Are investment returns becoming more elusive? In nominal terms, yes. But in real terms, maybe not so much. Possibly the single largest consequence of the Australian grand social experiment that is compulsory superannuation is that nearly everyone now has to decide how to invest financial assets over a very long term. What was previously the domain of a few is now a national occupation. In the current investment environment, it is an occupation that has lost a lot of its charm.
Continue readingBanking governance; or maybe not
I’m an unhappy shareholder of Westpac. There will be a lot of shareholder wealth destroyed before this sorry tale is over.
By way of background, Westpac stands accused by the relevant regulator of failing in its obligations to identify and report suspicious transactions that could indicate money laundering or terrorism financing. In this case, it is alleged that millions of dollars and transactions have been made through the use of Westpac accounts and payments systems to launder money ultimately used to facilitate child exploitation. Further, it is alleged that Westpac has known of these transactions for several years and has not acted.
Continue readingBlackshirts, brownshirts and hair shirts
I listened to a BBC Hard Talk interview of Roger Hallam this weekend, he being the founder of Extinction Rebellion. The ER group comprises the type of people who glue themselves to streets and footpaths because of climate change. No, it’s not clear why being glued to the road will change the climate, but it takes all sorts.
It is worth listening to Roger to understand the depth of his paranoia. In his mind, human civilisation is about to collapse. Within 50 years, he says the planet’s population will have dropped to 1 billion. That is, 6 billion people (give or take a few) will die. Primarily, this will be due to starvation. Roger believes that ‘the elites’ and the politicians know this but have been lying to the people about efforts being made to combat climate change. In his view, a critical mass of ‘ordinary’ people have realised this and now it is time for mass civil disobedience. He has studied theories of establishing revolution. At least in this regard, he knows his stuff.
Continue readingIs it cold in Melbourne?
Is it just me? I step outside in Melbourne in July and it feels colder than it used to. Is that a function of my age? Or a function of the temperature?
Western Civilisation
It’s over 30 years since the beneficial partnership of Thatcher and Reagan. 40 years earlier, Churchill and Roosevelt formed a partnership in the face of a potentially catastrophic enemy, with a little spice added by Stalin clinging on. These great Atlanticist partnerships are few and far between. They seem to emerge only when times are truly difficult. They are rooted in the fundamentals of western civilisation, freedom and responsibility of the individual, they hold the family as the unit of society and deem constraints on the size of Government as essential. Well, times are difficult now. I wonder if there is a new partnership ready to form between Boris Johnson and Donald Trump. I’m hopeful.
Rainbow Lorikeets
Noisy little birds. They chew through the apples on my apple trees. But their pairing and concerns for each other are endearing. They witter away to each other as if discussing today’s letters to the editor. This chap was photographed in the Melbourne autumn on Kodak Ektachrome 100 film, 100mm lens.
How to get monetary policy completely wrong
There is a difference between the prevailing rates of interest in the money and credit markets and what can be loosely called the natural rate of interest. When the rates diverge, problems emerge.
The central bank in Australia (the RBA) conducts the management of monetary policy, independently of the Government of the day but to a stated aim of constraining inflation between 2% – 3%pa. It has just manipulated down market interest rates twice in two months. Prior to that, the official cash rate (the benchmark the RBA uses to influence all other rates) was held ‘at emergency low levels’ for 3 years. If the old rates were at emergency levels, then what are they now being lower still? The official cash rate is now 1%pa.
Continue readingIncome tax cuts in Australia
There has been a lot of chatter in Australia this week about the cuts to income tax rates passed by Parliament. The cuts are phased in with immediate effect for lower income levels and deferred a number of years for the higher income levels.
While I’m in favour of income tax cuts, like anyone else who pays income tax, we ought to remember that the true tax burden is not represented by the rate of income tax, or any other tax, for that matter. The true tax burden is determined by the level of Government expenditure. The tax regime, the rates, the thresholds, the mix between consumption tax, income tax, royalties, stamp duties, corporate tax etc is the outcome of a political process that determines who will pay for the expenditure and in what time period they will pay. Cutting tax without cutting expenditure simply means someone else can pay for it, at some other time.
We are collectively better off when Government expenditure is cut first, and tax reductions can then follow. None of this is to deny the truism of the Laffer Curve.
Gender quotas and corporate performance
I think quotas of any sort are inherently wrong and likely to be bad for corporate performance. In recent times, many of those in favour of quotas have shifted their claims from “quotas are necessary to treat under-represented groups fairly”, to “quotas are good for business performance.” It is not easy to prove or disprove such claims.
Conceptually, the skills needed to perform well in business are not held in exclusively in the domain of any particular group of people. Those skills are held by all different sorts of people. And plenty of people do not have the necessary skills. Consequently, the best corporate performance will emerge from the companies with the best collection of people with those skills, regardless of who they are or where they came from.
Adding a degree of empirical research to the debate, the authors of a study conducted in Norway and published last month (accessible here), considered corporate performance controlling for gender composition of the board. Among the conclusions was this:
“Analyzing the causal effects of the Norwegian gender-balancing quota, we find the quota significantly increases the share of women directors on the boards of treated firms. Further, we find the quota significantly adversely affects the performance of treated firms and firm risk is significantly reduced.”
That is, if the law imposes quotas on gender balance, gender balance will improve. (No surprises there.) Also, firm risk reduces. Finally, corporate performance is significantly adversely affected.
Corporate performance changes as a result of gender quotas. Lower performance and lower risk is not the same as improved performance with no increase in risk.
The search for yield
Investors want yield. Many will take on quite a degree of risk to earn it. But yield has become difficult to find over the last five to eight years and there is every prospect that it will remain elusive for the foreseeable future. Are we mired in a never-ending low yield out-look?
To a large extent, the low yield environment has been deliberately generated by central bank policy in most countries. Faced with the prospect of a recession after the the sub-prime financial crisis, including the collapse of some banks, US and UK central bank policy engineered a reduction in interest rates by creating cheap easy money (in effect, printing banknotes) as a matter of priority. On top of that, fiscal expenditure programmes were instituted in haste, a course of action followed in Australia to the ludicrous extent of the Government mailing $900 cheques to citizens (including dead ones, of course). The end result has been budget deterioration, increased public debt and, crucially, a distortion in the structure of interest rates in the market and the delay in cleaning out bad investment projects.
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