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Wrecking Australia: Part one

Wrecking Australia: Part one

Mr Andrew Robb was on the front page of the Australian Financial Review on Wednesday as the new minister for Trade and Investment.

Now, I reckon most of us at Montgomery lean a little to the right. We certainly believe business is an important engine of our nation and a very important source of prosperity (if ‘prosperity’ is measured by how much stuff we can afford to buy). Personally, according Vote Compass, I sit squarely in the middle, which might explain why I don’t believe that economists got it right when they decided to use consumption as a proxy for ‘happiness’.

That aside, we know that the LNP is supportive of big business. I mentioned as much on the ABC this week with Ros Childs and Ticky Fullerton. Their logic is simple; big business can employ the most people quickly and make all the economic performance measures such as employment and GDP look good. Sadly this short-term window dressing will ultimately produce an emperor with no clothes.

More importantly, fuelling big business to keep on biggering and biggering and BIGGERING* is simply a lazy or laissez-faire approach to the economy and to regulation, and one that produces legislated abuses of market power.

A politician that focuses on numbers, accounts and statistics is a technocrat. A technocrat believes they will be re-elected if they can get everyone to focus on the economy, presenting a ‘before-and-after’ balance sheet and profit and loss statement that demonstrates an improvement – in the numbers they select.

But technocrats are not entrepreneurs; they aren’t good allocators of capital and they most certainly are not long term thinkers. And what might be good for pushing up short-term indicators like employment and GDP may in fact be detrimental to our very long term prosperity.

Have a look at some of the comments in Wednesday’s Australian Financial Review in an article entitled Increase Foreigner’s Profits about and by Mr Robb:

Comment: “Speedier approvals of big projects and lower taxes will drive foreign investment on Wednesday.”

Interpretation: It will be an eon before we see lower taxes, so ignore that carrot. This is about opening the door to the permanent transfer of our land, our businesses and our farms to foreign owners so that they will give us jobs. Sadly, while there will be jobs created from the investment, the long term profits will head offshore while the salaries we earn will be also be sent offshore to consume more of the plastic rubbish they produce.

Comment: “…Greg Hunt is under pressure to sign off on more than 50 resource related infrastructure projects. Dealing with the backlog will be one of the first major tests of the incoming Abbott government’s pro-development agenda.”

Interpretation: The Australian Financial Review trying to tell the government what to do.

Comment: “Mr Robb said environmental and other regulations had hurt business confidence and created uncertainty for business… In my commercial contact with the region, they’re all complaining the return on investment in so many of their projects has tanked because of changes to government rules. I’ve even had it from the big banks in China.”

Interpretation: The Chinese have told us they want to buy our land, our food production facilities and our best businesses, and because we need the money to pay for our balance of payments’ current account deficit (we don’t earn enough from our exports to pay for everything we are importing), we shouldn’t put road blocks in the way of selling everything that the Chinese want to buy and their bankers want to fund.

And the real red herring comment designed to pull the wool over everyone’s eyes: “Many of the principles say to me they would prefer to make further investments to the order of $150 billion but we are not competitive – very much because of that approvals process which has dragged out for years”

Now, I had breakfast with Andrew Robb last year and I can tell you he understood exactly what the reason for our uncompetitiveness is and he knows rules have nothing to do with it.

One of our biggest problems lies in our profligate ways – we simply spend more on imports than we can afford. We seem to sell our exports for less than the amount we pay for our imports. For example it requires 3 or 4 tons of iron ore to pay for one imported iPhone. We export our fresh fruit and vegetables while importing for more in processed or tinned form.

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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31 Comments

  1. A story on “Australia NEEDS MORE AMBITION”…

    Australia is perhaps the ONLY country in the world where Krispy Kreme is shutting stores, by pricing their donuts into the luxury category so shoppers buy KK donuts only at Christmas, Easter and birthdays… Sensible pricing doesn’t apply to KK but even to Smartphones. In China, Apple’s #2 market Apple has 8% market share and Android has 78%.

