A winner takes all society

This week on Talking Finance: 

• Bernard Keane, Political Editor at Crikey, runs through the latest political news including last week’s photo opportunity between RBA Governor Philip Lowe and Treasurer Josh Frydenberg;
• Diana Mousina, Senior Economist – Multi-Asset Group at AMP Capital, puts the latest RBA minutes under the microscope and tells us what to expect with the employment data out today;
• Evan Lucas, Chief Market Strategist at InvestSMART, checks the pulse of the market and shares his thoughts on which sectors are in for a good ride; and
• Steve Sammartino, Author & Futurist, explains what Amazon Prime Day is all about and why it matters.

Hello and welcome to Talking Finance, I’m Alan Kohler. This week on the show we’ve got Bernard Keane, Political Editor at Crikey, running us through the latest political news, including last week’s photo opportunity between the Governor of the Reserve Bank, Philip Lowe, and the Treasurer Josh Frydenberg. Diana Mousina, Senior Economist at AMP Capital, she’s in the Multi Asset Group there, puts the latest RBA minutes under the microscope and tells us what to expect with the employment data today, that is, Thursday. Evan Lucas, Chief Market Strategist at InvestSMART, checks the pulse of the market and shares his thoughts on which sectors are in for a good ride. And Steve Sammartino, Author and Futurist, explains what Amazon Prime day is all about and why it matters.

[Parliament audio clip]

And now for a look at politics, here’s Bernard Keane, the National Political Editor for Crikey. Hey Bernard, what did you think of the sit-down – the photo-op between Josh Frydenberg, the Treasurer, and the Governor of the Reserve Bank, Philip Lowe, last week? Which looked a bit weird, but what are the politics of that?

BK: Well it did look a bit weird… Let’s go back to the financial crisis, when Kevin Rudd and Wayne Swan, but mostly Kevin Rudd in the spotlight, put together that stimulus package in the general response to the crisis in guaranteeing bank deposits, etcetera, etcetera… They leaned back then really heavily on Ken Henry, who’d obviously been Treasury Secretary for a number of years at that stage. Ken Henry was almost a human shield at that point but it was politically expedient for them to do that because Ken Henry had the economic credibility at that point and Kevin Rudd and Wayne Swan were kind of untested, well literally, but certainly in the political sense they hadn’t built up a great deal of the economic credibility in the way that say, Howard and Costello had.

But what would a government that now was worried about the state of the economy and the need to encourage confidence in the economy, the need to assure and reassure voters about the state of the economy. What would you do? Would you go and get Phil Gaetjens current Secretary of the Treasury out to back you? Well, that’s not really an option because…

Nobody knows him! He’s Phil Who?

BK: Well, nobody knows him and those of us that do know him, know him primarily as a Peter Costello and Scott Morrison’s sort of Chief of Staff, so it’s a bit hard to rely on him for any sort of economic credibility at this point. Maybe in 10 years if he’s still there, yes. But at the moment, no, so who do you turn to? Well, you turn to Philip Lowe and there’s an obvious problem with that which is that the RBA’s supposed to be independent but their interests are aligned with the Government when it comes to the economy. Obviously, both the Government and the Reserve Bank want to make sure that the economy continues to grow strongly. Nonetheless, it’s supposed to be an independent Reserve Bank and the Governor’s not there for photo opportunities.

No, well the other problem is the Governor had just had a meeting at which he and the board had cut the cash rate to 1 per cent...

BK: Yes, well, exactly.

And said the economy, according to the minutes, was not all that good.

BK: Exactly. Philip Lowe was supposed to – and if you looked at the transcript of that sort of meeting or the media event part of it, it’s Josh Frydenberg for 99 per cent - Philip Lowe says something at the end, but he sort of says, “I agree that the economy’s doing very well.” So there was this very clear mismatch between what Philip Lowe’s been saying now, in a lot of detail, for a long time, which is there are issues around the economy, around household income, around spare capacity, a couple of other issues and a bit of a contrast to what he’s saying. For those of us who prize an independent central bank, and let’s not forgot, the independent central bank in Australia is a creation of Peter Costello – it’s a little bit worrying for him to be used as a kind of a prop for a Treasurer who is still relatively untried, he’s been in the job less than a year, and he’s kept a bit of a low profile during the recent election campaign because he was too busy trying to save his seat.

