a taxpayer-funded model. It gets $310m of its $318m purse from advertising. It’s staff costs excluding capitalizing into programs is $72m which converts to 23% staff cost/revenues. They do with 642 FT employees. Revenue/employee is $495,000. It paid a dividend back to the government of $3.7m. i.e. it is a revenue-generating asset.

In 2007, TVNZ had $339m in revenue. It employed 1,023 people. Therefore revenue per employee was $331,380. So in a decade, TVNZ efficiency improved almost 50%. A 6% cut to revenue on 63% of the staff.

Instead of the long term ratings slide at the ABC across metro and regional Australia, TVNZ’s figures keep improving. Last year, TVNZ had a 43.2% all day audience up 1.3%.

Comparing 2017/18 and 2015/16 at the ABC we see that TV audience reach for metro fell from 55.2% to 49.7% and regional slumped from 60.3% to 54.0%. If we go back to 2007/8 the figures were 60.1% and 62.4% respectively. For the 2017/18 period, the ABC targets 50% reach. Hardly a stretch.

ABC clearly has no place receiving funding with content like this. As it stands, the ABC isn’t out of control. It is in full command of its content. The Minister for Communications has lost control and continues to let the broadcaster do as it pleases – even allow shows with Aboriginal actresses pretending to defecate on white people or kids programs that take a stab at white privilege. The ABC is so left-leaning it would make Stalin’s Pravda blush for being too conservative.

The ultimate irony is that things are so bad at the ABC that the latest Annual Report revealed a survey that showed staff engagement at 46%, 6 points lower than the previous survey which placed the organization in the bottom quartile of ALL Australian & NZ businesses. It is so bad that many staff complained that poor performers are not dealt with but tolerated.

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.

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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.

Daft way to run a business

Why the celebration? CM is all for equal opportunity. Just not equal outcome. As CM said at the time of the US soccer team’s whinging over equal pay, if Megan Rapinoe and team make more revenues and broadcasting rights, pay them “more” than their male counterparts, not the same. Who could forget the almost North Korean level chants of “equal pay” during the Women’s World Cup this year?

How is equal pay remotely sensible for the Football Federation Australia’s (FFA) women’s team, the Matildas? Surely within the women’s team, there are proper stars and average players. Will those pay rates be equalised? So that the women’s soccer supremo that scores the most goals and achieves the highest number of tackles gets paid the same as the forward who can’t score and can’t defend to save herself? Who do the fans want to see? Who powers the turnstiles?

Look to other sports. Lewis Hamilton in F1 gets paid multiples more than fellow competitor, Romain Grosjean. Same job, Same conditions. Same everything. Yet, the 6x world champion gets factor fold levels of advertising dollars, hence he also banks that in his contract. Marc Marquez, the 8x world champion in MotoGP gets paid a fortune. Whereas Tito Rabat does not. Maybe because he is leading most of the time that the race coverage is focused at the front, rather than the back. It is all based on performance and TV exposure. Michael Jordan, Shaq, A-Rod and so on. The cream always gets paid what the market will bear. Some might call the $100mn that Ronaldo gets paid at Real Madrid as excessive but the club wouldn’t pay it if his magic didn’t cover the bills.

Ronaldo has 78 million Twitter followers vs his Real Madrid captain, Sergio Ramos who has a pitiful 16m. Surprise, surprise. Ronaldo makes more. Rapinoe has 899,700 followers. Should she get paid the same as Ronaldo? US men’s soccer team player Landon Donovan has 1.4m followers. Does the USSF see that the box office is sadly still skewed to the men’s game?

Once again, 260m watched the Women’s Soccer World Cup final in 2019. The 2018 men’s World Cup in Russia saw 1.12bn tune in for the final. 4.3x the audience.

To quote the Football Federation of Australia’s annual report of 2018,

Sydney FC had the honour of hosting the Westfield W-League 2018 Grand Final against
Melbourne City FC at Allianz Stadium. In front of a vocal crowd of 6,025.

Six thousand. Rugby Australia CEO Raelene Castle can feel a bit better about the abysmal attendance rugby has at home for the domestic series.

The men’s Melbourne Victory vs Newcastle Jets soccer final in 2018 saw 29,410 fans attend that match. 5x that of the women’s final.

Same for the Matildas. They achieved a peak crowd attendance of 16,829. The men’s Socceroo team saw 77,060 supporters at ANZ Stadium on 15 November 2018. 4.6x more fans watched the men’s national team over the women’s. It is nothing to do with gender. Fans prefer the men’s game. Because of that, sponsors are willing to pay for greater exposure.

This is not to denigrate the Matildas. It is to point out that this constant pandering to “equal pay” is a disastrous way to win over fans. Because if the right talent isn’t paid accordingly, an overseas league will quickly bid them away and hollow out the local market. Attendance will drop and the revenues and sponsorship dollars will dry up with it. Doesn’t require rocket science.

Still, get woke, go broke. The Wallabies are proof is in the pudding for management that focuses on inclusivity and diversity instead of accepting reality of what actually pays the bills – the fans. The financials continue to deteriorate.

By all means, if the Matildas smash the Socceroos for revenue, viewership and broadcasting rights then by all mean pay them more, not the same. Welcome to the Democratic Peoples Republic of Australia in 2019 where virtue signalling means more than merit.

Just watch the mainstream media gush at how progressive the FFA is before realising in years to come just how regressive it eventually becomes for the game and how could it have happened?

How to clean up in the adult diaper boom

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Zerohedge is reporting on the large market scope for adult diapers.  One-fifth of the world’s population will be of retirement age by 2070. The beauty for the diaper manufacturers is that adult diapers have 4x the margins of infant diapers despite exactly the same ingredients and production techniques. Asia is ageing fast, especially China and Japan. Incontinence affects 40% of people over 65yo so the market dynamics have rock solid foundations, even if wearers don’t.

Unicharm and P&G are two monsters in the diaper game. But who makes the equipment that makes them?

In a former life as an equity analyst, CM covered a business called Zuiko Corp (6279 JP) which made the machines that make the diapers. It is a captive business. All machines are built to spec. 50 metres long and weighing 20 tonnes. 850 diapers per minute.

The company has the largest share of the market in Asia. It used to be around 80% when CM covered the company and supply chains are very sticky. Zuiko is owned c.10% by Unicharm in Japan.

Zuiko has had quite patchy performance, despite the wonderful structural backdrop. Private equity must look to a buyout. The company has pretty poor investor relations and shareholder communications. The shares are in the dumps, at 7-year lows. It is quite hard to find a business that has such favourable, defensive growth characteristics which is in need of proper leadership.

Zuiko has effectively no debt, ¥10bn  (c. US$90million) in cash which represents around 48% of its market cap. Looks like one for the SMSF.