THE DISTILLERY: Business news for dummies

One of the tools that make the Australian commentator's job easy is the conveniently few labels that are applied to any development in the news. In fact, there are only two: the battler versus the bludger. Whether events actually fit this mould is irrelevant. Only the mould matters and the protagonists of the story must be squeezed into it one way or the other.

We'll start with the obvious. Alas for Clive Palmer! His frequent allegations against government misdeeds (usually a sure fire way of positioning yourself as the battler) have failed to impress Elizabeth Knight of The Sydney Morning Herald, who jams the mining magnate into the bludger mould. "If Clive Palmer's $7 billion sharemarket listing depends on the deal he announced at the weekend – a $60 billion coal sale contract with a Chinese-owned corporation – then his float may be in a spot of bother ... Professor Palmer (as he prefers to be titled) heralded plans to float his vast iron ore and coal interests in October but has since postponed the listing twice amid market scepticism about the quality of his reserves, his ability to finance their development and his choice of floating on the Hong Kong market rather than in Australia where the assets are located.”

While something is obviously awry with Palmer's deal, or at least his representation of it, some more information would be helpful to the reader. For instance, what exactly are the jitters about Resourcehouse's reserves? This is a business column, right? Where are the numbers? Knight prefers to put the boot into Palmer himself, condemning him, so far as evidence is concerned, for wanting to be called 'Professor'. A true bludger and, worse, one daring to act above his station.

After rehashing widely-reported details of the confusion surrounding Palmer's coal deal with a Chinese firm, Knight asks, "...the question is why? Putting aside the possibility that China Power International Development are being extremely legalistic, there can be only two other explanations. One is that Resourcehouse never had a proper agreement with its alleged Chinese partner ... in which case any chance of Palmer's company gaining the support of investors to list has been demolished ... Another is that Ms Li, and the company that Palmer thinks he has a contract with, is sending a clear message that whatever it negotiated with Resourcehouse is no longer acceptable [or] is no longer a deal.” Then Knight delivers her coup de grace. "Palmer is not short on form when it comes to announcing deals that don't eventuate.” The man's a bludger, don't you know?

What about some analysis of the Chinese demand for coal, past, present and future? Or, analysis of Australia's competitive position vis-a-vis sea-borne coal? Or, some history that we don't know, like who is CPID or its twice-quoted chairwoman. How does the current rocky relationship with China play into things? Why is Palmer listing in Hong Kong anyway? What do Australia's investment bankers think of this? The list could go on and on. There is irony in Knight pressing Palmer into the bludger mould.

Next into the mincer is bank regulation. Overnight, Bloomberg reported a fascinating story that the head of the Bank of International Settlements, Jaime Caruana, was quoted as saying "Capital and liquidity buffers need to be built up in good times so that they can be drawn down in bad times ... Capital requirements are the speed limits of banking [and] should draw on deep pockets that can absorb losses. An idea worth exploring is whether those pockets might be usefully deepened by debt that is convertible to equity when times are bad.” Needless to say, there are large implications here for Australian banks. What's more, Caruana made these comments in Sydney, at the RBA's 50th anniversary symposium. Yet, nobody even covers this today. Why? Because it doesn't fit with the myth of Australian banks as battlers made good ('best in the world', in fact).

Moreover, what does come out of the RBA event is one simple line, offered up like a steak hacked straight from the side of cow – that the RBA is now targeting housing with rate rises. Tim Colebatch of The Age gives us monetary policy, battler style. He quotes Stevens: "'The issue is not bubbles, or even asset prices per se,' Mr Stevens said. 'The issue is the potential for damaging financial instability when an economic expansion is accompanied by a cocktail of rising asset values, rising leverage and declining lending standards.'”

As this column has been saying for months, to do anything else in a post-GFC world would be idiotic. But what about some analysis of how well the RBA is going with its new program? Has the bank managed to stick to a consistent message on this? Reinforcing its rate moves with consistent rhetoric? Has the housing market responded? Is monetary policy a sufficient tool? Given runaway housing inflation and historically low rates, is the RBA moving quickly enough?

David Uren of The Australian is worse. His report limits the symposium to the confines of stimulus versus interest rates, that is, government bludgers versus housing battlers.

For those seeking a little more than that offered by commentators, the RBA symposium had terrific presentations by Glenn Stevens, Jean-Claude Trichet, Jaime Caruana, Andrew Crockett, Anne Krueger and William Dudley.

Of course, yesterday's millionaire factory (read bludger) can easily become today's underdog (read battler). Something of that nature is transpiring for Macquarie Bank, which will be glad to see that with failure comes great benefits so far Australian commentary is concerned. Yesterday's downbeat profit announcement and stock price hammering have positioned the bank nicely for battler status. And with the moniker comes the bright side. According to Stephen Bartholomeusz of Business Spectator, "beneath the modest and conditional top line expectations there is a lot of activity occurring ... While inevitably the market and analysts will focus on earnings and balance sheets, investment banks run on intellectual firepower ... A year ago the group had 12,851 staff, down from a pre-crisis peak of 13,898. Today it has 14,400 after a spate of acquisitions and senior level hirings.” This column will only add that despite the higher head count, the bank is generating roughly half the profits recorded at its previous peak in size. To state the obvious, that suggests dramatically-eroded margins across the group.

