How big of a deal is 5G?

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

• Michael Pachi, National Political Editor for Macquarie Media gives me an update on what’s going on with the National Energy Guarantee;
• Chris Weston, Head of Research at Pepperstone checks out how the markets have been performing;
• Callam Pickering, APAC Economist at Indeed.com puts employment and wage data under the microscope; and
• Steve Sammartino, Author & Futurist, tells me how big of a deal 5G will be!

Hello and welcome to Talking Finance, I’m Alan Kohler.  What a big week it’s been both in politics and the markets, so we’re talking to Michael Pachi, the National Political Editor for Macquarie Media, who will update us with the National Energy Guarantee politics; and Chris Weston, Head of Research at Pepperstone, who looks at the markets and what’s going on with the US Dollar and it’s plenty, let me tell you that.  Callam Pickering, APAC Economist at Indeed.com, puts employment and wage data under the microscope.  And Steve Sammartino, author and futurist, tells us about the Telstra decision to turn on 5G in the Gold Coast and what a big deal that is.

[Music]

[Parliament audio clip]

And now here to talk about all things NEG, is Michael Pachi, Political Editor of Macquarie Media.  Michael, the NEG remains on a knife edge it seems.  There could be crossing the floor and relying on Labor and they might say no, who knows?  Where does it stand?  Is anyone going to cross the floor?

MP:  Look, Alan, I do think that some Coalition MPs may decide to cross the floor when the issue finally does come to a vote, probably next month or the month after.  I think that at this stage we’re talking about eight or nine people that are reserving their right to cross the floor.  I don’t think eight or nine Liberal or National MPs will cross the floor, it’ll probably be two or three that will.  But there’s no doubt the Prime Minister’s having a really hard time of this.  They got party room support this week when the National Energy Guarantee was debated, but obviously there are these dozen or so MPs that do have their concerns with the design of this policy.  The big thing here is there’s people that say, ‘Is there any real guarantee that electricity prices are going to come down?’ 

If you talk to the Prime Minister, he’s saying that prices will come down about $550 a year.  That will be a gradual decrease to $550 a year.  The problem is, there’s a lot of people within the Coalition that are saying, ‘Okay, we’ll give the NEG a tick but we still aren’t sure that this $550 will ever eventuate.’  And that, I think, is the problem that you do have some people within the Coalition that are saying, ‘We need some sort of guarantee built into the NEG that will actually see prices really come down because they believe that that’s what they can sell to their constituents in the lead up to the next election. 

But surely, the fundamental thing is, why in this case is party room democracy not working? I mean, usually if the majority of the party room votes in favour of a policy, then off they go and do it.  But this time, what’s happening is the people who voted against are saying, ‘We’re actually going to vote against on the floor of the house as well.’  So what’s going on?

MP:  Well, the thing is this, when it comes to the Coalition Party room you’ve got MPs in the Coalition party room that are able to cross the floor and do reserve that right to cross the floor and that’s very much unlike Labor.  In Labor ranks, if you cross the floor then you’re expelled from the Labor Party.  That’s the big difference between the Coalition and the Labor Party.  This issue of energy policy has been fraught now for at least the past 10 years and there’s policies that have come and gone, finally does appear that the Coalition at least are settled on something, something that the states are reluctantly probably going to agree to.  They’re creating a bit of noise but I think eventually state and territory parliaments will sign off on it and I even think Federal Labor will sign off on it as well.  Even though they’re creating a bit of noise I think it does have broad support. 

But when it comes to the Coalition party room there’s always been this rump of MPs that just simply don’t agree with this push towards renewable energy.  They believe there needs to be more done to promote coal fired power, you’ve got some MPs that are saying new high-tech coal fired power stations should be built especially in some states like Queensland.  So you do have that rump of MPs that do still believe that coal fired power is the way to go and think that the government should underwrite that. 

You are right, probably 90% of the party room agrees with this policy, some of them do have their reservations, but I think the thing is here, is Coalition MPs do have the right to cross the floor and know that they won’t be expelled from the party if they do.  They’re exercising that right. 

