Kohler's Week: The Coming Health Revolution, Commodities, America the Buggered, Australian and Chinese Consumption, Astronomy

Last Night

Dow Jones, down ~1.9%
S&P 500, down ~2.2%
Nasdaq, down ~2%
Aust dollar, US71.9c

The Coming Health Revolution

There are, at the moment, four reviews of the Australian health system going on at once. Together they will amount to a revolution, probably in 2016, and the consequences need to be understood by investors.

To take a shortcut to the bottom line: hospitals and health insurers will do better than pathology firms, which will probably get squeezed, and hospitals will probably win out over the insurers, although that’s not entirely clear.

The reviews are:

1. Medicare review, led by Professor Bruce Robinson

2. Review of primary care (doctors), led by Dr Steve Hambleton

3. Review of private health insurance, led by Graeme Samuel

4. Reform of the Federation White Paper

The last of these is the largest and by far most important piece of work. It was set up by the Abbott Government, with discussion papers issued this year and the final White Paper due next year – there’s a website with all the stuff on it here. One of the most important areas is health and there have been a few mumbles lately – nothing official, but pretty clear – that a voucher system is being looked at. That would be in line with the recommendations of the Harper Review of competition law, and pretty much in line with Liberal Party philosophy. It would also be a big, good idea.

Most of the public discussion on the subject of Federal/state relations centres around the GST – is it going to 15 per cent or not? The answer is: doesn’t look like it, and it may be a red herring. What the state and federal leaders talk about when they get together these days, including yesterday’s meeting of finance ministers, and the two-day retreat of leaders in July, is the roles and responsibilities of each level of government, and especially health. They’re not spending their time talking about the GST.

At the moment money is transferred in block amounts from the Commonwealth to the states and the states simply fund hospitals on a demand-driven basis. Whoever shows up at a public hospital gets treated (eventually) and the state government pays, with 37 per cent of the money coming from the Feds.

Under a voucher system, the Commonwealth contribution to public hospitals would be pooled with the private health insurance rebate, and the $3.7 billion or so paid to doctors for inpatient services and the money paid to patients so they could choose where they took it – a public or private hospital. If public, the state would pay the rest; if private, the other 63 per cent would be made up by health insurance or cash.

The vouchers would be issued on the basis of what’s called a National Efficient Price (NEP) scheme, which would allow the Federal Government to control prices and force efficiency on the providers. The scheme would also level the playing field between public and private hospitals, giving patients a clear choice between them. 

Here’s a schematic of how the system would look, from a recent piece of research by UBS’ health sector analyst, Andrew Goodsall:

The Medicare review is being conducted by a panel of doctors, led by Professor Robinson, with a view to modernising the list of 5,700 items that are currently subsidised. The reason behind this review, from what I can gather, is that the health policy bureaucrats want to cut back on the number of tests doctors are prescribing, especially scans and especially expensive MRIs. This is why Capitol Health has been such a disappointment this year, going from 30c to more than $1 early this year and then falling back to 30c – because it is becoming clear that the health ministers and bureaucrats reckon that scans are being over-used, along with pathology generally, and are planning to squeeze it.

That aim will be reinforced by the Primary Care Review being led by Dr Hambleton. The purpose of this is to try to compensate doctors for outcomes rather than simply visits. It’s a bit like the NEP proposal for hospitals, where the government pays for procedures, except as I understand it, they’re trying to come up with an extension of it that would see doctors only get paid if the patient got better. I’d like to see that, but it would obviously be very complicated.

And finally the review of private health insurance, being done by the Health Department with some involvement of Graeme Samuel, is trying to integrate insurance with primary care to try to stop people ending up in hospital – that is, paying doctors to get patients better themselves, rather than send them off to hospital or pathology, before saying “next please”. This is something George Savvides of Medibank Private has been on about for years, and has applied to the Government to be allowed to vertically integrate his business into GP clinics, to better control the outcomes.

Health Minister Sussan Ley has knocked George back quite firmly, but I wouldn’t mind betting the health insurance review recommends allowing health insurers to operate clinics. There is definitely a common desire between the health insurers and the Commonwealth Government to keep people out of hospital, since they both fund them and will be big winners if the costs and usage can be reduced. And they both have powerful incentives: the Federal Budget is in a hole and needs to be fixed, and Medibank’s share price is languishing below the float price and the market is getting impatient.

