Interest rate comparisons continue to point to growth in Australia as well as China, India, Russia and South America: Good news for us!

News Corporation is positioned for growth, but will an expensive acquisition, out of the blue, hurt shareholders again?

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APRA (Australian Prudential Regulation Authority) released Banking statistics last week, updated for the March 2010 quarter. Of some concern is that total shareholder equity for the Australian banks had barely increased between June 2005 and March 2010 beyond the amount of additional capital that has been raised.

Share Capital - which represents issued share capital - has increased $60,549 million, whilst the total shareholder equity has increased by only an extra $2,059 million to $62,608 million. That is a 101% increase in issued capital that has only resulted in an increase of 54% in total capital.

APRA reports that net profit has decreased by 7% in this time. As Stockbroker BBY has reported, if the Green political party forms a successful coalition with the Labor Party, then expect that the bank fees will come under pressure to be regulated. Suggested changes have been regulating the margin banks charge over cost of funds, limiting/abolishing ATM fees and account fees etc.

Both the Reserve Bank of Australia and APRA have reported that bank asset growth has flatlined since the start of the year, with the RBA figures being published up until 31st July 2010. This will put pressure for the banks to increase margins and fees. If the Labor Party stays in power, this will certainly be a challenge.

Michael Cornips

Check out this graphic from the Wall Street Journal showing which sectors lost jobs in the US since 2008.

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Looking at past Federal Budgets shows just how hard it is to produce accurate forecasts.

The table compares the initial May Budget and looks at, with the benefit of hindsight, the change in forecasts in the following year. In the case of the May 2010/11 Budget, the Treasury produced an updated forecast in July 2010, for use by both political parties in the election campaign.

In 2009/10, due to the GFC, forward estimate receipts were reduced by $176 Billion, combined with an increase in $92 Billion in expenditure to help stimulate the economy.

Net Financial worth (NFW)decreased by $298 Billion (+$62 falling to -$236 Billion) for the forecast to 2011/12. The following year NFW increased by $94 Billion.

What is a certainty, next year the figures will be different.

Net Financial Worth is defined as total financial assets less all liabilities. Assets include the Future Fund ($67 B), Education Investment Fund ($5.8 B), Building Australia Fund ($10 B), and Hospital Fund ($4.8 B), totalling about $86 Billion. Liabilities include $140 Billion in Superannuation liabilities.

Michael Cornips

Graph: Year over Year percentage change in lending (source: RBA)

The RBA released the monetary aggregates this morning. The highlights are that overall lending expanded year over year by 1.79%, up until 30th July 2010. Investment Housing lending is showing continued resurgence, countering the declines in Owner Occupied lending. Both sectors of home lending are still growing at 8% per year. Personal lending has shown the greatest recovery from the 11% annual contraction, to a 3% growth.

Business lending continues its decline, maintaining an annual contraction of 7% to 8%. Seasonally adjusted business lending is running at $683 Billion, a $56 Billion decline over 12 months. I do not believe this number is as bad as it seems, for the following reasons. Business lending is being replaced by borrowings of the State and Federal Governments. Over the 12 months to June 2010, total Government borrowing has expanded by $70 Billion, from $227 Billion to $297 Billion, offsetting the contraction in business lending.

In addition, figures released by the ABS (Australian Bureau of Statistics) yesterday show that Corporate profitability is expanding rapidly, despite the contraction in lending. I have split out mining company profits from overall profits, which shows corporate profitability (excluding mining) expanded by 10.6%. This is not bearish.

Total corporate profitability only expanded by .6% for the year, but this is due to the more cyclical nature of mining profits over the 12 month period. For the quarter, March 2010 to June 2010, overall profitability increased by 6.4%.



If the US market vaguely saw these type of numbers there would be a massive rally. Australia appears to slavishly follow the gyrations of the overseas markets, but we should start to recognize that our economy is more a part of Asia, than it is of the US/Euro bloc. Our unemployment is one of the lowest in the World, we are seeing 5% plus wage increases annually, our working population did expand from 10.6 million people to 10.9 million people, retail sales rose in July greater than expected, building approvals rose 2.3% in July, and corporate profitability is accelerating.

In July, the Treasury Department published updated budgetary forecasts over the next 3 years for the Political parties to use for the "balanced budget" promises they were making. Treasury forecasts, being independent of the political process, are suggesting balanced budgets in 3 years because of growth in the economy. Given the figures above, the forecasts are starting to look reasonable.

Tomorrow (Wednesday), GDP figures are to be released, with expectations of a .9% increase. Look for a surprise on the upside.

Michael Cornips

The Independent Ministers are asking to get access to Department heads so as they can get accurately briefed on the state of affairs of the Country. Amongst other things, they would like to meet with the federal Treasury Secretary, Ken Henry, to get an explanation of the economic forecasts. This is certainly one of my favourite topics, and I would welcome more robust discussion on the topic, rather than the current speaking in "Headlines".

The Macro picture is the graph above. Treasury forecasts a further $50 Billion shortfall over the next 12 months, plus further debt issuance from the State Governments of $15 Billion (source ABS) . Budgets currently have total Government debt issued above $360 Billion by next year. From there, the Governments will point out of that debt is actually funding capital transactions and financial assets, rather than being simply expenditure.

Currently the Federal Government budgeted "Net Debt" for 2009/10 is $53.7 Billion. They estimate that Federal Net Debt will expand to $188 Billion by 2013. http://www.budget.gov.au/2009-10/content/bp1/html/bp1_bst10-05.htm. So on a net basis that is another $135 Billion over 3 years, plus asset investments, plus gross State Government borrowings. Today the gross debt is $300 Billion, so with the expansion in net debt, asset investments, and gross State Government borrowings, the number looks to be in the vicinity of $500 Billion plus.

