Eureka Correspondence

FoFA changes, Australia's shadow economy, Forge's warning signs

Rising against FoFA changes

As someone who fled from the conflicted advice, ruinous fees and poor performance of a retail superannuation fund, I welcomed and admired Eureka's advocacy of changes in the rules governing the financial services industry, and the Labor Government's efforts in this field.

Now, however, we have a Coalition Government undoing all the key elements of these reforms (I hesitate to suggest that this is to pay back the retail industry for its support) but I do not see Eureka raising the standard again and going in to battle for superannuants.

When can we expect Eureka to agitate against these adverse changes, or is everything fine now that we have a government of a different complexion?

Michael Dunn

Editor’s response: Thanks for your query. On Monday Alan took out a full-page ad on News Corp newspapers for an open letter that advised Assistant Treasurer Arthur Sinodinos to not go ahead with gutting the FoFA reforms.

The content of the letter is published on Alan’s weekend briefing last week, and you can watch a video of Alan and James discussing the topic here.

Australia’s shadow economy

We have heard much about the budget black hole and how badly the non-mining sector of the Australian economy is performing.

I do not believe it for one second.

There are more people, eating out at more restaurants, more often than ever before. The problem is it is a black hole: the tills are open and no one is ringing up the sales. It’s all cash and undeclared! Restaurants, Cafes, hairdressers, bars, coffee shops, laundries, car washes, fishmongers, take away places, fruit and veg, newsagents, trinket shops, butchers, bakers, candlestick makers and the list goes on.

How is this measured and how does it come into our calculation of GDP and therefore how well/poorly the economy is performing?

Name withheld

Adam Carr’s response: Thank you for your letter. What you refer to – illegal activities and those cash transactions otherwise conducted 'under the table' – are often called the shadow, underground or even black market economy. There are obvious problems estimating the size of such an economy and so analysing how it works or changes is difficult.

However, economists who have tried, including those at the US Federal Reserve, suggest that the size of the market is significant: often between 5% and 27% of a nation's measured economy for most developed economies and between 25% and 70% for developing economies.   The estimate for Australia was around the 20% mark. Given the potential size of the shadow economy, you are right in suggesting there are severe inadequacies in how we look at and measure the economy. 

Forge’s warning signs

Hi Alan. I was thinking about Forge and acknowledge your involvement. Would it be a good read for us novices if you took us through the reasons you bought in and possibly some of the signs you should have seen or did see but continued to believe in the management of the company, etc. A bit like a lessons learnt review. I appreciate it when you tell it as it is and even more so when things don’t go to plan.

Michael Stone

Editor’s response: Thanks for your question. While Alan does have Forge in his portfolio, Brendon Lau covers the stock at Eureka Report and has extensive knowledge over what went wrong with the mining services company. He has spoken to Forge’s management and has written in detail about the lessons learnt from Forge’s flop and how investors could have limited their losses, for example by using the ‘2% rule’.

You can find Brendon’s latest update on Forge here.

Moving between asset classes

Eureka Report has mentioned people moving out of equities into bonds and vice versa, and people moving out of long dated bonds into short dated bonds, yet unless the equities / bonds are extinguished somehow, for every seller there is a buyer, so they are doing just the opposite and at the same price. So what is really meant by terms such as investors are moving out of equities into bonds?

John Clark

Brendon’s response: The switch is measured by investor fund flows. For instance, PIMCO’s Total Return Fund (PIMCO is the world’s largest bond fund manager) recorded $1.6 billion in client redemptions in February, its 10th consecutive month of outflow. You would find a similar trend for bond ETFs too. Generally speaking, capital flows are not measured solely by volume but more by volume multiplied by price.

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