All of this work is complicated and politically difficult, so it’s possible that it will all come to nothing. But I think it’s more likely that health care will be revolutionised – it has to be, really – starting next year. They simply can’t go on as they are – forking out money on demand, for ever-rising costs. That is especially true if they don’t put up the rate of GST, and it’s what Treasurer Scott Morrison is talking about when he rabbits on about not wanting “tax and spend”, and rather than simply increasing taxes he wants to make service delivery more efficient. Health is what he’s really talking about.

Levelling the hospital playing field with vouchers will be good for Ramsay Health Care and Healthscope, and I suspect that the health insurers like Medibank and NIB will win from a clear aligning of their interests with the most powerful voice in this business – the Federal Health Department.

With the ageing of the population, health care should be a core part of any investment portfolio, but you should probably steer clear of pathology in favour of hospitals and insurance.


Last night the oil price in New York fell below $US36, prompting quite a big fall on Wall Street, as the International Energy Agency forecast that the global glut would worsen in 2016. “As inventories continue to swell into 2016, there will still be a lot of oil weighing on the market,” said the IEA. “OPEC’s decision last week appears to signal a renewed determination to maximize low-cost OPEC supply and drive out high-cost non-OPEC production -- regardless of price.”

Don’t expect to see commodity prices start to turn up until you see the whites of significant production cuts’ eyes. Prices have fallen for supply reasons, not demand, and it is supply cutbacks that will solve the problem and get prices up, not demand. Global growth, including China, is clearly going to remain weak next year and possibly the year after, and Chinese infrastructure spending is not about to bounce back.

In most big commodity markets – iron ore, oil, copper – prices have been driven lower firstly by a view that China’s demand would grow forever (“stronger for longer” was the catch cry) which led mining company executives to go mad and aggressively build mines and treatment plants, and secondly, in the past couple of years there have been market share battles as they desperately try to preserve what they’ve got and to keep the cash coming in.

In oil, Saudi Arabia, America and Russia are battling for supremacy; in iron ore the big three – BHP Billiton, Rio Tinto and Vale – have been trying to drive the Chinese producers out of business; something similar is going on in copper.

This week’s announcement by Anglo American that it’s going to become a much smaller company looks like the start of the output restructuring that will eventually see a bottom to commodity prices. Anglo said it’s going to reduce the number of its mines from 55 to 25, cut the workforce by 85,000, or 60 per cent, and cut annual capital spending by half. Both Glencore and Freeport-McMoRan have both previously announced production cuts.

These things in themselves won’t be enough, and are just the beginning. The keys to finding a sustained upturn in prices will be Australian iron ore and US shale oil, both of which have barely begun to see production cutbacks, as the chart below shows. In fact, during the week Gina Rinehart celebrated the first shipment of iron ore from her Roy Hill mine, 400km east of Port Hedland. This is truly an extraordinary achievement and she deserves plaudits for having pulled it off but, in the current circumstances, it’s also absolutely mad.

America the buggered

Here is a series of charts that I believe spells trouble for the US (even more than the ravings of the Republican Party’s Presidential election frontrunner):

Source: Gerard Minack

Source: GMO

Source: GMO

That last one is a bit random, I admit, but it’s extraordinary. Research has revealed that the increase in deaths among white 45-54 year olds in the US is due to very sharp increases in deaths from alcoholism, drug use and suicide – in other words, misery. If the death rate for American white men had declined in line with, say, Australia there would be about 50,000 fewer deaths per year. That’s twice the number of people killed in traffic accidents and half the number killed by guns – yes, that’s 100,000 per year!

There are many great things about the US – Silicon Valley for one, which Australia is desperately trying to emulate. But the way corporations and the rich are feasting off the poor and middle classes and capturing most of the wealth creation is not good. It’s made worse by the conventional wisdom, particularly among the Right, that it’s government that is increasingly dominating, through such things as Obamacare, which just makes the reality even worse.