To put that number into perspective, according to the RBA (release B2), total Commercial loans and advances outstanding, as at June 30 2010, is $622 Billion. So total Government debt issuance is rapidly expanding to being a sizeable component in our debt market, possibility putting pressure on the private sector.

It may be inappropriate to comment on whether the expansion in debt is good or not, but like the Independent Ministers, it would be great to shine a light on the detail of the forward estimates.

Michael Cornips

RBA cash rates are currently 4.50%, with the 5 year Bond rate at 4.55% and the 10year rate is 4.86%.

This is the usual chart you see when looking at the performance of the Dow Jones since 1928. It suggests that in the long term sharemarkets generally go up.



The Dow Jones expressed in ounces of Gold tells a different story, one of Government spending and inflation. The purchasing power of Gold generally is stable over very long time periods. In October 1928, the DOW Jones closed at 252, but the price of Gold was $20.63, or expressed in Gold ounces, the DOW was valued at 12.2 ounces. This was the period of the bull market, with the DOW eventually reaching a monthly close 380 in August 1929, or 18.4 ounces of Gold. The DOW reached a monthly low of 43 (an 89% fall) by June 1932. The DOW was valued at 2 ounces of Gold. The DOW closed 1944 at 152, or about 4 ounces of Gold.



In 1944, the Bretton Woods agreement was reached, making the US dollar the World's reserve currency, and effectively in charge of the printing press. Between 1934 and 1967, the price of Gold was held at $US35.00. In 1967 the DOW was trading at 905, or 26 ounces of Gold. The World became concerned that the US was printing more money than was backed by Gold, causing disruptions in currency flows. The first reaction was to allow the price of Gold to rise, effectively creating more backing for the US Dollar. What happened in the 1970's is eerily similar to what has happened over the last decade. Richard Nixon's administration took the US off the Gold Standard in 1971, in clear admission that it had relied too much on the printing press rather than true economic growth.

The DOW fell from 900 to a low of 608 in September 1974. The Gold price rose from $35 to $154 over the same period. (Sound familiar). Expressed in Gold prices, the DOW fell from 26 ounces to 4 by 1974. The oil prices quadrupled and inflation took hold in the 1970's as the Government's only solution was to continually add liquidity to the market. The 1970's finished with the DOW at 839 (nowhere over 13 years), but Gold was $533. The DOW was valued at 1.5 ounces of Gold.

The beginning of the 1980's marked the great bull run in interest rates, and the preferred weapon of choice to maintain economic growth.



1980 was the peak in Gold prices, and the start of the 10 fold increase in the sharemarket. By the year 2000, the DOW rose had risen from 839 to 11,497. The economic prosperity removed the fear contained in the Gold price, with the price falling to $290 in the year 2000. The DOW was valued at 40 ounces of Gold, up from 1.5 ounces in the late 1970's.

There is now no more power left in lowering interest rates (can't go below zero), and US domestic Government debt is growing exponentially, proving that adding more liquidity is not having any effect.

This is the period where World power has to shift away from the US. The US deficit is running at above $1,300 Billion per year, with their Defence spending running at more than half of the deficit, or $662 Billion for the 12 months ending 30th July 2010 (source http://www.fms.treas.gov/index.html). The World is unlikely to want to continue to fund these deficits, as the US's main export is debt. Like the Bretton Woods agreement of 1944, the World will need to establish another source of stability.

Michael Cornips

Half the lies they tell about the Economy aren't true. (with apologies to Yogi Berra).



It is always difficult to get an overall clear picture of the Australia's Budget and expectations. Above is a snapshot summary of the forward estimates in the Budget papers. As the estimates are provided by the Treasury Department, it is interesting to note that they predict a 30% increase in revenue, so as the budget is balanced by 2014. Both political parties support the overall forecasts of the Treasury Department, so a balanced budget is predicated on a very strong economy.

On the plus side of the argument is that wages growth figures released yesterday show year on year increases of 5%+. This should have increased tax revenue, combined with bracket creep. Also, net migration and natural increases in the population, added 2.7% (or 300,000) employed people to the workforce over the last 12 months, further increasing the revenue base. Overall company tax is running at about $56 Billion annually, so the additional impost of $9 Billion + on the mining industry was an important policy of the Government to get through.

On the negative side, both parties are now talking about restricting migrant intake into the country. Even with a 5% increase in the average wage, and 2.7% increase in employed people, taxation revenue from individuals fell by 1.7% in the 12 months to May 2010, highlighting the inconsistency between the figures. Also there is considerable concern with the UK and Europe undertaking austerity plans, impacting any potential future growth in the World's economy.

Taxation revenue is directly linked to a percentage of Gross Domestic Product (GDP). So the Treasury Department is predicting a very bullish economy over the next 3 years. GDP is also linked to indebtedness in the Australian economy. Unfortunately, a one dollar increase in GDP requires more than one dollar increase in borrowings. Currently every extra dollar in GDP requires 2 dollars in debt.



A predicted 30% increase in GDP will require borrowings in the economy to expand 30% to 60% from the current level of Bank assets of $2,600 Billion. This is the debt bubble Steve Keen, a prominent Australian economist, continually refers to. http://www.debtdeflation.com/blogs/

The problem is not whether Treasury is wrong in their growth estimates, it may be whether they are right.

Michael Cornips