A tax victory

This week in Talking Finance, it's all about politics, the economy, the markets, and technology!

• Malcolm Farr, National Political Editor for news.com.au, tells me about the government's tax cuts;
• Ryan Felsman, Senior Economist at CommSec, takes me through the economic news of the week;
• Michael McCarthy, Chief Market Strategist at CMC Markets Australia, tells me why we’re seeing the index at a ten year high; and
• Shara Evans, Technology Futurist, runs me through China’s 1984 like future.

Hello and welcome to Talking Finance, I’m Alan Kohler.  This week the politics is all about tax cuts and I spoke to Malcolm Farr, National Political Editor for News.com.au yesterday, Thursday, at which point they were still negotiating.  But he reckons that they’ll get through, probably through now and if not now then next week.  Mal gives us a bit of a run down on what that means and it’s very interesting and a most interesting situation for both the government and the Labor Party.  As for the economy, we’re talking to Ryan Felsman, Senior Economist at CommSec. 

For the markets, it’s Michael McCarthy, Chief Market Strategist at CMC Markets Australia because we’ve got the index at a 10 year high.  And finally, Shara Evans, technology futurist, talks us through what’s going on with facial recognition technology and particularly in China where it’s become 1984 all over again.

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[Parliament audio clip]

And as usual it’s been a huge week in politics and to talk about that, here’s Malcolm Farr, the Chief Political Correspondent for News.com.au.  Has the tax bill gone through yet or not? 

MF:  It’s still in the Reps.  It was sent down, amended by the Senate with the tactic being that they would immediately in the Reps punch it back to the Senate, reject the amendments and punch the legislation back to the Senate where the government appears to have the numbers to get it passed. 

What’s changed do you think, Malcolm?

MF:  Well, there’s the two centre alliance senators appear to be willing to back the legislation.

Who are they?

MF:  The former Xenophon senators and the two One Nation senators appear willing to back it now Pauline Hanson has in great grandstanding fashion announced that as if she was the sum total of the government victory.  They will have the cross-bench numbers.  As you know, the government would need support of 39 senators at least to get legislation through.  It only has 31 in its own name so it needs at least 8 of the cross-benchers and it appears to have those numbers.  When the legislation goes back to the Senate, depending how much they want to debate it again, we could see it pass either late today or early next week.

How much of a profundity, if I can put it that way, for Australian politics will this be?  Will this be a big deal?

MF:  I don’t think so.  I think that a lot of people out in the broad electorate will be happy that somebody’s thinking of how much tax they pay.  They’ll be happy that low and middle income earners will be tended to first and they’ll be happy that any benefits that go to higher income earners, $200,000 a year plus, essentially will be put off for six or seven years.  Both sides, both the government and the Labor Opposition are presenting packages that have those basic intentions. 

In the end, if there is a matter of duelling tax packages at the five by-elections on July 28 or the general election expected in the first half of next year, essentially it’ll come down to a matter of trust.  Do you trust Bill Shorten to deliver or do you trust Malcolm Turnbull to deliver.  I think character readings will play an increasingly prominent part of any election campaign.

But if the government goes to the by-elections and the election having passed the legislation then at least it can say it’s delivered.  Will the Labor Party have to promise basically to repeal that legislation and pass its own?

MF:  Well, you are possibly old enough, only barely, old enough to remember Kim Beazley and ‘Rollback’.  Back in 2001, the Labor Party opposed the GST but it got through parliament and Mr Beazley, then Opposition Leader, pledged that when Labor was in government it would rollback the GST, not eliminate it completely but roll it back by removing some items covered by the tax, such as, funnily enough, women’s sanitary products.  Of course, Mr Beazley couldn’t convince the electorate that he would roll [Rolling R] back the GST and John Howard won two more elections, 2001, 2004. 

When Labor got into office in 2007 it didn’t rollback.  I use that rolling roll back because Peter Costello used to get up and take the micky out of the whole thing.  He would always refer to, ‘Rollback.’ [Rolling R] and it was very immature and juvenile mockery which always got me laughing anyway.

[Laughs]

MF:  But if Bill Shorten is reduced to rollback promises, it’s a very sensitive position to be in.  One thing, you don’t know when Labor is going to get into power to do it.  Secondly, very rare is the government brave enough to take tax cuts away from people and thirdly, does the electorate trust him to do that?  Again, I go back to trust because I think that’s going to be an essential element, not just in the tax debate but the overall economic management.

How do you think the government’s travelling at the moment?

MF:  It’s been a pretty rough road, hasn’t it?  It’s run out of feet to shoot!

