View From The Couch - 16/Dec/2015

ScoMo Is A Different Kind Of Economic Animal

The MYEFO has come out and well, Scott Morrison isn't exactly cutting everything in sight. Yes, he's cutting some things, but he's vowing not to chase the fall in revenue down. 

Scott Morrison has learnt well from Joe Hockey, Chris Bowen and Wayne Swan.

The best thing to do when revenue is collapsing is to let it, lest it bring the economy down with it. 

As he put it: extreme measures would have placed "a hand brake on household consumption and business investment growth" and unnecessarily threatened emerging signs of economic momentum.

That's pretty contrary to the Coalition diatribe about debt only months ago, and as enacted in two disastrous budgets under WTE Joe Hockey. It must be that at heart, we're all Keynesians now, as the saying goes. 

It also shows that the Turnbull Government really is a different beast to the Abbott Government, at least on an operational level. A simple question of "what would Tony have done?" yields images of a cigar-chomping, axe-wielding WTE Joe. Instead, he's telling us it's not going to be austerity all the way down. I don't want to praise Scott Morrison in the least freaking bit but you have to hand it to him, he's not reacting as one would have imagined from his turn as minister for turning back boats. 

I have to admit, I'm a little surprised. On another level, I think I can see we're heading towards ZIRP a lot more than raising interest rates. As it turns out, it's really hard to get the market off the easing bias. Who'd a thunk it? 

Which leads me to the next thing... 

When The US Fed Dons Wolf's Clothing

This is weird when you reflect back to the utter chaos of the GFC at its height in August 2008. The US Fed is about to raise interest rates by 25bps sometime this week or early next year. Indeed, the speculation is that they have to do it this month because there are no more months beyond December and they committed to doing it before the year was out. So, logically, it's this month. The countervailing view is that the situation is so dire and the High Yield bond market is collapsing so fast, the Federal Reserve Bank would have to be crazy to pull the trigger. 

The fact of the matter is, they didn't pull the trigger when it was benign back in October, so we were left asking the question, if not then, when? If things get precarious enough, the FRB is going to have to think about easing again in no time, which means they'll back at ZIRP in a matter months. It is as if Wall Street is permanently addicted to having cheap indefinite credit and anything else makes it fatal to the whole financial system of the planet. In other words, nothing structural has been fixed since the GFC, that caused the GFC. The risk factors are right back up to where they were on the eve of the meltdown. 

And still, the language from Janet Yellen has been that they're going to raise rates because things are going so much better now. Goodness, it's hard to think all the way back to Paul Volcker in the 1980s. Would he have hesitated? No not a chance. 

On a more local note, the anticipation of the move has created ructions in our own equity market in Australia. It's very strange:

"Amazingly enough it hasn't been priced in. It really is quite extraordinary," he said. "Perversely we may see markets rallying on the back of it once we have some certainty about what the central bank is doing in the US." 

"It's all around these issues regarding sustainable, stable commodity prices and whether we get a decision out of the US Federal Reserve," said Mr Lakos.
Chris Conway, head of research at the Australian Stock Report said while some traders were dipping back into beaten down stocks, the overarching vibe was one of caution. 

"We don't expect any large moves ahead of the US Fed decision on Thursday morning (Australian time), with no-one ... willing to take on too much risk or place any big bets despite the outcome being largely expected," he said. 

"We also expect some volatility immediately after the decision but hopefully, once everyone has processed the result, markets calm and we rally into the end of the year."

So shares got oversold in the last 48hours because everybody suddenly remembered that Janet Yellen was possibly/probably going to go for it with the interest rate hike. Which means that if and when it gets announced, shares are likely to bounce back from 2.5year lows. Like I said, this is really weird. 

China Crisis On The Brew

Nobody's really talking about it in the mainstream news but, China's economy's actually on the ropes. How do we know this? Pretty simple. When China was going great guns, commodity prices were up. For commodity prices to hit the skids this low, this hard and for this long, means China's really run out of puff and can't turn the commodities into economic growth. The collapse in demand for iron ore and coking coal is more than telling, it's both a white flag from China and a red flag for the Australian economy.

In that spirit, here's a story that you might find explains a lot of things.