    Recently I was discussing pricing at Mr Burger, a food van business without the high costs of rent (usually largest fixed cost) but who charges $10-11 for a takeaway burger + $3 small fries so $13-14 for lunch. I mentioned to them that they charge almost exactly like Grill’d which is quite a “special” burger place. I also included a US comparison. A “Naked” beef burger at (Ted Turner) Ted’s Montana Grill at their MOST expensive location of 40 restaurant in 16 states @ Time Life Building 110 West 51st Street at 6th Ave., New York is ONLY $13 but I prefer the Peppercorn Bison burger at $18 (a regular beef burger is $16). By the way they use the highest quality meat, artisan breads and french fries are included. There is absolutely no problem having a “business lunch” here it is a proper sit-down, full-service restaurant. Alternatively a main course grilled chicken caesar salad is $15.

    Yesterday I went to Mr Burger at Therry Street next to Victoria Market and I was the only patron at 3.15pm. I ordered an EXCELLENT standard burger and small fries but as I expected the oil wasn’t really hot enough (due to lack of customers) so the french fries were a little too oily. In friendly conversation, they told me they average 60 burgers per day operating between 11.30-3.30 so call that 11.00-4.00 or 5 hours… They only sell 1 burger every 5 minutes! Apparently the permanent restaurant store in Little Bourke Street does 100-120 per day. WOW!!!!

    Let’s be generous make that an average $13 per meal or $780 per day – 1/3 costs (meat, fuel, truck, permits) = $523 – 2 staff @ $20 per hour leaves $323 per day. Since they’ve been there for a while I think they have reached their “steady state” even though there is a HUGE tourist and student population nearby. Checking around the corner at Rose Garden Chinese restaurant was three quarters full at 4pm. The difference is less than $10 per sit-down Chinese meal where the tea is free and they’ve been in the same location for 30 years. I would be VERY surprised if each seat (40) isn’t turned around 15-30 times each day.

    Such a small tweak to the price can have a HUGE impact. I’d be very surprised if Rose Garden didn’t make $5000-10,000 per day profit for a 12-hour day.

  2. You know the major problem in Australia today, nothing has changed since Donald Horne called us a lucky country run by second rate leaders who share that luck. The fault of this can be sheeted home fairly and squarely to compulsory voting. Our winder takes all electoral system which mitigates against compromise and our disgusting lack of engagement with the pliticial (I’m channelling Pauline here) process leaves people disaffected and cynical even while we demand more and more of Government. If the majority think their civic responsibility ends at rolling up every 2.5 years to vote then it is little wonder that Governments continue along the path of taking us for granted. In the U.S. kids can’t get out of primary school without understanding their constitutional arrangements. In Australia you have most adults and yes, even some pollies who have no idea how our Parliamentary system works. It’s fine while things are going well. When challenges arise like drought or war or a collapse in the dollar or terms of trade, it’s a recipe for disaster.

  3. The LNP remind me of a broke couple selling everything they own on eBay to get some quick cash, and then wind up having to pay out even more in the long run to start again. It concerns me that the sheeple just “vote for that ‘him’ cos they don’t like the other him” rather than assessing their policies and whether they will be destructive to the planet or their own livelihoods. We need to educate them to see through the LNP spin

  4. Some interesting points.However after the waste, incompetence and spending on grand plans and multiple “revolutions” over the past 6 years-what real alternatives are there?
    I don’t believe the LNP or in fact any other party would get elected should they run on effecting some of the necessary changes you refer to, along with some other very necessary changes required along the lines of what Germany effected in 2003.
    So perhaps they know what is required, but also know that it ain’t ever going to happen in Australia.

  5. -in the fiat-money era, balance of payments deficits are truly meaningless

    -the absurdity of worrying about the balance of payments is made evident by focusing on inter-state trade. For nobody worries about the balance of payments between New York and New Jersey, or, for that matter, between Manhattan and Brooklyn, because there are no customs officials recording such trade and such balances.

    The international gold standard provided an automatic market mechanism for checking the inflationary potential of government. It also provided an automatic mechanism for keeping the balance of payments of each country in equilibrium.