[Laughs]

MF:  When you take the National Council decision on the ABC, that was a shocker.  You take Tony Abbott standing up and the former Prime Minister saying he might cross the floor on an energy policy that already had been approved by the party room.  When you take instances such as the dreadful sackings projected for Telstra at a time when the government is saying it’s creating jobs all over the place, it’s a very, very difficult road for the government to be travelling on at the moment.  One response by it could be a return to the issues favoured by its base and they include immigration etcetera…  Even given those difficulties, and they are significant, I don’t think Malcolm Turnbull can be written off at this stage.

I imagine the Labor Party will be hanging onto the ABC resolution by the Federal Liberal Party Conference like a drowning man with a raft.

MF:  Well, it’s not a bad one because as you would know, whatever you think of various individuals who operate in the ABC, out in the regional and rural areas it’s an essential source of information and entertainment, and in the cities it’s very popular as well.  Further, if you privatise the ABC or even parts of it, it would increase the competition for advertising, which as any news or broadcasting outlet will tell you, is already fractured and a tooth and claw matter with so many different players from the digital revolution.  It wouldn’t be doing existing broadcasters and news outlets a favour as such in that area and it would be upsetting a lot of people.

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It was a deceptively quiet week in economics but there’s actually quite a lot going on below the surface.  To discuss that, here’s Ryan Felsman, Senior Economist with CommSec.  Ryan, the weekend economics is a bit thin.  There was the RBA minutes the other day and they seem to have left out what they’d said in the previous couple of sets of minutes which was that the next move is more likely to be up than down.  Did you think that was significant?

RF:  Yeah, it’s an interesting one, Alan.  Governor Phillip Lowe has been reiterating in recent speeches and also in commentary that certainly the next move would be up in interest rates rather than down, so that omission on Tuesday was quite perplexing and grabbed the attention of economists and market participants alike.  Really, that was quite strange, but it did detract from the fact that the Reserve Bank remains quite positive on the global and domestic economic outlook and also the backdrop.  Obviously, there’s been a lot of focus on merging signs of stronger wages pressures. 

Certainly, that’s evolving in terms of their business liaison program.  But we think that wages growth will only tick up gradually from here.  Of course, there’s mention around the tightening of lending standards which are expected to be only modest going forward and obviously average mortgage interest rates have fallen at the same time.  Our expectations are that the interest rates in Australia will be unchanged at least through to the end of this year.  We’re expecting a potential lift in February next year but that’s largely dependent on the data and also what transpires as far as consumer prices and wages are concerned.

I don’t know whether you’ve picked this up but Phil Lowe is in Cintra in Portugal at the moment at the European Central Banks Annual Conference and he actually, according to the Financial Times, he kind of followed up with the RBA minutes the other day saying that the issues that everyone’s grappling with, that is to say the underlying causes of low wages growth, were probably global and probably structural and he said, “The system looks less inflation prone than it once was, we just need to accept inflation will be lower for a while.”  That kind of possibly explained why they left that out of the minutes.  

RF:  That’s right.  Perhaps it was an opportunity for the Governor to provide some clarity around their views on inflation and wages in Cintra.  Certainly, you’re right, they came out and very much said that certainly issues around global inflation, particularly with low wages growth and also low goods prices are certainly contributing to that benign inflationary backdrop globally and particularly on the wages front where there’s that breakdown in that Phillips curve between falling unemployment and rising wages.  Certainly, a structural issue globally. 

Obviously technological changes are ever present.  We’ve got an ageing population at the same time which is boosting the participation rate for older Australians who may work in the services sector.  It’s less labour intensive and of course casualisation of Australia’s workforce is a key focus.  I think we’re the third highest OECD nation as far as part time workers are concerned, around 30% in total.  That increased casualisation of workers and also a diminishing presence of unions as well.  The number of Australians with union membership has fallen from about 40% to 15%.  

Yes indeed, there are big changes.  Do you think that this is going to change everyone’s view eventually about what’s going to happen with interest rates?

RF:  Well, I think the key thing here is obviously wages growth.  We are seeing some emerging skills shortage.  For example, yesterday we had the skilled internet job vacancies released by the Department of Small Business and Jobs.  If you look at some of those skilled vacancies, particularly in the mining sector they’re starting to emerge.  Job ads in the mining sector were up in the vicinity of 34% over the course of the last 12 months and engineering job ads are up by 27%. 

We’re also seeing science professional job ads up by 23.5%, so we are seeing some of these skills shortages emerging in some of those STEM and skill type areas.  If we have insufficient workers to fill those jobs then that should push wages up eventually, but of course as I’ve mentioned there are some structural issues at the moment and of course there’s excess supply in the labour market.  The underemployment rate is currently at 8.5% and the under-utilisation rate’s up 13.9%. 

