View From The Couch - 26/Nov/2015

The Old Companies Rule

For some time it's been apparent that Australia's industrial mix is getting a little ossified. Now that the mining boom is finishing and the capital expenditures that direction is shrinking, the non-mining sectors are supposed to be taking off except today we find that the last quarter saw drop in capex by 9.2%. That's a sheer drop off a cliff, which means the rest of the non-mining industries have basically said the future is just not all that interesting. And why would they, with interest rates so low? That has got to be the big indicator that the future is not that interesting to investors.

Anyway, this thing caught my eye:

Corporate Australia is pretty old. Certainly our biggest companies are, like CBA (which is actually 103 years old).

Take a look at the ten biggest companies on the ASX 200 index:

That, on its own doesn't say much except here's where America is at:

The picture you get is a greater mix of companies leading the pack. More importantly you can see the corporate engine of America is steadily moving towards high tech and higher expertise. The stark inertness of the Australian economy demonstrates that at the highest levels of corporate governance, they're really not interested in innovation or change; they're interested in oligopolistic rent-seeking. And because the top end of the town is essentially turgid and unimaginative an staid, the rest of the business sector takes its cues and behaves essentially the same way. 

There is a big discussion to be hd as to just how Australia should go, but history suggests even mounting the question is bound to be shot down by the oligopolists at the opt end of town. In the great reforms of the 80s, Australia shed its primary industry dominance and traded it in for tertiary industry dominance. The secondary industry never really grew in that mix and with the advent of China, manufacturing has been on the way out for some time. 

If you look at the top 10 companies in Australia, you have 4 banks 2 supermarket chains that form a massive duopoly, 2 mining giants and a Telco, and the lone biotech firm, CSL. This strongly reflects the point of Australia is housing loans, feeding families in the mortgaged homes and connecting them with phones, but also looking after them towards the end of life, having spent our lives being happy little consumers buying from Woolies and Coles, talked to our friends on the phone, and maybe had something to do with the export of commodities. 

One would think - if one were the thinking kind - that with all these graduates loafing around that the Federal Government would expand on research programmes like the ones that used to exist at the CSIRO instead cutting the CSIRO budget. Or that there would be greater expenditure in the arts (non-film division) and simply look for an exponential growth in Intellectual property leading to new industries. One would think - if one were the  thinking kind - that this was an obvious problem even back in the 1990s, and that somehow, successive governments have failed to address these basic, fundamental structural problems with our economy.

Of course, what we really did in this country instead was simply inflate a property bubble, so... You get the picture.

It Might Actually Be A Ponzi Scheme?

Ever since the Bernie Madoff thing, we've become sensitive to the term 'Ponzi scheme'. The proper definition of which reads:

A Ponzi scheme is a fraudulent investment operation where the operator, an individual or organization, pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned by the operator. Operators of Ponzi schemes usually entice new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent. 

Ponzi schemes occasionally begin as legitimate businesses, until the business fails to achieve the returns expected. The business becomes a Ponzi scheme if it then continues under fraudulent terms. Whatever the initial situation, the perpetuation of the high returns requires an ever-increasing flow of money from new investors to sustain the scheme.[1]

So calling the Property Bubble a Ponzi Scheme might be a little harsh.

As many first time buyers turn to the bank of mum and dad to top up their deposits, a new report "Parental guidance not recommended" warns Australians are being caught up in a classic "Ponzi scheme". 

The report by economic consultancy LF Economics – which has previously sensationally warned of a "bloodbath" when Sydney's property bubble bursts – estimates it will now take the average first time buyer in Sydney nine years to save a deposit, up from three years in 1975.

That seems a little drastic. After all, it's not like the market as a whole has turned fraudulent. Still, you can understand the alarm when it costs 12 times the average annual salary to pay off the average mortgage. Even if you allowed it for being an era of double-income parents, that 6:1 per person is 50% over the 4:1 that a single income dad would have carried 40years ago. In short, everybody's all in on the property market, and they've convinced themselves that they can take 20-30% of negative equity should the bubble pop. They might be okay with that calculation, but chances are their banks won't be.

In the last few weeks, the market seems to have come off the boil. There are plenty of places in Sydney experiencing falls in prices. So much for the talk that record low interest rates will keep prices soaring.