Jeremy Grantham from GMO, from whom some of the charts came, says part of the problem is the reluctance of Americans to face unpleasant facts. “We are ready to be manipulated by vested interests in finance, economics, and climate change, whose interests might be better served by our believing optimistic stuff ‘that just ain’t so’.”

Gerard Minack says the outperformance of US equities is due almost entirely to superior corporate earnings. The question raised by the second and third charts above is: how long can that go on?  The Fed is about to start tightening policy, although as Goldman Sachs points out, financial conditions have already been getting tighter for about 12 months. 

And as Jim Grant puts it with typical elegance in this month’s newsletter: “Ultra low interest rates … pull consumption forward in time and push failure back in time. They flatter the judgement of aggressive lenders and ease the burdens of encumbered borrowers.”

The equity market almost always falls when the Fed is tightening. After an outsized bull market based on what could be seen as an earnings bubble, that seems likely to happen next year as well.

Australian consumption

On the subject of wages, Barclays Australia’s fine local economist, Kieran Davies, produced some very interesting work this week showing that the key problem with the Australian economy, apart from the commodity crash, is the weakness in consumer spending. So far this decade, growth in spending has been just 0.8 per cent, compared to 2-2.5 per cent in the previous two decades.

Kieran’s work shows that the decline is more or less uniform across the country and the main contributor to it is spending on services, down to 0.6 per cent growth this decade. He then built a model to explain the causes and … “The model suggests that weaker wages explain most of the slowdown in spending over recent years.” The model also suggests that stronger house prices have boosted spending, but this has been offset by a drag from weaker financial assets.

It all suggests that unless real wages growth picks up, spending won’t. That’s especially true if house prices continue to fall and become a drag on spending next year.

And it is probably why the consumer staples index has underperformed the market over the past two years, -20 per cent versus -5 per cent, notwithstanding the 400 per cent rise by the cracker called Blackmores. The main drags, of course, were Woolworths and Metcash, which are also dealing with problems from competition, and some of their own making as well.

More broadly, the Australian economy needs not only some big cutbacks in output by mining and energy (see earlier item), but also a pick up in wages growth to support domestic consumption. It won’t happen as a result of monetary policy, that’s for sure.

Chinese Consumption

Further to my note with the end of year special about the opportunities in Chinese consumer products, such as baby formula, vitamins and gold, as opposed to bulk commodities, I stumbled upon a couple of fascinating, contrasting charts this week. 

First, as we well know already, per capita disposable income in Australia has been going backwards for several years because of the decline in the terms of trade, and is running well below GDP growth.

This chart is from the Australian Industry Report, put out last week by the Department of Industry, Innovation and Science:

Now, here’s the same thing for China, from a report this week from NAB:

What’s more, a very large proportion of Chinese consumer spending is online:

This is the place to be looking for investment growth in future. Yes, at some point the commodity market will turn, but who knows when? In the meantime, consumption and services are already booming, largely independently of what happens to the Chinese economy.


The most interesting thing I did this week was to travel to the Mt Stromlo Observatory just outside Canberra to interview Professor Brian Schmidt, Nobel Prize winner and soon to be vice chancellor of Australian National University. It’s part of a series of interviews I’ve been doing for The Australian of non-business people, including chef Peter Gilmore, soprano Taryn Fiebig, conductor Ben Northey and neurosurgeon Associate Professor Kate Drummond. The video interviews will be published in the first half of 2016.

It’s been a wonderful privilege to spend time with these outstanding people. All of them have been generous and expansive about themselves and how they manage to do what they do.

So I asked Brian Schmidt how he became an astronomer and he gave a great answer: “When I was 17 I asked myself – what would I do for free?” What a good way to figure out what to do with yourself, if you can. As I’ve often told my kids (too often?): you’re best at, and more likely to succeed at, something you love.

Brian won the Nobel Prize for figuring out that the universe is expanding at an accelerating rate, which is slightly alarming although it’s probably not going to bother me too much, at the age of 63. I may not last until the wheels start to come off the expanding universe.