There’s people out there who are looking to work longer hours or want to work more hours, perhaps a part time worker and wants a full time job and that excess supply of labour with the unemployment rate at 5.4% means that certainly we need to get the unemployment rate towards full employment levels of around 5% for that tightening of the labour market to occur sufficiently to see wages growth gradually eventuate.

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To talk about the markets I’m joined by Michael McCarthy, Chief Market Strategist at CMC markets Australia.  Michael, the markets hit a 10 year high this week on Wednesday.  That was good I guess.

MM:  It certainly is good news and especially that it came against the backdrop of negative leads from international markets, concerns about potential for a trade war, a rising interest rate and a lot of pressure on the Telstra share price.  To see the market break to new highs as measured by the index is really a very impressively strong performance.

Michael, I suppose it means that the market is not too worried about trade wars or anything else for that matter?

MM:  Well, that’s certainly one interpretation, another might be that some people see Australia as a potential winner out of a trade war.  I know that sounds very counter-intuitive because trade wars tend to slow global growth.  But Australia’s economy is quite small in the global context and given a deep and rich relationship with both China and the US, there’s potential for trade demand to be directed away from those partners and to Australia, and of course being a smaller economy that might have an effect it outweighs any slowdown in the global scenario.  It does appear some investors at least internationally are looking at that dynamic and the lower Australian Dollar, there’s reasons to be investing in Australia at the moment. 

Well the ASX200 index has had a good couple of months since the beginning of April, but 2018 year to date it’s up 2.5% or something and driven mostly by the energy index which is up close to 9%.  The banks are down 5% year to date, so there’s a bit of a dispersion between sectors isn’t there?

MM:  Absolutely, and it’s active investors, those who are rolling with it, taking profits when they get good gains and jumping in on sectors that are underperforming and looking for a turnaround that have really won in their current environment.

Yeah, I’m just looking at the best performer on the market in the ASX200 year to date is Sirtex Medical, that’s very interesting.   Did you know that?

MM:  I did not know that, Alan.

I suppose it’s an indication that turnaround’s a good thing to invest in.

MM:  Quite possibly, and of course acquisition – the companies bidding for each other has been one of the key drivers.  It’s certainly helped Sirtex and it’s helped groups like Healthscope where there are some doubts about the future of the business but a bid on the table has pushed the share price significantly higher.

Are you guys getting much shorting of stocks like the banks or Telstra?

MM:  Yes, is the short answer to that.  A lot of investors of course are long only.  That is, they are either holding a stock or they don’t hold it.  But on our trading platform we do see significant shorting and at the moment I’m looking at the overall market index and by value our clients are 95% short the market.  There is certainly a lot of scepticism about the rises we’ve seen both in individual sectors and for the broader market and ironically that dynamic means that the gains could be even more sustainable because people are underweight the market or they’re actively shortened.  As it rises they’ll be forced to turn their positions around. 

That’s amazing!  95% short by value, bloody hell!

MM:  Yeah, 67% by number of accounts, so two-thirds of clients, who have a position in the index are short.  But clearly some of the bigger players are involved because the value is so high.

The bears are out in force, they’re dominant at the moment, that’s amazing.  As you say, they’re going to have to cover.  If it goes the wrong way, which it could well do, it could actually give it a bit of a whiplash upwards, give it a spike.

MM:  That seems likely at the moment and of course it fits with that description of a bull market that starts in despair, rises on scepticism, rises further on optimism and then dies in euphoria.  It looks like we might be about to make the transition from scepticism to optimism.

Right, and it’s still a fair way off euphoria then?

MM:  Well, yeah.  A few market commentators have made calls for a test of the all-time high at 6,852.  Of course, when the index was down around 5,700 they copped a fair bit of stick, but given the breakthrough to 10 year highs it looks like that’s a more realistic scenario than some might have thought. 

And as we’re saying, the performance of the market hasn’t been that great.  I mean, the XJO, the ASX200 index financial year to date is not doing that great either.  It’s up 9% financial year to date.  That’s, I suppose, not too terrible but I suppose it’s the banks really that have been holding everyone back and getting everyone gloomy, and Telstra and AMP. 

MM:  Well, that’s right.  Financial services have been a real weight on the market and those share prices have come off significantly.  I think the financials index is down around 28% from its peak.  Given how significant they are on the index, still making up more than a quarter of the value of it, that sort of fall holds everything back.  The rest of the market is clearly doing a lot better. 

