Monday, June 20, 2016

Deflation, Housing Bubbles and Sacred Cows

Contrary to the Political party's dictate, there is no Revenue or Spending problem in Australia. There is however, a lack of honesty, debate and courage, the willingness of our Pollies to broach hard subjects and engage in a meaningful three-way conversation: voters, conservatives and progressives.

There's $120 billion of Revenue that Political Parties choose not to collect or discuss, yet they claim we have a $37 billion 'deficit' which they say will increase "as far as the eye can see".

It doesn't have to be this way.

Australia, as businesses, consumers and investors, needs certainty and stability to grow and to deal with the social and economic challenges of the 21st Century.

We need an agreed medium-term plan that will be executed and supported by whomever wins power. No surprises, no reversals and no expensive killing-off established programmes. Menzies didn't cancel the 25-yr Snowy Mountains Scheme that the Labor Curtin government put in place and that finally finished under Whitlam. Why should that era of unprecedented population growth, high-employment and economic activity not be the default,  be how we normally run Politics?

To get back there, we require our Political Parties to focus on "Government of the People, by the People, for the People", not intolerance, division, nay-saying & negativity, "mean, petty and spiteful" actions and a focus only on gaining Power. That thinking gave us all the problems of the Howard era and the flip-flopping leadership and policies since.

If we continue on this course, Australia will end up as a third-world country, a place riven with strife, with deep social unrest and unacceptable sovereign risk for investors, local and foreign.

The Parties & Pollies need to stop trash-talking each other and start to be "Men & Women of Honour", people that voters can trust and respect, who's word can be trusted and whose outstanding character traits aren't dishonesty, greed and arrogance. Unless voters push-back, then we'll just get "more of the same". This is a vicious spiral, attack breeding attack & payback, dishonesty engendering distrust and 'spin', lying and evasion being the stock-in-trade of political interviews - an information-free zone.

The Budget papers for 2016-17 [PDF] estimate Revenue of $417B, Expenditure of $450B and Deficit of $37.1 billion (statement 3). The Net Debt is projected to become $326 B (18.9% of GDP).
Have a look in the appendix, Table A1, or at Treasury, and you'll see $120 billion of Pork Barrelling Give-aways, euphemistically named "Tax Expenditures".

Around $10B-$20B of these address equity issues for lower income earners, the rest are sweeteners thrown at the already wealthy, or those wanting to be wealthier. Australia should have an extra $100 Billion revenue, a surplus of $70 billion and a be looking at paying down the debt before 2020. So why aren't we?

If we had a rational & honest Political debate, instead of shouting matches, sloganeering and gross lies, we'd be openly talking about who we throw money at, and why.

Instead, we have negative campaigns, fear and scare-mongering, name calling, endless repetition of vapid 'talking points' and misleading & deceptive statements, including complete omission of primary platforms, that in any other corporate context would see droves of people behind bars for years and years.

There is more money at stake in the Federal Budget than in any Corporation, yet there are NO consequences for poor governance, misleading & deceptive conduct and no systematic and pervasive investigative and accountability function, designed to halt corruption, dishonesty, backroom deals and nepotism & cronyism. It wouldn't pass muster in the Corporate world, so why do we accept this lack of openness, transparency and honesty in our top-tier parliament?

Especially when for twenty years, the overwhelming view of the electorate towards Parties & Pollies is disgust. Voters are not 'disengaged', they are enraged and throughly disgusted, attempting at every possibility to "fire the bastards", but the mainstream parties have "captured" the mechanisms of Government, Review and seemingly Law & Justice, preventing an effective change.

The "will of the people" isn't done. Pauline Hansen in 1996 and every other Independent and rag-tag minor Party since has stood on a simple platform: anyone but those mainstream bastards. This culminated in the 2013 krudd vs RabidAbbot debacle.
Who do you hate more? Tough choice.