    • Your observation about fiat money current account deficit being meaningless is spot on. If Australia runs out of raw materials and assets to sell to foreigners, the exchange rate will drop. So the cash outflow from Australia generated by assets bought by foreigners would be worth less and less to foreigners. Also currency depreciation will cause a drop in imports since they will be less affordable. Investment would start flowing back to Australia as local labour would be relatively cheaper. Consequently production will return to Australia. Owning the right assets is only one way to become wealthy. Warren Buffet does own a lot of assets but this is only one of many ways he generates wealth. Warren Buffet uses financial intelligence to time the market and utilises appropriate financial instruments to take advantage of the situation. Thus he sold long term PUT options six months before S&P bottomed during GFC, and collected cool 4 billon USD. Since Birkshire is a AAA credit rated company he did not have to post any collateral. He then used that money to buy assets at rock bottom prices. Not only the timing was spot on, but the choice of financial instrument. S&P index is constantly changing with falling companies dropping out and rising companies coming in. Its engineered to go up by default.

  6. marilyn.hughes.543
    :

    Why do our politicians today underestimate the ability of Australians to understand and evaluate a problem and a proposed solution? John Howard sold us the GST; Paul Keating was also good at selling an idea. If Andrew Robb and Joe Hockey are unable to tell the story as well as Warren Buffet perhaps they are in the wrong job.

    We regularly read here of outstanding Australian companies such as CSL, COH, RMD, ARP, CCP, BRG to name just a few. A scheme such as Singapore’s would be money well spent and could eventuate in more quality Australian companies with a global competitive advantage. Supporting company research must also be more productive compared to propping up the pseudo Australian car manufacturing industry which is obviously not giving potential customers what they want.

    Are we just going to roll over and sell to the highest bidder. Watching coverage of the current America’s Cup brought back incredible memories of Australia’s great win 30 years ago. What has happened to our fighting spirit. I heard that Australia has not even contested an America’s Cup since that win. We’ve left it to NZ!

    Yes. We want stability – but more than 50% of voting Australians are hoping for a vision and a passionate belief in that vision to change direction for Australia. Don’t let us down! Come on Andrew and Joe tell us what you really believe and take us with you.

  7. Vince Brotherton
    :

    Well said Roger. I’ve being saying for many years that Governments in this country do not protect our interests. They sign us up for so called “Free Trade Agreements” in the deluded belief that the rest of the world believes in our strange notion that a “level playing field” really exists. Other countries do not play by the same set of rules.

  8. I disagree. The whole debate around “ours” and “foreigners” is a distraction. A little over 200 years ago Australia wasn’t even a country and didn’t have borders as such. Why should we care who makes profits, us or foreigners as long as all pay fair taxes on profit? I would like free and unimpeded access to foreign markets and in return willing to offer access to mine. We are all people, we are all the same – that’s real. Countries and borders are artificial and subject to change. Capital, goods and people should be allowed to transcend borders freely without prejudice. Only this approach will deliver long term prosperity.

  9. Unfortunately you are not going to discuss real problem one which is responsible for all this other problems:

    “Thou shalt not steal”

    “Your silver has become dross, your wine
    mixed with water”

    Fractional reserve banking
    Central Banking
    Honest Money

    Civilizations fall when they become morally corrupt.
    One sign of this corruption in virtually all known
    instances is debased money. When a society finds that
    its rulers have debased the currency unit, the people
    receive a warning: the rulers are corrupt, and if the
    people continue to support these rulers, then they, too,
    are corrupt.

  10. Hi Roger and the Montgomery team,
    I don’t have a strong economic background so cannot provide any technical insights on the subject. However I do understand the concepts in your article Roger, which are also expressed by other commentators I have heard on the radio. I think it is criminal of our politicians no matter their political persuasion, to take such a short term approach to our economy so that they can ‘spin’ a positive outcome to the Australian people for their gain. It saddens me that my young children may not be able to enjoy such a prosperous Australia that today’s generation of politicians have. Perhaps they should spend some of our hard earned tax dollars on employing the advice of intelligent and innovative people such as those at Montgomery Investment Management!!