I ask all these high-performing people how they maintain it – what’s their secret? The answer is usually: a balanced life. Brian Schmidt and his wife, for example, run, and live on, a winery. It’s called Maipenrai (http://www.maipenrai.com.au/), near Canberra, from which the Schmidts produce a very fine pinot noir (apparently – I haven’t tasted it yet). This year’s vintage sold out in two hours and you can’t get it at Dan Murphy’s – you have to be on the mailing list.   

Brian planted the vines, prunes them, harvests the grapes, and makes the wine. Remarkable bloke. A bit like Waleed Aly, who played Pink Floyd’s Comfortably Numb at the Walkley Awards this year and apparently nailed the guitar solo. (Here’s a shaky video of him doing it.) I think I prefer David Gilmour (oh boy, just watching and hearing that again makes me go weak at the knees), but Waleed’s effort is not bad for a university academic turned guy-on-TV.

Speaking of a balanced life, an early heads up: from the end of next week I’ll be taking long service leave (it’s been 10 years since I started Eureka Report and News Corp inherited the leave obligation when it bought the business in 2012). So I’m going to bloody well take it – I’ll be off for three months balancing my life, and Bob Gottliebsen will fill in on Saturdays (Phabulous Phil Lasker will phill in on the TV). I might even fit in some guitar practice….


Just one interview this week: Keith Glennan of IT security firm Tesserent, which is in the middle of an IPO. The offer is for $5 million to $7 million worth of 20c shares and is open until February 5. The interview – video and transcript – with Keith can be found here

Readings & Viewings

Nicely done: Darth Trump. Actual Donald Trump quotes used over Star Wars footage, with The Donald as Darth Vader.

And this one uses Donald Trump voicing over a drunk rambling on the verandah.

Trump’s anti-Muslim plan is constitutional.

From The Economist: what Donald Trump’s success reveals about the conservative movement.

Oh, and he apparently wants to close down the internet as well.

This is a video interview on Bloomberg with Russ Koesterich, the chief global strategist for BlackRock, who I’ve met a few times. He’s pretty good.

The next step for Wi-Fi: Li-Fi, which is 100 times faster than Wi-Fi. This is a 7:40 minute video, really interesting.

Apparently 75 per cent of the world’s population don’t have an address – they don’t exist. This is a start-up that wants to do something about that.

My friend Percy Allan says “Truth (the movie) is the best political thriller and morality tale since All the President’s Men. Kate Blanchett and Robert Redford put in outstanding performances.

Compelling viewing for current affairs junkies.

Mohamed El-Erian: the great policy divergence between the ECB and the Fed.

Anatole Kaletsky on US interest rates.

Someone else: “It’s a different world when the Fed is raising interest rates”.

America’s middle class is no longer the majority.

BHP Billiton CEO Andrew Mackenzie has given his first interview since the Samarco tailings dam collapse – with Sheryle Bagwell on Radio National’s breakfast program.

Moving Saudi Arabia’s economy beyond oil.

How to capitalise on China’s healthcare.

John Menadue on tax reform and Federal-state relations.

Pollution is good for China.

“Sharing economy” companies “are really just fronts for millionaires and billionaires to opportunistically ride off the backs of everyday people, while also exacerbating many economic inequalities”.

Apparently the founder of bitcoin is an Australian named Craig Wright. As soon as that news came out, his home was raided by the cops.

You might have read during the week that DomaCom, the fractional property business in which I am an investor, is running a book build for an attempt to work up a crowd-funded acquisition of the Kidman cattle properties. Here it is on the DomaCom website, if you’re interested.

Driverless trucks will transform the economics of freight.

A fine editorial in the New York Times about America’s gun epidemic.

2015 was a breakthrough year in artificial intelligence.

But the big revolution is not artificial intelligence, it’s the battery.

The bloke most likely to succeed Putin.

Perfect taxes exist only in rainbow land – Craig Emerson.

From Clive Hamilton at the Paris climate change conference: There is now unprecedented momentum towards participating in the transition to a low-carbon economy.

Punctuation for the internet age.

