Politics: An important investing subject

Suddenly the investment world is starting to turn. And Reserve Bank Governor Glenn Stevens will have some important decisions to make on interest rates.

But the change also extends to politics, which is going to become an increasingly important investment subject.

Separately, this week I also want to deal with Wesfarmers and finally look to what the gold price is telling us.

When the Australian dollar was around 70-72 US cents, the Reserve Bank could afford to have official interest rates above the rest of the world. Now it is skyrocketing above 76 US cents (today it sits at 77.02): At these levels, it will damage the structural Australian adjustment as we lessen dependence on mining.

What's more, lower interest rates and the horror they represent for savers are back on the agenda. Make sure your interest bearing securities portfolio is not too heavily skewed to the shorter term.

We are seeing a stirring in the demand for commodities. Iron ore is rising and the efforts of Russian President Putin to bring the oil producers together, which I have described in earlier issues of the Eureka Report (read more by clicking here), is bearing fruit with higher oil prices. I discuss this later in the commentary.

In the world of politics...

On the political front there are a lot of things on the Coalition's agenda which I find very attractive including the re-establishment of the Australian Building and Construction Commission, the emphasis on innovation and at least the prospect of a fast train between Melbourne and Sydney.

But increasingly I am becoming apprehensive that this election will be won by Bill Shorten. Don't put that down as a prediction but at least at the start of the election campaign Malcolm Turnbull appears to be accident-prone.

His suggestion that states should have taxing rights had merit, but was announced at a rugby function and was not properly thought out and sold to the states.

In his conversations on talk-back radio his answers are far too long and get the presenters off side – and what should have been a magnificent platform for the government – the decimation of owner driver trucks – was badly handled.

Although we don't know what is in the budget, the early leaks indicate that, after having everything on the table, it will be a close to a do-nothing budget, apart from a clamp on superannuation contribution tax concessions.

Turnbull blasted the banks at the Westpac anniversary dinner, so giving Bill Shorten an opportunity to call a Royal Commission into the banking industry and wrong siding him again. A Royal Commission is not good for the banking industry at this time.

On the other side, Bill Shorten and his very capable treasurer Chris Bowen have a clear platform that is not investor friendly. The key aspects of ALP policy are:

• Negative gearing will be confined to new dwellings;

• There will be a 15 per cent tax for income in pension funds above $75,000 per person and

• Capital gains tax rises.

And of course the Coalition's mistakes are being reflected in the opinion polls which currently have the election on a knife-edge. As I said in no way does the above reflect a prediction from me, merely a danger alert to investors that a change in government is now a possibility. And that change has very clear investment implications.

Wesfarmers

Suddenly the almost “perfect” company Wesfarmers is in the gun and the difficulties at Target – where there are allegations of misconduct by former senior management in relation to client rebates – have caused the market to downgrade Wesfarmers.

It is strange, but I had the reverse view.

Wesfarmers has been incredibly successful with their decentralised management model and I believe that model will become essential to most large corporations in the future. The pace of business is simply too fast to have these vast conglomerates trying to battle on many fronts via central command.

Nevertheless it was inevitable that at some point in time that the decentralised model would trip up. It has tripped up but the amount of money is small and the company has publicised the mistake to the maximum degree and jumped on those that did either the wrong thing or should have known about it.

That means the entire Wesfarmers staff in all its various operations have been alerted that if you do silly things the company will come down very hard on you. There will be no concealment.

And as we saw with one executive, it can affect your future employment in other enterprises.

The chances of a similar situation at any of the other Wesfarmers operations in the future have been greatly diminished. And of course the company itself will see the gaps that enabled this to happen.

Across a very wide spectrum of corporations we are seeing bad management decisions led by the banks. If you go back a year or two, the miners invested poorly in the boom. Australian companies are going to need to look much more closely how they manage and how they will meet the challenges of the small and lean high technology attackers that exploit their high cost weaknesses. Wesfarmers as a result of the Target mishap is better placed to handle the new environment.

Confidence

For most of 2016 that new environment is being dominated globally by a deep feeling of nervousness, but there is just a chance that sentiment is changing. Let's first talk about why confidence has been down. My colleague Alan Kohler has written about how negative interest rates in Europe and other places have badly impacted on confidence.

The failure of the US Federal Reserve Chief Janet Yellen to proceed with her planned interest rate increases added to the nervousness. And China is all over the place. The latest rise in uncertainty comes from its clamps on certain food imports indicating that it is nervous about its rural industries. At the same time, it is maintaining excess steel production which might be helping our iron ore miners but not world steel producers.

This uncertainty is reflecting itself in the price of gold and of copper. The yellow metal put on 16 per cent on the market quarter, which is a large turn around on the fall in the previous last five years. In part, it also reflects the fact that there is great unhappiness in the way central bankers are managing world finances. In such situations people buy gold as a defensive hedge. And fuelling that situation is the fact that the biggest gold miners are expected to produce less gold than in the current calendar year. That fall is off set in increases by smaller miners but the metal is certainly not experiencing any major production increase, so any increase in demand is reflected in the price.

If there is a metal that tells you what the market thinks is going to happen in the world it is copper. Given the stimulus afoot among central banks, copper should have performed much better, particularly as it is important in many of the new technologies and production is not dramatically in excess of demand. Instead there has been a steady decline.

So that's the bearish view and the markets are awash with shorting to support that view.

Then suddenly Londoners awoke to this headline in the London financial Times (I am grateful to Richard Morrow of Baillieu Holst for alerting me to the headline):

Here in Australia, we see iron ore above $US60 a tonne in the headline. The combination of the two is wonderful for our iron ore and LNG producers. And if that sentiment gathers pace it will cause shorters to cover – we may be looking at a significant change.