But you reckon Federal Labor will pass it, in which case the crossing of the floor doesn’t matter?

MP:  Exactly right.  I think that Federal Labor eventually will pass the National Energy Guarantee.  Yes, they are going to create a lot of noise around it, they’re going to really put the screws on Malcolm Turnbull and ramp up the division within Coalition ranks over this policy.  But I think by the time October comes around, I think Federal Labor will give us a tick and basically what Federal Labor’s going to do is say, well at least this is a framework.  We don’t agree everything that’s in this framework, however it gives us the option to ramp up the level of renewable energy or ramp up the investment in renewable energy if we were to win the next election. 

That’s the way I think that Labor will go out and sell it to its constituents.  They may not agree with it but it is something and it gives them the ability to ramp up renewable energy and reduce emissions even further.   That’s the way I think that Labor will get around it.  I do think they’re going to really make Malcolm Turnbull and Josh Frydenberg, the Energy Minister, sweat on it, but I think eventually they’ll come around.  So you’re right, even if Labor does agree with it, it doesn’t matter that Coalition MPs cross the floor.  However, it’s not a good look for the Prime Minister to have, let’s say even three of four of his own MPs crossing the floor on a signature government policy.

No, and in fact I suppose what might happen is Labor strings it out and makes it go as long as possible before they have to pass it, in the hope of destroying Malcolm Turnbull along the way.

MP:  They could do that.  In the end, this policy is time-sensitive.  It basically needs to be passed by the states by around October because I think that’s when Victoria goes into caretaker mode ahead of the November election.  So, I think there is a bit of pressure for this to be passed by the states towards the end of September.  Then if it’s passed by the states by the end of September, then it’ll go to the Federal Parliament and I think the Federal Parliament will see it through.  But you are right, Labor is going to want to try and obviously really harm and try and destroy Malcolm Turnbull’s credentials as much as possible.  I don’t think it’s going to lead to any kind of leadership spill within Coalition ranks, simply because there isn’t anyone ready to takeover that leadership position.  While there might be some people within the coalition that aren’t happy with the job that Malcolm Turnbull is doing, in the end there isn’t another person that really could step up as leader, so I do think that in the end when it does come to the next Federal Election it will be a race between Malcolm Turnbull and Bill Shorten.  Malcolm Turnbull’s leadership may be wounded but I still think he’ll take the Coalition to the next election.

Just finally and briefly, Michael, the company tax cuts I think come back before the Senate next week, it won’t pass.  In fact, I think the government, just listening to Mathias Cormann and Scott Morrison, they’ve basically given up on it haven’t they? 

MP:  Yes.

So the company tax cuts will be given up now won’t they, or dropped?

MP:  Well, this is going to be the interesting conundrum.  You are right, Mathias Cormann, the Finance Minister, Scott Morrison, the Treasurer, they’re not going really out there this week selling these company tax cuts.  They will come before the Senate again next week.  It’s likely to fail unless there’s some sort of miracle and One Nation and the Centre Alliance senators and Derryn Hinch and all these people decide to come on board at the last minute, which is very doubtful.  All these cross-benchers have said they won’t be backing further company tax cuts.  Mathias Cormann and Scott Morrison haven’t really been trying to sell them this week at all.  They’ll just come through the Parliament as par for the course.

But then the question is, will they take them to the next election?  Now, there are some people within the Coalition that say that if they fail to pass the Senate, well then they should simply be dropped.  One thing that is very interesting, earlier in the week when this question was put to Mathias Cormann in Question Time as to what they’ll do with the company tax cuts, Mathias Cormann seemed to indicate that they will take them to the next election.  But I don’t know, I don’t think they will.  I think they’re going to have to drop them and just realise the support isn’t there for further company tax cuts.

[Music]

A lot of action on the markets this week, so let’s talk to Chris Weston, Head of Research at Pepperstone.  He used to be at IG Markets, now something called Pepperstone.  Chris, big falls on commodity markets last night led by the base metals.  What happened, was it Turkey?