  11. I agree that selling our assets overseas is a problematic long term strategy. But how can Australia compete at value adding to primary resources when the cost of doing business is so high. ie, uncompetitive? The high costs of business have to be addressed. It’s a message no one wants to hear, but Australian wages for low to medium skilled labour are way too high by international standards. House prices seem to be a major part of the problem. We have a vicious spiral of property appreciation driving wage increases driving property demand, and so on. This has to be short circuited somehow. Politicians need to review their economics 101 and start addressing supply side issues and land use regulation to restore sanity to the property market.

    Commodity market suppliers are almost by definition price takers. But is Australia really that much of a price taker? Don’t forget that Australia has some serious advantages that are hard to replicate. Australia’s ancient geology is one, providing large ore bodies which are readily accessible. A large land mass with a small population is another. With iron ore I think the Chinese have been the price takers in recent years – iron ore prices remain historically high. Furthermore our capacity to be a net exporter of food is a strong position, with world food demand destined for steady growth and arable land becoming an increasingly scarce resource. We can do alright as price takers for a while, especially if demand pressures support prices, and that ‘while’ turns into a really long while.

    In the meantime, if Australia is going to develop into a smart, knowledge based economy with unique market dominating products – price makers – then that takes a generation of stable government commitment to world class education at all levels coupled with the kind of incentives you described in Singapore. That has to start now for the sake of the next generation. But Australia may yet be capital poor and need to import investment to bring new startup firms to full fruition.

  12. Everything you say here is spot-on. The Abbott crew has a one-term only chance to reverse the course of this nation, which is currently heading for a disastrous date with its present destiny, to become a sorry and very unlucky place to live. The sell-off of every productive enterprise (including our agricultural land) has to stop. Manufacturing in steel, processed foods, and why not motor cycles, bull bars, security systems, and on and on ? has to be encouraged. Infrastructure bonds offering good rates of return will get the roads and fast rail networks built, because the boomers’ super funds will go for that in a big way. Tolls to repay the bonds will be accepted by the majority. “Entitlements” need pegging, beginning with maternity leave at about $800 per week. Someone needs to seriously study and suggest elements of the Henry Tax review for adoption. Heaven knows we all paid for the bloody thing. And why can’t government be financially involved when our brilliant medical, surgical and pharmaceutical companies come to maturity? Remember when CSL was a quasi-government institution?? And-put the stupid NBN on hold for now, while we see what the new satellite based system can give us! Wake up, LNP, get the silly grins off your faces Tony, Julie, and Joe, and start thinking and acting like responsible 21st century Australians prepared to save this country from a desperately sad future! The very last thing we want you to be is the sad bunch of opponents that you were in the last abomination of a federal parliament. And stop bullshitting about turning boats around, because clearly it won’t work, when (a) every boat has a seacock that can be opened and (b) international maritime law says the navy must strive to save every person overboard. Get real, LNP, and dare to be good enough to deserve the vote we just gave you.

  13. Pretty much what I have been saying for the past 30 years. As a country we have valued wool, wheat and iron ore over value added industries since the Menzies era. At one time Australia was the world leader in semiconductor technology, but the Menzies government placed no value in such high-falutin nonsense. When tourism receives more support than science and technology (which it has been for decades now), there is no doubt we are being pushed by our own government towards being Paul Keating’s banana republic.

    Australian high technology has been historically some of the best in the world, but Australian tech companies succeed in spite of government policy rather than because of it. The ones that really make it big aren’t even incorporated in Australia. They found – as have an alarmingly large number of our most highly trained professionals – that the grass doesn’t just look greener overseas, it actually IS greener.

  14. Increasing the superannuation guarantee to 12% would go some way to helping boost the ability to retain assets domestically. It’s a real shame the Coalition are deferring the increase and would be an even greater shame if the deferral turns out to be permanent.