There's another Global Financial Meltdown coming, but this time Australia isn't going to luck its way through. We have a fragile economy (both sides use this language publicly) exposed to multiple local and external risks. A very few things are under the control of the Government, most events they will have to react to, the best they can.

The Global Economy is in unchartered territory, the US economy, still the global engine-room, hasn't picked up since the '08 GFC, deflation is starting to strangle more & more economies, the 'Chinese Miracle' has racked up 250% GDP of private debt with its Banks, and a unknown amount in the shadow banking system, and is starting to look more like the "Asian Tigers" just before their meltdown, global markets are "volatile" and investors everywhere are nervous. All those countries in trouble after the GFC are still on life-support, not dying, yet not recovering or thriving - caught in a financial twilight zone.

The 'BRexit' has global markets rattled, not just the UK or Europe.

Unlike the 2000 & 2008 "global events", Australia now has multiple internal triggers for an economic meltdown, we're not just exposed to 'external shocks'. If our economy nose dives then there's a global economic crisis, the resulting mess will make the decade-long Great Depression look quick and easy.

It is that dire.

Business confidence is low & falling and investment is nose-diving. Official unemployment rates may be under 6%, but under-employment is raging and we're becoming a nation of Part Time workers, not by choice. This is reflected in ABS figures: Real per Capita Income peaked in Dec 2011 and has sunk, in aggregate, 6% since. A significant number of people are much worse off. We've an unemployment and production shock looming within 12 months as 200,000 workers exit the Car Industry and its many supporting firms. South Australia seems to already be in a 'technical' recession, they and Victoria are going to really tank in 2017.

We've ticked over $1 trillion in Foreign Debt - if things 'go bad', this will be the millstone that drowns us. The credit ratings agencies have publicly warned our AAA rating is 'at risk', losing it will hike all interest rates. A fall in the Australian dollar will also push up mortgage rates, because Banks borrow 80% of their funds offshore.

We are super-exposed to the Chinese market: 80% of our Iron Ore exports alone, 450M tonnes/year, are to China. If they sneeze, we end up near death. If they have a 'hard landing' and reduce their imports by even 50% our economy looks very, very shaky because the price for Iron Ore will collapse, undermining all Treasury forecast assumptions. We've become over-dependant on just one customer. In business, that's a really bad position to find yourself in, for a nation, it's diabolical.

If your household budget feels stressed, you're not alone.

If you're a Gen-Y or Millennial wanting to buy a house, unless you've a rich family, you're never getting there and probably already know it. Unless, as Mr Hockey advised, you bothered to "get a good job". Did you think of that before Hockey told you?

But there's a kicker with mortgages and Housing Affordability. Anecdotal evidence is that a large number of households couldn't withstand even a 1% rise in interest rates, the minimum impact of us losing our AAA credit rating, let alone a 3% increase a return to long-term 'trend' rates.

The next turn in the Housing Affordability debacle is a profound collapse in house prices, triggered by any one of many causes. All lead to the same outcome: lots of people in default, Banks making thousands of forced sales and the market tanking everywhere, not just Perth or the far-flung mining towns. Perth prices are down 5% recently, so it's not "a supply problem", and many mining boom towns have seen prices crash 3-4 times in the last 5 years.

The problem for those currently locked out of the Housing Market isn't solved with a market crash. You need a job to get a loan. Pulling even $1 trillion - $2 trillion out of the capital markets will have a dire effect on the real economy - the part that creates jobs and pays wages.

A least twice recently, the governor of the RBA has warned, publicly, that the Housing Bubble will burst, just as it has multiple times in his working life. Those 1.2M 'clever' taxpayers running up $6 billion/year in Negative Gearing are headed for a very bad time, or at least 80% of them with low total income are - a market collapse will wipe them all out financially. That's at least 1M of 10-12M properties on the market in 12-24 months - it will be a rout of 'biblical' proportions.