I reckon Dr Lowe smiled too much in that meeting, there was all this smiling! He would have been much better off being really grumpy like Ken Hayne was.

BK: Do the Ken Hayne glare and hope that everyone gets the signal. Well, I suppose when you smile too much it also looks a bit like you’re the hostage, hoping that the bad man will go away. For me, it nearly refocused attention on the fact that the Government, I think, is desperately hoping that the tax cuts or at least the lower middle-income tax offsets that are currently flowing out into the economy are going to do the trick along with the half a per cent cut in the interest rate, and nothing else will be needed despite Philip Lowe saying over and over, “More infrastructure spending please and more economic reform that’s going to lift productivity.” That’s the other sort of story that’s received less attention, but we had a very damning Productivity Commission report a couple of weeks ago saying that productivity and innovation in Australia are really in a funk and there’s a real need to get those working again.

Quarter after quarter in the national accounts, labour productivity is either negative or it’s flat and that’s been the way now for a couple of years. That’s just one indicator on a broader situation which is, where’s the growth going to come from in the economy, apart from the fact that, courtesy of various mining disasters, iron ore is going gangbusters. Where’s the growth going to come from when we’ve got a construction industry that’s almost in recession. We’ve still got big question marks over house prices and our productivity and our innovation are lagging.

Bernard, just on another topic, you had a piece today on APRA’s Capability Review done by Graeme Samuel and his panel, and the headline said, ‘You want a financial services culture review, start with the Liberal Party.’ What do you mean?

BK: Well, if we look at the history over the last 10 years, really it’s been in big part when it comes to financial services regulation. The Liberal Party, not the National Party by the way – the National Party have been on the side of the angels when it comes to financial regulation, a bit heavy-handed at times, but nonetheless. When it comes to Liberals though, really they’ve been doing their level best to deregulate, to strip away financial regulation, to encourage the banks and to really go after industry superannuation. All those things have really been proven by recent history to be exactly the wrong direction that we needed to go in and Graeme Samuel did a cultural review of Commonwealth Bank, not by himself but he led that. He’s done one with APRA. I think he needs to do one of a Liberal Party that’s shown it’s all too willing to be really an agent of the big banks and still has, even after all this time, still has this sort of weird obsession with industry superannuation. I mean, all political parties have their weird obsessions, but the liberal obsession with the industry superannuation sector is just downright disturbing, and what better demonstration of a cultural problem can you get than this sort of ideological weirdness about industry super, which from another perspective I would argue is actually neo-liberalism’s greatest triumph. I mean, what better way to co-opt trade unions and workers into the very heart of the capitalist system, than via industry superannuation sector. But obviously the Liberal Party doesn’t see it that way.

No – what a marvellous point on which to end, Bernard, thanks very much.

BK: Thanks, Alan.

[Music]

And now to tell us about the economy, here’s Diana Mousina, Senior Economist in the Multi-Asset Group at AMP Capital. Hey Diana, what did you think of this week’s RBA minutes, did you learn anything from that?

DM: I don’t normally tend to learn too much from the RBA minutes unfortunately these days because they have so much communication in throughout the month that they’re not always the best signal to the central bank’s sentiment. I’d say that the minutes were probably not as dovish as their post-meeting statement. I still think they’re concerned about the inflation outlook and global growth, but they didn’t explicitly come out as much as they did in the post-meeting statement and say that there is still a need to cut interest rates, which I think was really evident in the post-meeting statement.

They took out one statement from the minutes that were in the June minutes, which was it’s more likely than not that there’d be another rate cut. Did that change your view about anything?

DM: No, we’ve had the view for a while now that we’re going to need to see more interest rate cuts, so we still think that we’ll get another two, one in November and one early next year and there is definitely the risk that they’ll need to do some type of quantitative easing or some kind of asset purchasing program next year. The RBA is thinking at the moment that they’re going to need to do more, it’s too out of line with our own. I just think that they are still generally pretty optimistic on the growth outlook here and especially on employment. We just don’t think that they’ll be able to get the unemployment rate down towards 4.5 per cent which is what they’re currently expecting.

