Category Archives: Business

The RBA has not been rendered impotent by the Big Four (updated)

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The bank debate now seems officially out of control. Increasingly foolish notions about banking are being served up day after day. One example: the developing meme that claims the banks have decided they will no longer be bound by official interest rate policy.

One morning last week I listened to ABC’s Melbourne local radio presenter, Jon Faine, beat up the banking industry’s official spokesman, Steven Münchenberg, on radio (audio here). Münchenberg could well be Australia’s King Of Making Difficult Arguments Sound Reasonable, but Faine is fast turning into Australia’s One And Only Left-Wing Shock-Jock, and the whole thing quickly became pretty awful to listen to. Its worst awfulness was that Faine kept insisting that the banks were now rendering government and Reserve Bank policy impotent. By deciding to react to rising overseas funding costs by raising their rates, he claimed, the banks were saying: “we will decide what’s best for the Australian economy; we won’t let the Reserve Bank decide what’s best for the Australian economy”. “It nobbles the government’s main strategy for trying to in some ways address inflation and therefore control what goes on in parts of Australia”s economic activity,” Faine declared, in a tone that suggested he knew exactly what he was talking about.

If Faine were right, this would be a huge problem for macroeconomic management in Australia. Thankfully, it’s populist blather. As a couple of Faine’s phrases disclose, he has little idea about how or why the Reserve Bank conducts monetary policy. If Faine really believes it … Continue reading →

Seeking a viable pre-retirement investment strategy …

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Twitter even allows you to convey complex if slightly tongue-in-cheek ideas, but possibly only to people who bother to follow the links:

11 hours ago

CDU Law School
CDUlawschoolCDU Law School

1/2 Houses not o/priced tiny.cc/iwt9a but will fall over time due boomer retirement tiny.cc/2sw9b Hmmm…

CDUlawschoolCDU Law School

2/2 Commercial property through floor & prone to bubbles tiny.cc/df8ug super r/s. Shoe box under bed only answer…

 

Hooray for the bullshit-callers

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ASIC, one of our main financial markets regulators, has today declared that short-selling is a “legitimate business in the market”. Good on them. Markets need short-sellers, far more than most people realise.

The reason is that financial markets are markets in ideas – ideas about what will be valued in the future. And so they need people who are able, every so often, to loudly yell “Bullshit!”

It was short-seller James Chanos who called “bullshit” on Enron in 2001. And it was short-sellers who identified the problems with the US mortgage market a few years later, a story well told in Michael Lewis’s book “The Big Short”. In both cases, the short-sellers explained why the rest of the market was wrongly over-valuing those investments.

If only there were more such people, Enron and the US mortgage market might both have failed earlier and done far less damage.

In fact, if financial markets are to operate calmly rather than in the boom-and-bust mode that does so much damage, short-sellers should be encouraged. In the absence of short-sellers, markets will be full of people with an incentive to overstate the merits of particular investments.

Calls to limit short-selling featured prominently in the 2008 crisis, but they go back to at least the 1600s. People making money out of selling over-valued investments don’t like seeing their tall stories exposed. Their objections tend to be effective, because not enough people value the role the short-sellers play.

Bullshit in financial markets is too dangerous to be left alone. People need to call it early and often. We need more short-selling, not less.

Footnote: The only reason I’ve posted this is that it seems to be an extreme minority opinion. Almost everyone I talk to sees short-selling as sinister. Does anyone know why?

The winner’s curse, power station edition

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Ian Verrender in the Sydney Morning Herald recently wrote of Victoria’s two oldest power stations that they were bought by their owners “when the issue of climate change was well known”.  Though he made that remark in the middle of a longer article focused on different issues, the point is important. The winners of Australia’s power station privatisation auctions all knew they might someday face a carbon price. And the losers knew it too. It’s one of the reasons they lost.

Since some appear to doubt this – for instance, commenter Patrick in this Ken Parish post – it should be made clear.

Patrick argued: “Anyone in 1996 who seriously envisaged carbon trading/caps/etc would have been considered delusional. Can you remember how long ago 1996 was?”

In fact, 1996 was not that long ago in the climate change debate, which is more than 30 years old. Dr Sinclair was teaching my Year 10 science class about the greenhouse effect back in 1979; the first substantial federal political discussion of a carbon tax occurred in 1990. The prospect of a carbon tax or trading scheme was very real by the time the Victorian electricity assets came up for sale in the mid-1990s. And the prospect of a carbon tax was particularly real for the community of people trying to figure out what a brown coal power station was worth. The conversations I had with keen potential buyers (or more often, their investment bankers) at the time could be summed up like this: “Carbon pricing will come. One day. But there’s plenty of money to be made before that happens.”

Now step back a bit and take a careful look at the potential buyers who made it to the final stages of the Victorian power auction. They were by definition the biggest optimists about the industry’s prospects. They could see the greatest opportunities, and had the greatest myopia about the risks. Fifteen years later, what I remember most is their intense optimism. In contrast, people who were worried about carbon pricing couldn’t justify the sort of prices that were being talked about, kept their wallets in their pockets, and didn’t even bother flying to Melbourne. Continue reading →

Privatisation of Medibank Private

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One needs a full cost-benefit analysis (including all externalities such as secondary effects n health premiums) to form an intelligent view on whether to sell Medibank Private.

In the meantime, it makes no sense to say that reducing the level of government debt quickly is essential for the future prosperity of all Australians, as Joe Hockey argues. The level of debt is not an appropriate measure of balanced sheet strength (public or private). Rather the focus should be on government net worth (assets minus liabilities) and earning power of the assets – the dividends earned relative to public debt interest.

Dear Woolworths

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Stop trying to make me use your crappy “self serve” checkouts.

I noticed you installed them a few months back. A few weeks ago, out of curiousity, I tried it.

It was just that: a curiousity. My experience went as follows:

  1. I was reminded of my first job as a checkout operator, which I utterly detested. It was with your company, actually, at the Big W in Darwin. Your managers there were incompetent and mean-spirited. I guess they got promoted to head office. I do not see doing a job I hate for free as progress.
  2. I am out of practice. A normal checkout operator is much faster and has a good idea of efficiently packing the bags.
  3. You still needed someone to verify my credit card signature. This took longer than it would at a normal checkout. No, I will not use a credit card PIN. I happen to like the additional legal protection the signature gives me.

So basically you want me to provide free labour, waste more of my own time and get crappy service from a grumpy curmudgeon (me). No bloody thanks.

It’s obvious you’re really keen on these machines. Today you closed the express checkouts so that I would either have to queue up with the trolleys or go through your stupid, rubbish, useless, dodgy, crappy, dumb, time-wasting, moronic, transparently grasping self-serve aisles. I chose to queue with the trolleys.

I noticed today that your competitors at Coles haven’t installed these machines. Indeed their express checkouts were fully staffed. And so, from now on, I will refuse to purchase my groceries at Woolies. I will be buying my petrol at Shell. I will be avoiding Dan Murphy’s and Dick Smith.

You, the Board and Executives of Woolworths, are a pack of wankers. I hope to see you resigning or being sacked with no bonuses. Thereafter I will look forward to the news that you are all rotting in a special hell where you are required to torture yourselves.

Yours Sincerely,

An ex-customer.