CW:  No, I think what you’ve got there is just further confirmation that the wrecking ball here is the US Dollar and specifically, I think you really do need to have a look at what’s happening in China.  If you have a look at the US Dollar against the CNY, which is the onshore Chinese Renminbi or the offshore which is the CNH, which is the Chinese Renminbi traded out of Hong Kong.  There’s a very, very strong correlation or an inverse correlation now between the Dollar-CNH and what we’ve seen in base metals.  That seems to be the driver.  The algorithmic traders have pretty much got this tick for tack at the moment. 

Every move that we’re seeing higher in the Dollar against the Chinese Renminbi, we’re seeing lower levels in copper.  Copper was taken to the wood shed and chopped up last night as the Dollar strengthened against the Renminbi.  It’s down 4.6%, people are talking about bear markets in copper.  Is this a reflection of the global economy?  Well, maybe to an extent.  We didn’t see much of a flattening in the yield curve and you’ve got gold, precious metals like platinum, palladium, they’re all getting hit pretty hard.  Why?  It’s all to do with the Dollar to be honest. 

It’s not to do with what’s happening in Turkey because Turkey overnight saw a bit of a reprieve and we actually saw a pretty strong rally in the Turkish Lira.  This is about the US Dollar and specifically against select emerging market currencies and this time it’s against the Chinese Renminbi.

In fact, the Emerging Markets Index generally is down 20% this year so far, so that’s kind of bear market territory too which I presume is also due to the US Dollar strength.

CW:  I think there’s two factors here, Alan.  The first one is going to the structural issues, which is the Federal Reserve to an extent, the ECB and the Bank of Japan.  Central banks give it, they’ve now taken it away and we’re in this process now of quantitative tightening.  For anyone who says that quantitative tightening is not having an effect and not looking at markets closely enough, there was a wave of capital that surged out higher returns throughout the quantitative easing years where the Federal Reserve were buying bonds from the secondary market and creating excess reserves. 

A lot of that money went into emerging markets in China, Hong Kong, Latin America, into other parts of Asia, with the idea of picking up not just the capital return because there was higher inflows into these markets, but also because the yields that you could get both in the bond market and also the equity market was substantially higher.  Emerging markets did very, very well during those years.  Now we’re at a stage where people are talking about the ECB reining in, the Bank of Japan potentially could be changing their yield curve control.  But most importantly, the Federal Reserve have already reduced its balance sheet by just over $200b and that will continue going on, so there is less liquidity in the markets. 

But money is now reversing and money is coming out of these emerging markets, it’s made its way back into the US.  That’s part of the reason we’re seeing the US Dollar strengthen.  The US economy continues to be an outperformer, best house in a fairly poor neighbourhood at the moment and you’ve got those capital flows out of emerging markets back into the US and reversal happening.  You are seeing an outperformance in the US markets, you’re seeing it in the S&P, the Nasdaq.  You’ve now seen the Chinese equity markets under all sorts of pressure this year and that was sort of highlighted by a fairly poor result from Tencent last night, one of the big 10% market cap on the Hang Seng.

I think, yeah, you’ve got a double entendre of the capital flows making their way back in as we see balance sheet contraction from the FED, but you’ve also got the strength in the US Dollar which is really causing capital to come back there as well.  There’s a really interesting trade there.  

This, I guess, is pretty bearish for Australian resources stocks.  I note that BHP is down more than 3% today, so is Rio Tinto as well, and I presume it’s also bearish for the Australian Dollar. 

CW:  Yeah, 100%.  We are in a unique position at the moment now where we are in a position where emerging markets are slowing.  China is trying to stimulate its economy but what they’re doing very differently in China from all other credit cycles, whether we’re seeing vulnerabilities in the Chinese economy and they come out and put the credit caps on.  If they also come along and incentivise people to buy cars and buy houses, that’s the opposite this time around.  They’re actually saying to people, we’re going to be really tough on property, so we’re thinking this is stimulus very, very light in China at the moment and I think that’s not going to be taken overly well at a time when the US Dollar is arguably the best currency to be long, has been for a while, with the exception maybe of the Japanese Yen which has got some attractions as well. 