In fact, in that photo opportunity last week that Dr Lowe did with the Treasurer, Josh Frydenberg, he was terribly optimistic, wasn’t he? In fact, slightly at odds, you would think, with the meeting that had just taken place where they cut interest rates.

DM: Yeah, I suppose that that’s sometimes a difficulty with central banks and especially the Reserve Bank, their commentary does tend to be particularly optimistic and I guess if you’re thinking about it in a holistic sense, I mean the economy’s not actually doing too badly, we’ve still got growth somewhere around 2 per cent, the unemployment rate is somewhere a little bit over 5 per cent. If we compare ourselves to our global peers, things don’t look too bad, it’s just that Australia has had a step down in its growth profile and the outlook is challenging. But if you were just taking the numbers at hand, then you kind of think that things are actually going okay here.

We’ve got the employment data tomorrow on Thursday. What do you expect to see, what should we look for?

DM: It’s always difficult to read the employment data, it’s kind of a mixed bag and it’s been interesting that the employment numbers have actually been pretty good over the past few months. Last month we got a 42,000 increase in jobs – probably some of that is election-related and we think that the election probably added an extra 20,000 jobs or so – so taking that into account, the pace of jobs growth has slowed, but probably not as much as we would expect given the leading indicators. Things that we like looking at, the leading indicators of employment growth, things like hiring intentions, job advertisements, all these things are pointing to a slowdown, not a fall in employment growth but just some sort of slowdown perhaps below 2 per cent employment growth.

We think that that will ultimately drive the unemployment rate higher, we see it taking about 5.5 per cent towards the end of the year. The RBA want it to be somewhere around 4.5 per cent, so obviously there’s a divergence there.

Indeed, and that would suggest more rate cuts than even one or two.

DM: Yeah, I think that the conversation will continue – and it has already, people are talking about the need for quantitative easing, but that’s definitely where the conversation will move to the more interest rate cuts we get… I mean, there are reasons to be more optimistic on the economy. We’ve got fiscal stimulus coming through when households do their tax returns from now on, so we think that that’ll be a pretty good boost to consumer spending and obviously the rate cuts are going to work to boost consumer spending power as well. So, there are some reasons to be optimistic and if the global environment improves a little bit, which it should do in the second half of the year, that should be positive for Australia as well, so things might not be as bad as we expect, but I still think that we need to be definitely factoring in at least one or two more rate cuts.

Thanks very much, Diana, good to talk.

DM: Thank you, Alan.

[Music]

And now to get the pulse of the market, here’s Evan Lucas, Chief Market Strategist at InvestSMART. Evan, Friday, a week and a half ago, the ASX 200 almost reached the record high, but didn’t quite make it, and now it’s settled back and has kind of basically done nothing for a month. But I was looking at the individual indices and most of them are well below their peak, but the consumer discretionary index is way above its peak of 2007, which I think may be because it includes A2 Milk and Bellamy’s, but it’s also got Treasury Wine Estates. There are some sectors of the market that are reaching new highs. What do you think of all that?

EL: It’s interesting from the point of view that if you look at also what is being touted as one of the biggest headaches for the Australian economy, which is consumption, is going the other way, it also makes it quite interesting from that perspective. At the moment, my biggest concern that is going on in, not just the ASX, but globally, is the drive into price over earnings. We are approaching US earnings season, in fact it basically really kicked off last night with JP Morgan. Our earnings season starts in a week and a bit time, with regards to actually seeing something, production reports at the moment, and I’m just not convinced that the E part of the P is going to catch up, and that’s going to be the question.

What I am sort of fairly certain about at the moment though is that clearly all of the lowering of spreads, the drive-down in monetary policy across the globe which is expected now to happen at the Fed on the 31^st, ECB will do it some time this year… It’s going to continue to create an inflation inside asset prices, but I would agree there is not necessarily an actual backing inside of it. Today I see that there’s a lot of talk around the cyclical side of the stock market, looking at things like materials. There are enough broker reports out there showing and suggesting that your BHP’s and Rio’s of this world are toppy. That’s no hard to argue. I mean, look at Rio Tinto as a very good example, it’s gone from mid to high $60 handle this time last year to be into the $100 off the back of the iron ore price going all the way up to $127. It did ease back but it’s just all a little bit over-inflated.