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Here’s Shara Evans, technology futurist, to talk about facial recognition and what’s going on there, particularly in China.  Shara, you wrote a piece recently about what’s going on in China where they’re using artificial intelligence, facial recognition, smart glasses and goodness what.  But it’s 1984 there – just explain to us what’s going on as far as you understand.

SE:  Okay, I’m not a Chinese expert, my information comes from third party reputable news sources, but what China’s doing is in many ways not different to what governments around the world are doing.  That is, they are amassing very, very large databases of people’s faces using a technology called facial recognition which is a subset of artificial intelligence and they are in real time detecting who particular individuals are. 

In China, what they’re doing is equipping police or other government workers with glasses that have augmented reality capabilities.  These glasses have cameras in them that are able to use facial recognition, tap into these big databases and in real time an officer who’s looking around be able to identify a particular individual.  What would happen is, let’s say you’re looking at a crowd of people and up pops a display that you can see in your line of site but no one else sees because it’s in the digital world and it might have a red box around it saying ‘known criminal’ and then the name of the criminal. 

They’re doing it through the use of this technology called facial recognition which is getting faster and faster and more accurate.  But I do want to say a couple of things about facial recognition.  First is that it is not full proof.  The accuracy of facial recognition systems very much depends on the dataset and images that are fed into the system.  If you’ve got really high quality images such as pictures from passports or driver’s licences where identity has been verified or at least most people have been verified unless they’re very tricky criminals, you’ve basically got a pretty good database of images that you can rely on for accuracy.  Whereas, if you have a database that might include images posted on social media, the accuracy and identity affiliated with a particular picture could be very questionable.

But most people have got a passport or a driver’s licence haven’t they?  I mean, basically it means that the government knows where you are all the time, right?  Or could do.

SE:  Well, in China that would be it and if you imagine other technology which is again an aspect of facial recognition and artificial intelligence, that being motion detection, what the very sophisticated algorithms can do is look at the expression on your face and determine how you’re feeling.  From what I understand with what’s happening in China, part of the drive is to keep people in line with what the government wants them to do.  You can imagine that there is a broadcast about something that’s very pro-government and you’re scanning the expressions of people in a crowd listening to announcements and you see somebody with an expression that says, ‘I don’t believe that.’  Or, ‘I’m against that.’  Or something else that’s contrary, that could actually lead to a trigger that has real world ramifications if used in that way.  That’s where you start to really get into 1984, which is thought police.  You know, you haven’t actually done anything, you haven’t said anything, but maybe you’ve merely had an expression on your face that says I don’t like the sound of that.

Would the European privacy laws that have just come in a couple of months ago be an antidote to this?  I mean, obviously China’s not about to do them, but how extensive are the new laws in Europe and would they apply to your face? 

SE:  The new laws in Europe called GDPR or General Data Protection Regulation, cover information including your facial database that pertains to any EU citizen anywhere in the world.  If an EU citizen was in China and had their face captured in a Chinese facial database, that would fall under the auspices of that law.  The purpose of this law is to literally turn data ownership on its head.  Today, the default is with every website that you interact with, whether it’s social media or an individual company, you’re inputting a lot of data about yourself where they’re able to collect a lot of data about you by your interaction with the website. 

The default there is that the data is theirs to own and use as they like.  What these new laws do is turn that around and say, ‘No, you don’t get to have default ownership and use of this data.’  End users have to specifically opt in to allow you to use information and they have the ability to say, ‘No, I don’t want you to use my information, delete it!’  And what’s interesting about the EU laws which came into impact on the 25^th of May, is that they have a real sting in the tail if there’s a violation.  If there is a suspected data breach, an organisation has 72 hours to report it.  If it turns out that there is a breach, then there are very severe penalties.  Those penalties are the maximum of 20m Euros or 4% of worldwide turnover. 

That’s enough to make even the very largest social media giant stand up and take notice.  But you’ve probably seen in your inbox in your emails, a whole bunch of newsletters that come to you saying, ‘We’ve just updated our privacy terms.’  And a lot of that is because this new law in Europe has come into effect.

I’d like to see Europe try to fine the Chinese Government 4% of its global turnover! [Laughs]

SE:  That would be an interesting legal case because it’s not just a company there, you’re talking government to government.

Happy birthday Lionel Richie, who turned 69 on Wednesday would you believe, and here’s ‘All Night Long’ which I would say that Lionel is not quite up to jiving all night long anymore at 69, but that’s okay, we all get older.

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That’s it for Talking Finance, I’m Alan Kohler, have a great week.

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