Malcolm Maiden of The Age also muscles up in defence of the battling Macquarie with the suggestion that we need to keep yesterday's lousy profit upgrade and share action "in perspective”. Apparently "it is subdued earnings momentum we are talking about here, not some perceived existential crisis”. So we should invest because Macquarie is not in crisis? Maiden's sympathetic tone belies his own analysis, which suggests the path ahead is far from bright. "The group has substantially disentangled itself from its stable of listed funds ... It has been dragging forward future management fee streams in the form exit payments ... But that process is drawing to a close, and Macquarie probably needs to find at least $500 million a year of new, high-yielding income to fill the hole ... The plan is that broking commission income from investors and equity capital markets income, including book-running income from companies Macquarie covers, will follow. The No.5 broker raked in an estimated $US2 billion, the No.10 broker booked $US800 million, and the No.15 firm took about $US400 million ... Macquarie [is] somewhere between 10th and 15th place.”

This column will leave to the reader to decide if finding half a billion dollars in profit in the highly competitive broker market is likely in the near future. Especially given the focus the area is receiving from US investment banks whose fixed income businesses have been trashed. Of course, there was limited or no mention of the fact that the great bludger, the Australian government, has more or less funded Macquarie's entire transformation.

Another company today enjoying battler status is Alumina, at least so far Alan Jury (Chanticleer) of the Australian Financial Review is concerned. Apparently "stock analysts” are out of step with Jury's assessment, which is that yesterday's earnings exuded "good news”. The subsequent analysis is all about decoupling with "demand for aluminium to rise 10 per cent this year, led by China.” Demand is expected to return to pre-recession levels "within three years, and to average growth of about 4 per cent a year over the next two decades.”

Jury fails to mention a global glut of aluminium that has the London and Shanghai Metal Exchange inventories overflowing, even as prices have shot up with global reflation. When the $US resumes its decline, aluminium prices may find some support, but in this column's view, the only battle to associate with Alumina is an impending collapse in the price of its key commodity.

Last today is tax. And what hope is there of a balanced debate here? Not much from Matthew Stevens of The Australian who somehow manages to cast the global private equity industry, with $2.5 trillion in funds under management, as the battler. Stevens relies heavily on a submission from a "quartet of peak accounting bodies [which] has labelled draft guidance provided by the Australian Taxation Office after its unprecedented attempt to extract $678 million in back-taxes and penalties from TPG as 'not accurate', 'incomplete' and 'misleading'.”

Stevens quotes over and over from the reports to mount the argument that the ATO "has erred in going after TPG because the pursuit represents a fundamental shift in views offered both privately and publicly by the taxman". That this "...shift in approach announced by the TPG action represents a lack of understanding both of the nature of the TPG transaction and all others like it, and of the broader significance of a decision that seems to fundamentally recast the tax liability of a far broader class of investment vehicles than just private equity and the other pooled investment schemes”. And finally that the taxman has rushed "to respond to the controversial and highly political decision last November to accuse TPG of tax avoidance by handing down guidance that is worryingly narrow in its interpretation of taxation law, stands in apparent contravention of our external tax treaty commitments, and seems to undermine the intention of existing government policy on foreign investment.” Stevens concludes by bringing it home to you, the other battler. "If we don't want to be a target for investment by pooled funds, translating these drafts into firm rulings is the way to do it. But I am pretty sure that is not what the federal government wants, given its ambition for Australia to be a regional investment hub, and its understanding that our prosperity is built on foreign investment.”

A couple of points. Stevens conflates private equity with all foreign investment, even though it is a small portion of the total. He also avoids any discussion of the difference between private equity and other forms of investment. That is, private equity is supposed to function as a kind of bottom-feeder that picks off failing companies and industries and reshapes them into productive sectors. Is there a single example of this happening in Australia? Looks rather more like a pattern of 'pump and dump' to this column. Stevens also avoids any discussion of the tax downside of private equity, not to mention the disadvantage that tax dispensations place Australian capital at. Nor does he discuss the pro-cyclical nature of any of it. It just private equity: the battler.


Crikey, Australian readers deserve better than this.

Thankfully, Alan Mitchell of the AFR is our exception that proves the rule. Also writing on tax, Mitchell has a sensible take on tax reform in which, refreshingly, this column can't find any bias. "It would be a pity if unnecessary tax cuts to capital taxes crowded out more economically valuable cuts in the effective marginal rates of second income earners. It would also be a pity if this chance for tax reform left important industries seriously undertaxed. There is suspicion, for example, that the state governments have undercharged the mining companies for the exploitation of the nation's minerals.”