But Evan, this situation’s been going for a while…

EL: Yes.

I suppose earnings have been reasonably okay, but multiples have been supported by monetary policy for a while now obviously and it’s hard to see that stopping. Monetary policy is going to continue to be easing for ages…

EL: Yes, it’s going to be a core policy, it’s going to be a core part of all investment, isn’t it? And that’s the caveat to all of this because the question therefore becomes is, with earnings season does it actually matter, the retrospective numbers, or does the outlook statement look more of the reason to get involved? Probably the next part of this is that once you have a pillar in central bank policy supporting asset prices and outlooks that therefore say, ‘Yes, we’re actually going to benefit from seeing lower monetary policy, high amounts of stimulus in the economy, possibilities of QE across Europe and the US, all of that therefore drives it up.’

But at the moment, your question about getting back to the ASX and whether or not we can reach the November 1^st 2007 all-time record high, the one thing that is catching my attention from the sector is what’s going on inside banks? The financial services space is near enough to 46 per cent of the ASX. Banks are going to find things very difficult over the current sort of five years. Their JAWS are going to get depressed, the political pressure to move on interest rates… Then there’s also the pressure from their borrowers, what they’re going to do, how term deposit holders move…?

Net interest margins are the ones that may just be a reason why the ASX doesn’t really move the dial, because I suspect that the banks themselves are going to have a bit of a poor reporting season because the outlook for them is actually not as rosy as some would expect, even with the RBA doing what it’s done.

In fact, APRA’s whacking them with more capital requirements because they’ve all been very bad. They had bad cultures, so they’re going to have to have more capital, which is going to weigh on their ratios as well, isn’t it?

EL: Yes, and so that’s part of it… CET is going to be a core driver of flat returns from banks, not just for this year, but a good decade to come.

What do you mean, CET?

EL: Capital Tier 1 Equity ratio, that is what you’re alluding to, the capital on balance sheet. You can only see that going one way over the next decade and that’s higher. The risk and the experience of the GFC and the risk that therefore comes with that. The fact that the Australian housing market is quite indebted on the household itself. The risk in the system is there, your APRA’s of this world are going to be monitoring that and therefore culture, banking Royal Commission and also the risk would therefore suggest they would need to have more capital on balance sheet. Not just that – internationally, the Basel requirements that they have to also abide by are seeing globally that increase as well. That’s why the banks will probably unfortunately be a drag. They’re not necessarily going to decline, they’re probably going to do what they’ve done for the last five years which is track, sideways, and that is a reason why the ASX has underperformed global markets because our bigger end of the market has actually realistically gone nowhere. Yes, they give you a dividend but overall the capital is just not moving.

Overall, do you think that our market is expensive or cheap or somewhere in between?

EL: Probably the latter. You certainly can’t make the case for it being cheap. There’s no real thing out there. If you look at the moment, most value funds have had unfortunately a pretty tough time because there is minimal value out there. We are not necessarily though what you could call by historical standards, expensive-expensive. We’re not like the US at the moment where they’re trading at like over 18 times earnings, we’re sitting here between 16.5 to 17. It’s not cheap, not by any means, but it’s not the most expensive I’ve seen it. And that’s also probably again why my answers have been slightly hesitant as to where we all go.

The other argument to this is, how much more up can we get towards the possible risk to the down? That’s the next question, is the 2-5 per cent that you might be thinking about to meet that record all-time high and go through it, versus the possibility of a pull-back and even maybe a correction, are fairly evenly poised. Unfortunately the loss is likely to be larger than the gain you could get out of that.

I suppose the answer is, it’s the sort of market where you’ve got to find a good company and buy that and not worry about the market as a whole.

EL: Yes, that’s exactly right and that’s why we love to say in this country particularly it’s a stock pickers’ market.

Good to talk, Evan, thank you.

EL: Thanks, Alan.