  15. Great article Roger keep it coming!

    I’d just like to keep going with your iPhone analogy, but for the sake of easy comparison lets assume AUD and USD parity. Using the price range of iPhone 5C 16GB $739 and top-of-the-line 5S 64GB $1129, At $100 per tonne Australia must exports 7-12 (10 on average) tonnes of iron ore to purchase a device weighing 113-132 grams, let’s call it 0.1 kg. In Australia adoption is probably running close to 50% of phone users on smartphones call it 10m which is an under-estimate. Most people replace their phones every 2 years. So in 1 year, about 5m of 10m smartphone users will replace their phones.

    In 2012-2013 Australia exported 533 million tonnes of iron ore. But Australia needs to export about 50m tonnes of iron ore JUST to import 5m units weighing 500 tonnes. So, Apple, Samsung HTC elaborately transform the 50 million tonnes into something 100,000 times more valuable. That’s a guaranteed annual market of smartphones that costs Australia 10% of our iron ore exports? As Australian iron ore companies bring on more production capacity it will inevitably put pressure and further soften the price of iron, recall prices fell below $90 in 2012.

    Depressing isn’t it

    • The 100,000 times ratio is truly frightening and clearly demonstrates the need and urgency for Australians to focus on innovation. Scandinavia, for example, has a combined population similar to Australia, and yet the number of “global brands” that have come from that region is impressive. Sure, some are past their best, but a case study by the Federal Minister of Innovation would be a worthwhile exercise. Examples include Electrolux, Nokia, Volvo, Saab, IKEA, Bang & Olufsen, Ericsson, Skanska, Carlsberg, Lego and Pandora.

  16. Sounds like another Polly with three yearism.

    They wouldn’t think to build a harbour bridge for the future? No that’s right they are building an NBN one quarter of the speed however three quarters the price of the full fibre system.

    I wonder how many cars were registered on the north shore in 1923 and how many people complained about the 4.2 million pounds it costs for one arch considering you could buy a house for 500 pound?

    Where is another Mr Bradfield in this world who can think a little bit beyond three years and build something that will make the government some money and create some even footing for small business to generate value added products and or services.

    This is a fine article and I just don’t understand why people don’t realise that once big business for example Coles and woollies price the little butcher, baker and con the fruiter out of the market everything will just go up. People have a choice to be rich and as you say roger value added businesses is what keeps the margin and it’s that margin that keeps businesses in business with healthy rates of return on equity which will see those businesses into the future. However, just as many businesses as commoditising everything and just make a small margin which if we keep going this way there will be no margin and we will just get what we are given see the pg. 20 of the weekend AFR re squeezing margins does to people with respect to the NBN construction.

    I don’t think the Packers Robert, Frank Kerry have become as wealthy as they have from selling assets but by what you say is the real wealth generation that is from owning assets not selling them making a profit and reinvesting that profit. Isn’t compounding the eighth wonder of the world?

    Anyway thank you for taking a view and I hope you profile in society can create real discussion as someone like me 23 years old with no voice can’t do much in Joe Hockey seat we need people like you Roger in politics then I can come work for you now that would be amazing.

  17. Awsome article. Draw up a petition and I’ll sign it. Form a centerist political party that remembers we are a society/community as well as an economy and I’ll join it, along with many others I suspect – just look what was achieved in the seat of Indi. Interesting to remember that Whitlam’s troubles escalated when he became concerned with foreign ownership of our resources and commenced measures to buy them back – all those years ago. We have to remain the landlord and not the tenant, for our future’s sake.

  18. peter.johnson.503
    :

    “Because digging stuff up out of the ground is not highly valued by the rest of the world and so they won’t pay much for it.”

    More importantly, that stuff we are digging up out of the ground is a finite resource and will either totally deplete or become uneconomic to dig out the last bits. Meanwhile, the value-adding economies can get their raw inputs somewhere else, and continue to innovate and manufacture products which are in demand.

    Can’t argue with any of your article, Roger. So called “resource booms”-ie. temporary increases in commodity prices – seem to come along just often enough to allow politicians to kick the can down the road a little further. Government needs to provide incentives to industries that rely on intellectual capital and innovation for their revenue and profits, not a depleting (minerals) or finite (arable land) resource.