Several local officials in China's Northeast region sought to explain dramatic economic drops in their areas by admitting they had faked economic data in the past few years to show highgrowth when the real numbers were much lower, Xinhua News Agency reported on Friday. 

"If the past data had not been inflated, the current growth figures would not show such a precipitous fall," one official was quoted as saying. 

The report cited several officials in the region who acknowledged they had significantly overstated data ranging from fiscal revenue and household income to GDP. 

Three years ago Liaoning province's GDP growth was reported at 9.5 percent, but its current figure－over the first three quarters of this year－is just 2.7 percent. Jilin's growth was reported at 12 percent three years ago, but its current rate is 6.3 percent in the same period.

That right there is your confirmation. The Chinese figures have been worse than rubbery, they've been fraudulent. Not only is the commodity boom over, we're in uncharted waters as to exactly what the hell is going to happen next in China when all the debt racked up to fake the demand to fake the growth comes home to roost. So if you're inclined to believe this week's offical statement about strong industrial production and retail sales in China... sure why not? Let's all take that blue pill from Morpheus' hand. 

Syria Is The Apocalypse

'Reductio Ad Absurdum' Of State Power

The modern state monopolises power, and with it the capacity for violence. Yes it's true that in the USA there is an ardent belief that their constitution allows citizens to bear arms in order to confront this monopoly of power and violence, but strangely enough the kinds of people who subscribe to this view are also the most likely to support the kind of state power being exercised against minorities. That is to say, we would believe the protestations of the NRA more about the Second Amendment, if they were jumping up and down in support of black people getting shot by the police, and not the police. Still, this entry is not about that topic.

The ultimate state control of monopolised power is the modern military junta. Military juntas exist as proof that a stable state is not necessarily democratic or pleasant. People go on about stability ("vote Tony Abbott for Stability," the SMH said! Ha!) Many military juntas come into being at the end of civil strife, and enforce the military power as policing in order to keep a lid on the civil strife. This is true of Franco as it was of Pinochet, Saddam Hussein's or Bashar Assad's regimes. We in the democratised 'developed' world view these political arrangements with a great deal of contempt, but as the experience of Iraq has demonstrated, there are far worse things than the stability assured by a military junta.

Similarly, Syria is turning out to be the second recent case whereby our own idealism for democracy has brought to an end a stable junta government. In writing that sentence, I am overcome with a cultural revulsion, for I - in no way in hell - support military juntas anywhere on this planet. It is hard for me to write a sentence that even vaguely validates their existence. Yet the historic evidence is pretty clear that some of these juntas are sitting on great fissure lines of civil conflict and once unleashed, the state cannot even survive. This is a terrible state of affairs, where on one extreme you have the Orwellian regime and Room 101 and the torture never stops; and when we remove this horrible state that keeps the populace in a social stasis of uncomfortable peace, we end up with Bosnia and Kosovo, the battle of Fallujah, or the Islamic State which is an attempt to reconstruct a state, but around religious laws instead of common laws.

All of which is to say, military juntas come into being to stave off a slide into complete chaos, but then overstay their welcome as it goes through its own paranoia phase, torturing and killing people to maintain this uncomfortable stability. Again, I'm not writing this in praise of these horrible arrangements; I'm simply pointing out that in the absence of strong democratic credentials and traditions, a military junta ends up being the compromise arrangement to keep civil peace. You have to think of Tito's Yugoslavia as the shining example - but all these nasty regimes exist because of necessity. Nobody likes this stuff. And when they fail, they tend to fail spectacularly as they descend into chaos.

The refugee exodus of Syria isn't just an issue of Assad and his brutal regime or the fact that Vladimir Putin will not give-up his ally facing the Mediterranean Sea. To that end, Putin has now stationed his own warplanes in Syria. In the mean time we have Tony Abbott trying to engineer a 'request' from the President of the USA to enter into bombing runs on ISIL-held positions in Syria. Not only is Tony Abbott exacerbating the problems inside Syria which is already a war-torn post-apocalyptic landscape, he is adding to the reasons for residents to flee as refugees, while risking coming to blows with Russian warplanes. The people are running because civilisation has collapsed around them. Their civilisation collapsed because it was held together by the military might of the state, and then the state wasn't there any more - just the violence. And we want to ad to the violence.