Commodity prices are getting hit, that’s attracting a lot of momentum funds which we call CTA’s which follow trends in the market, big massive multi-billion dollar funds, so there’s a lot of speculative money going there.  It’s a tough time to be anything but cautious in this space at the moment in my opinion because we are seeing that quantitative tightening playing through.  So, it’s all eyes on the Fed, how do they react?  And specifically, how do they react should we see an inflationary shock that comes from Donald Trump’s tariff policies.  With the $200b that’s likely to be enacted on Chinese imports in September, of course that’s going to be passed on to the US consumer at a time when they’re coming through with tax cuts.  That’s going to be an inflationary shock to be honest, so what’s going to happen with the federal reserve.

All of these factors, the liquidity drain we’re seeing from emerging markets, the Dollar strength, what’s happening with tariffs, potential other shocks with the Italian budget, Brexit, suggest staying fairly cautious on this space at the moment. 

You’re suggesting that maybe the Federal Reserve will respond to this inflation shock by raising rates more than two times again this year?

CW:  Well, they won’t raise by more than two times, I think there’s very, very little doubt and in fact there’s still an argument out there amongst interest rate traders whether they’ll go again in December.  I’m sure you would have noted, Alan, the flattening of the yield curve and the Federal Reserve, whether you’re using it, the difference between 2s and 10s, or the 3-month LIBOR rate and 10-rate.  But it has been flattening for some time and I think that’s a reflection that people see the Federal Reserve going quite aggressively and then having to ease back a bit longer term.  Some inflation expectations longer term come down.  I think that’s the issue, is will we see them going again in December. 

They’ll raise rates in September, that’s if they are complete, but will they go again in December and I think they probably will and they’ll probably go again in March the following year.  I think after that time, if the dollar continues to strengthen and that will play into economics, not just in emerging markets, but that will have a feedback loop into the US economy, the Fed will have to ease off.   The other thing which we have to think about is what happens to the balance sheet.  They have given us fairly transparent guidance on what they’re going to be doing with the balance sheet.  But I think over the last couple of days the new development that’s actually come out, led by Credit Suisse’s analyst who actually used to work for the Fed, very, very well respected, he’s now saying, ‘Based on the scarcity of certain reserves, the Federal Reserve will actually stop balance sheet contraction or what we call the taper in late December or going into the new year.’ 

That’s a really interesting development.  We are going to get a rate hike from the Fed in September.  Probably we’re going to get another one in December, but will we start seeing the Federal Reserve based on the fact that we are seeing this exodus of capital from emerging markets that will probably have a feedback loop into the US longer term.  Will we see them ease back on its quantitative tightening or tapering program.  I think that’s an interesting dynamic that we need to think about there.

[Music]

Here’s Callam Pickering, the APAC Economist at Indeed.com to talk mainly about the labour market figures that came out on Thursday.  Callam, employment went backwards this month or the most recent month, up 58,200 the month before, so it’s all over the place, terrible volatility.  Do you think we should start ignoring seasonally adjusted figures and maybe just focus on the trend?

CP:  Well, I think I’ve been saying that for a number of years now.  The monthly seasonally adjusted data is quite the rollercoaster and depending on the months you can arrive at very different conclusions about the state of the labour market.  The trend is certainly the safer bet, particularly when we do see this monthly volatility.  What the trend is showing us is the labour market is performing reasonably well.  Employment growth on a trend basis was up 26,900 people in July and it’s averaged about 20,000 people per month this year.  If that was replicated over the remainder of 2018, that’s a pretty good year for the Australian labour market.

It’d be fair to say, wouldn’t it, that the labour market and I guess, immigration, so the flow of people into the country and the fact that they’re getting jobs, is the best thing  about the Australian economy, wouldn’t you say?

CP:  Well, it’s certainly creating a number of jobs at the moment and there was a number of years there where the economy was performing okay but wasn’t necessarily creating the jobs to go along with it.  But that certainly appears to have changed over the past 18 months or so and the economy is really ticking over, we’re seeing the creation of high quality full time roles and that’s always important and that’s helping to push the unemployment rate down.  It’s down to 5.4%, it’s lowest level in about 6 years.  So, despite really high population growth, the people coming into this country are finding jobs and the unemployment rate is making its way down.