When Deb first played me this song a week ago, my eyes filled with tears. It’s First Aid Kit’s cover of the Paul Simon song, America. Ever since then I’ve been flogging the song all week – gosh this Swedish duo have beautiful voices. And then, bugger me, it happened again just as I was listening to it again as I write this – eyes full of tears, especially over the lines: ""Kathy, I'm lost", I said, Though I know she was sleeping."I'm empty and aching and I don't know why.” This is a live version, with Paul Simon in the audience – he gives a standing ovation at the end. Get the tissues ready – and watch it!

And here’s the real thing – Simon and Garfunkel doing America on Letterman in 2006. It’s better, I guess.

Next Week

By Craig James, Commsec

There are no economic statistics of note domestically from December 17 to January 6. So the coming week represents the last hurrah.

A big week is in prospect in the US with the Federal Reserve expected to lift rates for the first time in over nine years.

In Australia, the week kicks off on Monday with October data on credit and debit card lending from the Reserve Bank. Aussie consumers are still keen on using the plastic to make purchases, but in the case of credit cards, many are choosing the pay off debt by the due date.

On Tuesday the Reserve Bank releases minutes from the board meeting held a fortnight ago. But there were probably few areas of contention for board members to mull over at the meeting, so little in the way of ‘new’ information is likely to be uncovered from the minutes.

Also on Tuesday the ANZ/Roy Morgan weekly consumer sentiment survey is released together with two publications from the Australian Bureau of Statistics: residential property prices and new vehicle sales.

The home price data is two months behind the results published by Core Logic RP Data. But the vehicle sales data will confirm that sales were at record highs in the year to November.

 On Thursday there are three indicators to round off the week. The ABS publishes the latest demographic (population) figures. At the same time new estimates of wealth are released together with detailed job market figures.

The population data is somewhat dated, being for the June quarter, but the data has a myriad of uses for consumers, businesses and policymakers alike. Australia’s population is growing at the slowest rate since December quarter 2005. Population is up by just 1.35 per cent over the year to March, down from highs of 2.19 per cent in the year to December 2008. Still the average growth rate over the past 30 years stands at 1.38 per cent.

The estimates of household wealth to be released on Thursday with key financial information such as the share of Australian listed shares owned by foreign investors and the share of cash held in superannuation accounts.

And also on Thursday the ABS releases detailed job market data such as employment across industry sectors and unemployment rates for regions.

Over the week the Mid-Year Economic and Fiscal Outlook report is also released.

The US Federal Reserve takes centre stage

The meeting of US Federal Reserve policymakers occurs over Tuesday and Wednesday and dominates proceedings over the week. But there are also plenty of ‘top shelf’ indicators to mull over.

The week kicks off on Tuesday with the release of key inflation data -- that is, data on consumer prices. The annual rate of core inflation (excludes food and energy) may have crept higher from 1.9 per cent to 2.0 per cent. But if there was to be one, ‘last-minute’ factor to delay the Fed lifting rates then this would be it -- the general absence of inflationary pressures.

Also on Tuesday, the New York Fed manufacturing index is issued together with the housing market index from the National Association of Home Builders, weekly data on chain store sales and the October figures on capital flows.

The Federal Reserve starts its two-day meeting on Tuesday and a decision is announced on Thursday morning Sydney time at 6am. The Federal Reserve hasn’t touched interest rates in seven years. The last interest rate hike was 9½ years ago. So a decision to lift rates will clearly be a big deal. Fortunately, economists now believe a rate hike is almost certain, so that may cap financial market volatility. Still the language of the statement will be closely assessed.

On Wednesday, November data on industrial production is released alongside housing starts. Production may have edged 0.2 per cent higher in November after falling 0.2 per cent the previous month. But capacity utilisation was probably unchanged at 77.5 per cent.

Housing starts (commencements) have been volatile of late. And that volatility likely continued in November with starts projected to lift 6.3 per cent after an 11 per cent fall in October.

Also on Wednesday, the early or “flash” readings on manufacturing activity in the US and Europe for December are released.

On Thursday in the US the usual weekly data on claims for unemployment insurance (jobless claims) is issued together with the leading index, current account and influential Philadelphia Federal Reserve index.

The leading index may have edged up 0.1 per cent in November after a solid 0.6 per cent gain in October.

And then on Friday, the Kansas City Federal Reserve index is released together with the “flash” reading on US services sector activity in December.

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