The Syrian Collapse

Syria came to this collapse because of the Arab Spring. The Arab Spring of course was prompted by high commodity prices, which led to staple foods being too expensive to buy. Not even the long-standing regime of Muamar Gaddafi could hold on in the face of the high commodity prices. Similarly, in Egypt, the high commodity prices drove people into the streets to protest and that brought down Mubarak's regime which had stood solid since the assassination of Anwar Sadat. The irony is that the commodity prices surged because oil prices surged, and the oil prices surged because these very same OPEC regimes opted to make a killing out of surging oil prices thereby creating the conditions for their own demise. Oh the irony!

All the same, what is not well known is that Syria underwent a crippling drought between 2006 and 2011. This was such an historic drought that it decimated longstanding farming operations and communities. The drought pushed whole populations into urban areas without any means of survival. And the military junta remained locked in its rigid "maintain-order-at-all-costs" sort of thinking, which made things worse. The historic drought was most likely (nobody ever gets to prove these things) due to Global Warming and Climate Change. Again, these countries that export oil for combustion created the conditions whereby they strangled themselves. Oh the double irony!!

Today, Bashar Assad is in charge of his military, but Syria itself has collapsed as a civilisation. It is every bit like a failed state - much like Somalia, Eritrea, Sudan and on the same trajectory as Iraq and Afghanistan. As Global Warming and Climate Change continue, there will be more and more places that succumb to its effects. There will be more refugees from failed states. The wave of refugees coming from these places are people who want to remain civilised. It's time we accepted this simple fact. We could do much worse than to take in these people.

Syria today therefore offers us a glimpse into the post-apocalyptic future we ought to fear. The fragile, brittle state collapses as result of economic and environmental chaos, there's nowhere to run. We can't go around assuming this is stuff that only happens in far away lands.

How Many Refugees?

Before the recent surge of Syrian refugees, I did a quick search on Google and found that in 2015, the refugee count according to the UN was 60 million people. Out of the 195 or so UN member nations, let's hypothetically say 100 are up to receiving refugees. The other 95 are candidates to send out more, rather than receive, but we'll leave that issue for a moment. I know this is a gross oversimplification, but I want to lead you through this so you understand the scale of numbers. That would make it 600,000 per nation to take in from the refugees that exist right now. If we said the realistic number of nations that are able to take refugees was more like 50, we're talking about 1,200,000 per nation.

That's a big number, but it goes to show that Germany is doing pretty well when Angela Merkel says they will take 800,000 people. It's effectively saying they'll add 1% to their population with refugees. In any case, 800,000 is not entirely out of the order of magnitude that sits between 600,000 and 1,200,000 people.

Australia on the other hand, says it will take 20,000 this year. It's an amazingly paltry figure, really. It's a whole order of magnitude out from the problem as it exists. If it were left to Australia, it would take 60years' worth of refugee visas before it took in its share of 1,200,000. So one wonders just what on earth Peter Dutton is asking "what can Australia do to help?" when the mathematics are very simple - Australia needs to up its refugee intake to about 240,000 before it can claim it's punching its weight.

More to the point, that 1% rise in German population is probably going to add a whole bunch to GDP growth in the coming years. Think about all the new whitegoods and TVs and demand on real estate that will arise out of the arrival of these people. Its not a half-dumb move to be taking these people in. Australia's economy could do a lot worse than adding 240,000 people straight off the plane from Syria.

The Sino-Reality War

Market Bears On The Loose

Pleiades slipped me an article about China that's behind the paywall on Crikey. It's a rather depressing article because it spells out the essential problem of having our economic drivers hitched firmly to China. China for its part, keeps telling it is growing at 7% rate, but the growing evidence is that this is simply not true. Earlier in the year I linked to a talk which included an analyst who is closer to the ground and pointed out that China's growth figures are more 'aspiration' than actually measured. In the past, the Party would have said, 7.5% and then the political cadres would crack the whip to make the 7.5% figure stand, so as not to embarrass the party - but the problem has simply gone beyond that point. They bought the economic growth through debt, and the debt has been piling up at various levels and locations and municipalities.