Multiple investment analysts have put out warnings that there's an over-supply of Apartments already, and more being built. Roger Montgomery has publicly said in 18 months, there will be a 12 month over-supply of apartments, which will spark a collapse in both apartment and house prices.

Listening to the election campaign, these gathering Economic Storm Clouds either don't exist or are or no consequence, presumably because "we're special".

In 1964 Donald Horne's "The Lucky Country" wrote that we had 2nd-rate businessmen and politicians. This hasn't changed in my opinion. The real difference is there's no pretence at honesty and honour in Politics now, just naked ambition and raw power-grabbing. Horne said:
"Australia is a lucky country run mainly by second-rate people who share its luck".
Australia not only didn't take advantage of three one-off opportunities, never to be repeated in our lifetimes, it turned income from a temporary boom into permanent tax cuts - we deliberately created a structural budget disaster with deficits "stretching as far as the eye can see" and we argue that this insanity should be maintained, in fact extended every election with more tax cuts.

What kind of bizarre cargo-cult thinking is this?
Why do Parties & Pollies allow and encourage this perverse and unrealistic thinking?

Howard was a disaster as a treasurer under Fraser. He left Keating with double-digit unemployment, inflation and interest rates. And a record Debt of $40 billion. The full quadrella! Quite an achievement of incompetence or bastardy.

13 years later when Howard became PM, Labor had let that debt creep up to $96 billion. If you allow for CPI, that's around a 10% increase - a fair performance. Howard then vigorously pursued a fiscal surplus in a number of unsustainable ways, like selling everything he could and giving away any benefits as tax cuts. He changed the 'Net Debt' by around $105 billion, but burnt over 5 times that in revenue.

On top of this, Howard reduced Public Construction, otherwise called Infrastructure Investment. For a decade, Howard's Infrastructure spend was 50% lower than the historical average (4.5% vs 7%). No wonder Malcolm Fraser left the Liberal Party in 2009 - they had nothing in common with the party he'd led in 1975.

A more harsh opinion, stemming from the data and using the LNP's own criteria, is Coalition governments are the worst Economic Managers in Australia.

Australia let slip by:
  • $200 billion (current dollars) of Asset sales
  • $350+ billion over 4 years of the one-off China Mining Boom
  • No leverage of infrastructure investment with Government Bonds at record lows (2%-2.5%) and a AAA credit-rating. Prior to 2013 election, even senior Liberals were calling for this.
And we've let the one-off investment in an viable and sustainable NBN pass by as well. There's NO way back now to the Full Fibre NBN. That path is closed.

This result for Telecommunications hasn't been accidental or unplanned.

Howard did everything he could for a decade to stymie an upgrade to a Digital Customer Network, then sold off Telstra "vertically integrated", unlike every asset sale of every utility across all Australia for 25 years, knowing they could and would act as road-block to Digital/Broadband.

Howard disregarded a blizzard of professional technical and financial advice to "structurally separate" Telstra before the final sale. This was not an act of random perversity or ignorance. This was a wilful, contrarian and destructive act. The last gasp of a PM who was so out of touch and unpopular, not only was his Party swept from power and banished to years of turmoil and roiling leadership struggles, but he lost his own seat. An act almost unprecedented in Australia. That was personal as well, his ALP replacement last just one term.

Abbott very clearly and publicly instructed Turnbull to "Destroy the NBN", a task he took on with energy, enthusiasm and thoroughness. There can now never be a strong, universal Broadband Network, a platform to take Australia into the 21st Century. Turnbull's machinations have stymied that forever.

Howard was the person that made the technical world of Telcos' political. Lay all blame for this mess with him, and underlining the above, it wasn't an accident or unintentional, but deliberate destruction of critical and essential Public Infrastructure. We'll probably never properly know just why.

By 1999, there had been multiple large-scale deployments and multiple generations of optical transmission & access networks reaching farther & farther from the 'centre' out to the edges, right to the customer premises with ISDN and HFC services. Within a few years, the entire Telstra core network was changed to "IP" - raw internet.