  19. Warren Buffett, as always a brilliant thinker.

    Neil Degrasse Tyson is also a great thinker and has argued the case for NASA as an engine of innovation and prosperity for America. I believe his principles can be applied to Australia. There are various youtube videos of him stating his case. A transcript and video of one of his speeches can be found here http://neversocial.wordpress.com/2012/03/20/nobodys-dreaming-about-tomorrow-anymore/

    Neil has some outstanding arguments for exploration as a driver of economic prosperity. He uses 3 hypothesis for innovation, self preservation (war), economic exploration (sending Columbus to find gems and spices), religious (Great Pyramids). The earliest undertakings were always funded by the state. The people writing the cheques now are the politicians. The economic benefits were not known when the various explorers set sail. However, once the risks became known, private industry moved in and those countries prospered. In America’s case, we can see the benefits of NASA’s space exploration now with the burgeoning low earth space industry.

    Neil also argues the case that people need to start dreaming again. Rather than saying “learning is good”, he argues that if people start dreaming of tomorrow they will WANT to learn!

    On another topic, the shortness of the political cycles is a problem. It is widely acknowledged that CEOs should be judged on the long term performance of their company. However, how can you do the same for a politician? Politicians have until the next voting cycle. How can you incentivise a politician to look long term when they may only have 3 to 4 years? It’s a problem I don’t have an answer for. Neil states that the one bank bailout of $750 odd billion was more than the budget of NASA over it’s entire history. Judging by that, funding for exploration is not an issue.

    It is my belief a country should be run like any other business. Many of the same principles apply. Competitive advantage, revenue, expenses, balancing the books, capital expenditure on infrastructure etc. Where can competitive advantage come from? Research and development. Australia should spend more on exploration. The argument “how can we spend money on exploration when we have so many other problems” doesn’t hold weight with me either. Even the low socio economic people of Australia are living far better than they did 100 years ago due to the progress that has been made by innovations.

    It will be a long process, but I believe pushing the exploration frontier (eg space) will provide long term economic benefits as Australia will be doing things other countries haven’t even thought of yet! It won’t matter if we sell off old assets because we will have new innovative assets which others will want.

  20. Roger, I would support foreign investment that does not involve selling assets for the reasons you point out. Here is an article written by the IPA
    http://www.ipa.org.au/news/2961/foreign-investment-is-always-a-two-faced-policy. Where it says;
    “Australia has always been utterly dependent foreign capital to finance its development.
    We’re small, open, and desperate for other people’s money. We have more economic opportunities than capital to service them.
    PM Abbott stated yesterday
    ” “It’s got to be the right foreign investment, it’s got to be foreign investment which is in our national interest”.
    Roger, What would you consider presents foreign investment in the national interest?

  21. Very interesting thoughts Roger. I would agree that value adding is the long term solution and innovation is the bridge to get there. Many innovations arise from small business entrepreneurs who should be supported by government policy. Reallocating subsidies from foreign owned and uncompetitive “old industry” car makers would be a good place to start. Reinstating the voice of science and technology in the Abbott ministry would be another.

    I have no problem with allowing sensible levels of foreign investment in the resources and agricultural industries. Having worked in the coal industry for many years, I have seen many foreign companies come and pour many billions of dollars into Australian jobs and industry and end up leaving with a hole in their pocket. As you say Roger, price taking industries do not, in the long run, make super profits. Let others take these risks if they wish.

    I do have a problem with the new Governments downgrading of Australian science and technology. After all, every innovation has some foundation from science. Or does Tony Abbott believe innovations are somehow handed down from God? Surely Australian industry deserves all the support it can get, both intellectual and financial. The government should provide a measure of both.

  22. Perhaps Mr Robb should convene a summit of all those business owners who make things and export them at a profit. Let them tell him what the government can do (or not do) to promote wealth creation.

  23. Well said. And of course easier said than done. Part of the problem must stem from the work backgrounds of our elected officials?

    On both sides, student politicians, political staffers, bureaucrats, union officials and lawyers. Little comprehension of value creation, just moving the pieces around the board for the benefit of themselves or their narrow constituencies.

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