So what are you worried about?

CP:  I think the main concern about the labour market and the Australian economy in general at the moment remains wages.  We saw maybe some light at the end of the tunnel with the release of the wage data yesterday and the quarterly result was the strongest one in four years, but wage growth overall remains very weak and it may take some time before the unemployment rate and the under-utilisation rate get down to the level where wage growth is going to return to the levels that were once considered normal.  So while we have seen an improvement in employment growth and that’s supporting the economy, we still have a long way to go before we return to a level where the economy is really strong. 

A lot of people are talking about the housing market and the levels of debt and the looming switch from interest only loans to principal and interest loans.  I understand this is not your direct area of interest, Callam, but do you have any concerns about that as well?

CP:  There remains a number of concerns for the housing market particularly in the likes of Sydney and Melbourne.  Growth was so strong for such a long period of time that there is going to be a period of weakness in prices and there is the risk that many buyers got in towards the top of the market.  They purchased using interest only loans and when those do roll over into principal plus interest loans, they could be in a little bit of trouble, particularly if prices do continue to decline.  So, I think while it’s not my immediate area of expertise, I did just recently enter the market myself, so obviously I’m closely watching prices and hoping that they don’t fall too far in the immediate future.

[Music]

I’m joined now by Steve Sammartino, author and futurist, to talk about 5G and also Foxtel.  Steve, Telstra said this week that it’s turned on 5G on the Gold Coast as a kind of experiment.  Firstly, could you tell us what 5G is, before we get onto what it means for Telstra and what 5G is and how it differs from 4G?

SS:  Yeah, 5G is the next iteration of mobile network systems and the first and most notable difference is that it’s so much faster than 4G.  I mean, in our minds we sometimes think, well 4 to 5, that’s a 20% improvement, but it’s not that.  The 4G networks, their speed is anywhere between 50 and 150 megabytes per second on Telstra at the moment.  But the 5G networks have a capacity of up to 20 gigabytes per second, so it’s significantly faster, inordinately faster.  It’s going to allow a lot of different things especially as we move into the iteration of the internet of things.  Another thing that 5G has which is quite interesting is it has the potential for what they call network slicing.  What that enables the operator to do is to divide the 5G networking into different pieces so that different types of usage can be split up. 

An example that’s really important is, as we move to driverless cars, they’re going to require a lot of data and a lot of people say that driverless cars will use more data than your house does and so in order to ensure that we have the right level of speed and decision making with GPSs and so on, the network speed that’s enabled by slicing in 5G becomes really important for things like internet of things and autonomous transport and so on.  It’s not just about the mobile, it’s actually a really big infrastructure shift which allows different types of network effects, everything around us, our buildings, our cars and so on, become connected.  It’s not just the speed, but the network slicing is a big one.  And very, very low latency in terms of decision making, down to around about 1 millisecond which again is about a 10 times improvement, so it’s very significant. 

I’ve been reading stuff to the effect that it’s no big deal or it’s been over-hyped or indeed that it might not happen at all, it doesn’t sound like you agree with that?

SS:  Under-hyped!

It’s under-hyped, it is a big deal?

SS:  Yeah, it absolutely is under-hyped.  I mean, if we look at wealthy countries what we see is wealthy infrastructure.  Increasingly, our world is becoming connected and having this form of infrastructure opens up business and entrepreneurial opportunities.  I actually think it’s one of the things that’s been fully lacking is our move towards a solid type of infrastructure.  It’s actually quite an improvement.  I think that once we have it, we will not know how we lived without it. 

So why do we need the NBN then?  I mean, it sounds like if it’s that fast we don’t need the NBN?