Earlier in the week Zero Hedge had this entry about how nobody outside China who is a serious analyst of China's economy believes in the GDP growth announcements from China any more. If you go to that link you will find a procession of charts covering various areas of the Chinese economy that simply contradicts the 7% growth figure. You simply can't be having 7% growth while all these other negative things are going on in your economy.

And so with that we go back to the Crikey entry from which I want to lift some lines:

What is instructive about the series of daily crashes that continue to break records in whopping out trillions of dollars is that the sharemarket run was a strategy by the government to put more equity into companies and less debt into the growing Himalayan debt mountain. 

With government encouragement, millions of ordinary Chinese piled in and eventually lost, in many cases, their life savings, after efforts by the party to “control” the market forces failed. This will surely give very real pause on implementing key liberalisation polices such as the freeing up of the capital account — just how much more money will start gushing out of the country now the government has broken its promise on the sharemarket? 

Trust and most importantly confidence have been dented — badly. And confidence, that intangible yet vital mass mood, is as critical to economic management as interest rates. With growth sliding, not one rational economist or China-watcher will admit privately they believe the 7% growth figures for last quarter. The real work indicators show the country is, in many parts, falling into recession. 

Oil is falling again, dragging all commodities back with it, and while iron ore is having a mild surprise surge, forecast supply and demand indicate this is only short lived. A good theory is that the steel mills that operate in Hebei, not far from Beijing, are working overtime before the World Championships in Athletics clean-air policy comes into effect in a few weeks. The market-leading Atlas Iron is on life support once more. Its share price collapsed by 70% last week after it revealed that it had failed in a bid to raise US$180 million. So, one suspects, it is good night to them. Many analyst are still tipping iron ore will fall to US$45 in the next six months from US$51 a tonne on Friday.

The cat is out of the bag, so to speak. The whole collapse phase in share prices in China prompted some interesting policy announcements whereby it was illegal for you to sell shares, and illegal for you not to buy shares. That was bound to look like the whole market was rigged.
Indeed, the Chinese gambling share investors are getting out altogether.

What is interesting about the Crikey article is that it argues the leading economists who busily hitched Australia's wagon to China were wrong, and worse still, wilfully misrepresented the reality on the ground for their own self enrichment. It's a big call, but it's also hard to ignore the evidence. Let's face it. If China really was so damn remarkably good, why are so many people trying to get themselves sand some money off-shore?

That all brings into stark relief the problem of just what Australia is supposed to do in sight of China's economic slowdown. In the years since the GFC, Australia has essentially doubled down on mining to support China. It has been argued in may places that China's process of 'emerging' is such a great engine for growth that they will continue to need the commodities Australia digs up from the earth. Even the big fuss about the Adani mine and the coal in the Galilee basin represents our attempts to keep digging up ever more commodities for this very process.

The futures market on the other hand has been signalling for a drop in commodities far into the future. If the collapse of their price has ben the product of OPEC trying to force out US shale oil from their positions (and failing), then it is certainly true that the collapse in iron ore prices represents BHP, Rio Tinto and Vale trying to force out the smaller places by not cutting supply in an over-supplied market. Basically, there is a general glut in all the commodities because there has ben ramped extraction in commodities based on the figures presented in the past by China about its growth. If China has been lying about its growth for some years, then it would follow the Chinese market is nowhere near as big as we think it is, and the oversupply is going to be much larger as a result.

In a nutshell, we're producing way too much of commodities and it is leading to the accelerated decline in the prices for the very commodities we produce; and by extension our national income is going to fall. now, you can add an adverb like precipitously or dramatically in front of the fall, but the essential point is, we are going to find ourselves were we were in the late 1980s and early 1990s when the Japanese bubble burst.  This time, there won't be a Chinese economy for us to hitch our growth. We may be just about to hit the roughest patch of the economy in 25 years - the roughest patch since "the recession we had to have".

Oh, and when it comes to fossil fuels, the world is divesting, which means the impact will be even worse.

“I haven’t noticed one negative reaction from the shareholders. Look back and would you have been a conscious investor in the 50s or in the 60s in asbestos-related companies, had you known what would come afterwards? Probably not. I am not saying it is the same thing, but there are some techniques, some sectors, some products where the case is now very clear – everything shows that it is not sustainable. Do you really want to be the last investor?”

That last investor is looking like it's us, by dint of a very unimaginative government committing us to be the last investor.