[Music]

And for our weekly technology chat, here’s Steve Sammartino, Author and Futurist. Steve, it’s Amazon Prime Day – that’s just a kind of an annual sale, isn’t it? Like a stocktake sale or something that we used to have with actual shops?

SS: Yeah, it is, and it’s a bit of a trend around the world certainly with e-commerce players. We have Cyber Monday, Black Friday. In China we’ve got Singles Day from Alibaba. It’s really a consumer promotion where they have an annual day with significant sales, anywhere from 50 per cent up to 70 per cent off on items to force some retail sales. This year, Amazon are hoping for $6.5 billion in revenue in sales on this particular promotion.

This is in Australia?

SS: This is globally, certainly not in Australia but globally that’s what they’re hoping for. It has blown up in their face a little bit because what we’ve also seen is protests around the world in many of their warehouses where warehouse employees have gone on strike due to the poor working conditions that they’re claiming that occur in their warehouse. Which is interesting given that Jeff Bezos is the world’s richest man.

Well, he’s also supposed to be the world’s nicest man. It’s supposed to be a very nice company, but in fact they’re really mean to their employees, are they?

SS: Yeah, absolutely. I mean, the working conditions there are pretty stringent. They famously put up their minimum wage a little bit higher than what the legal amount is. They pay around about USD$15 per hour. But the working conditions are really draconian, they have limited toilet breaks, very, very cold conditions in many of the warehouses, people are walking several kilometres, and in fact during the promotional period what they have now is trailer parks filled with temporary employees who follow the circuit to get work, who are otherwise unemployed, to work in these warehouses. A lot of people are saying now on social media that buying on Prime Day is equivalent to crossing a picket line – which I hadn’t really heard before, a virtual picket line. There’s been some really negative press around the world’s richest man providing really poor circumstances for his employees that make the e-commerce possible.

What is Amazon Prime Day and all that controversy you’re talking about, plus the actual growth of Amazon Prime Day, what does it tell us about online shopping in general and online retail? Is there anything we can take from it?

SS: The thing that we need to remember is the reason that prices are so low is because of the efficiency that we get at that warehousing level. Obviously, you’ve got the bricks and mortar element that gets removed that brings the prices down, but the reason that it’s so price competitive is because there’s a lot of hard labour and robotics happening at that end which creates cheap products, but it’s almost like a negative spiral that goes down where you have a winner-takes-all society where it’s really hard for anyone else to compete. Even the employee circumstances and how much they earn is really not going to help for growing the economy. It seems as though things get cheaper and there’s a limited number of beneficiaries around it.

The automation that’s happening in the warehouses, that’s only going to increase. Amazon have just brought in some new box packers which are six times more efficient than the humans that were doing it on the line in their warehouses. As a response to some of the protests, Amazon have come out and said that they’re going to invest $700 million to provide 100,000 employees with training to help them cope with the changes of the automation in the warehouses.

Well, that’s nice, good for them!

SS: Well, it seems nice. I mean, $7,000 per employee, but I can’t help but think they’re just going to be teaching the employees to teach the robots how to do the jobs that will eventually replace them. It does seem like a bit of a transition from humans to robots. Although, I mean interestingly that’s perpetual. We know, Alan, that over time humans get replaced. In Australia we had tram conductors and train conductors that got replaced, bank tellers that got replaced, automation on farming… That’s a perpetual cycle. The real question is, who should be training employees as they become structurally unemployed? Is that incumbent upon the employers like Jeff Bezos, or is that something that the Government needs to take more seriously in training people so that they’ve got the skills?

A couple of really great examples on this is, there’s more than one million jobs open right now today in the world for cyber-security that can’t be filled because that’s a skill base few people have. For the first time in American history what we have is more jobs that are unfulfilled than unemployed people, but there’s a skill gap between the people looking for jobs and the skills that are needed in the workforce at the moment.

Thanks very much, Steve, good to talk.

SS: Absolute pleasure, Alan, cheers.

[Music]

Happy Birthday the fabulous Carlos Santana, who turned 72 on Saturday, and here’s a little bit of Smooth featuring Rob Thomas to celebrate.

[Music]

That’s all from me, have a great week!