The first Telstra CEO in the early 1990's, Frank Blount, was very voluble that by 2010 (now six years past), the Copper Customer network would be "zero revenue". Blount, and every aware Telecom executive, had known for decades that "Digital Convergence" was coming, that we'd end up with a fully digital network over optical fibre, and probably on his watch. This was the "Information Superhighway" Al Gore has talked about since 1978.

That's right, the people that understood technology and have been tracking it, anticipated Broadband & Optical Fibre to the Premises everywhere for around forty years - longer than the IBM PC has been around.

Australia rolled out its first all Fibre urban Exchange (~20,000 premises) in 2004. We've had Fibre to the Home for more than a decade, not that you'd know listening to the media.
At the time, a senior Telstra exec (Ted Pretty) put on the public record that this Fibre rollout only cost 50% more than new Copper, and by 2006 (12-18 mths) would cost the same.

The way electronics costs scale with development and volume sold, you'd expect Fibre, after ten years, to be 'significantly' cheaper than Copper: 2 to 5 times, when done 'at scale'.
Which is why we see overseas providers, like Google Fiber and NZ Telecomms, rolling out Optical services for $1,000 - $1,500 per premises.

Yet somehow, the Politicians have loaded up our Fibre to the Home to cost $4,500, around 2-3 times more expensive than the half-copper, half-electronics Fibre to the Node. The expensive solution that's slow, fragile and most expensive to maintain - and has to be entirely thrown away when we're done with it. That's probably the most galling part of the decision: Turnbull & Ziggy have deliberately destroyed tens of billions of our money. Nobody has ever said if the FTTN / VDSL network can, or will, payback it's construction cost. It's the worst possible choice that could've been made.

In Political-land, just how did they inflate costs by a factor of ten?
Strangely, all the documents of the publicly owned company doing the work, nbn (tm), that might tell us, are classed "Commercial In Confidence". There are NO commercial competitors for these public works, making the secrecy reek of political reasons.

Here are some of the Turnbull misdirects, obfuscation and 'unquestioned truths', repeated endlessly by our unquestioning, uninformed mainstream media:

0. The NBN COSTS THE BUDGET NOTHING, repeat NOTHING.You cannot find a Budget line-item for the NBN, not anywhere since 2009. It doesn't have to be "Funded", because it's an investment, it pays for itself.
The NBN is an Investment, it's meant to make a PROFIT and return ALL the capital we tip in.
Treat it like what it is, a BUSINESS that MAKES MONEY FOR US.
Not like Roads, Rail, Health, Education, Pensions, Defence and Immigration - they are on-Budget EXPENSES. Those are 'expenditures' that really do have a 'Cost' and require 'Funding'.
1. There is no "average" NBN user: most traffic & revenue is generated by a small cohort of subscribers. The top 1% download 10% of all traffic, the low 50% download 6.5% between them. If you want a profitable network, who do you build it for? The 'average' users who account for under 10% of revenues, or the highly profitable high-end, who also happen to be early-adoptors and will gladly pay for increased services.

2. Fibre speed-tiers are a gold mine: input costs are unrelated to "speed" while revenue increases with "speed". It's $24/mth wholesale for 12/1 Mbps and $150/mth for 100/40Mbps - without NBN Co costs changing at all. Exactly the same network and equipment is used for both the slowest and fastest connections. It's a business dream.

3. All the profits of NBN Co flow from the top 25% of consumers: 100% of profits, not 'nearly all'. The high-end pays for the low-end, not vice versa. It is definitely not a way to subsidise Rural subscribers by Urban. Two in three of us live in a Capital City. 80% of us live in just 45 locations. Rolling out the majority of the NBN is an Urban engineering problem.

4. NBN Co profits can only be maximised with universal supply of the full range of speed-tiers at guaranteed rates. This allows high-end users to pay a lot extra for exactly the same links and equipment.

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