SS:  That’s an interesting question too but the reason that we do need the NBN, we need to remember that networks don’t work in isolation.  What you need to have is a base or feeder network, the cables under the ground that connect everything not only to Australia but also to the cables that go under the sea and also to the networks in the satellites.  On the one hand it’s easier to say, well we should just move to 5G and that’s all we need.  But what we have is existing infrastructure and we need to feed into that.  On the one hand, yes, it might be better off to have a 5G network and just use your phone as a tethering device inside your house, but it turns out that the networks have these layers where they need to feed into each other.  It’s easy to kind of write off the NBN and say we don’t need that. 

But of course, you need to have a multitude of networks because you won’t be able to cover all of the ground across Australia and you’ll need to be able to flip between those networks because they all feed into each other in a layering type effect.  It’s one of those things where people often ask me the same question and say, ‘What would you rather have?  A wireless or broadband?’  It’s kind of like saying, ‘Do you want aeroplanes, trains or cars?’  and the truth is we want all of them because they all feed into each other to give us a first class infrastructure.

Yeah, but the NBN is fundamentally a retail distribution network or a connection for households – I mean, obviously it connects everyone and businesses but it’s really all about the households.  I suppose it doesn’t come down to a question of whether we need it or not need it, the question is whether people will actually use it.  Because if they’re connected their phones to 5G and they’re streaming their 5G movies off their phones or some other device onto the TV, then they might decide, well, we don’t actually need to pay for the NBN.  I mean, it’s more to do with whether the business model of the NBN is buggered because of 5G, not so much whether we need it. 

SS:  Yeah, look, the business model from a retail perspective on the NBN, I think there’s potential risk there and I think personally I would go to the 5G.  I have NBN but I would go to the 5G.  The NBN network is used as a feeder network for a lot of the wireless capabilities as well so it does feed in at a non-retail level.  But in terms of the business model I agree with you, there’s some danger there that it’ll never get the return on investment that it should have.  Honestly, if you think about this from an investing and a governance point of view, there are certain things in countries which are natural monopolies, it’s one of the first rules in economics. 

I can’t help but wonder why a government doesn’t build out high-end infrastructure and even in the wireless towers and have retailers compete on top.  I really feel that we’ve kind of made an error and it goes way back to the Telstra float when to have high-quality infrastructure which is government owned and a natural monopoly, I think is still the best approach to have when it comes to any form of infrastructure. 

Foxtel has also launched something called Vision in 4K, which I presume means a better picture, like high definition.  Is that going to use 5G in some way do you think?

SS:  Yeah, the IQ4 which is for 4K televisions is really a resolution play from Foxtel, but I can’t help but think that they’ve got this wrong because it seems as though resolution is one of those games that you can’t win.  It’s a little bit like computer speed, everyone is always going to improve the speeds of it.  By having the NBN it becomes more possible and 5G networks, but in terms of a strategy for Foxtel, moving into resolution as a core proposition to try and get people to sign up, I can’t help but think that they’re missing what the game is and the game is absolutely on content. 

If you look at what’s happening with the giant tech news we had just this week, Facebook had purchased the rights for the La Liga which is the biggest soccer league in Spain, so they’ll be siphoning out sporting rights and I can’t help but think that this idea that getting better resolution for Foxtel would be a way to get loyal consumers doesn’t seem like the right strategy from my end.

Well maybe it’s just desperation because they can see they’re going to lose the content.

SS:  Absolutely, I think it is a desperate move.  Some of the interesting things for technology is that there’s a law called Butter’s Law and it’s very interesting.  Basically, the amount of data we can fit down any pipe or cable, actually doubles every nine months and so what becomes an advantage in terms of the speed and the resolution, that advantage gets wiped out very quickly, so I can’t help but think that they’re scrambling, especially given now that Netflix has more subscribers in Australia than Foxtel does.  I can’t help but think that their pricing model and where they’re going is a little bit of a scramble in effect with Foxtel.  It’s quite ironic given that Telstra had the share of it in this country.

[Music]

Happy birthday to one of Australia’s best female singer-songwriters, Missy Higgins, who turns 35 on Sunday and here’s her flagship song, Scar.

[Music]

That’s all from me, enjoy your weekend!  Until next week…