THE DISTILLERY: Dollar dispute

Jotters chew out the government and RBA for underestimating the problems associated with a strong dollar, while one foresees a tough AGM season.

The Distillery hopes readers learn two lessons from this morning’s sip. Firstly, contrarian arguments are few and far between, and we need more of them. If you go hard on an argument about the Australian dollar, be prepared to cop some broadsides regardless of what you say.

Our discussion begins this morning with Fairfax economics writer Tim Colebatch who’s delivered what appears to be his last column until February (he’s going on leave). The writer issues a clarion call of sorts to challenge the accepted wisdom from on high.

"Perceptive critics warned that US sub-prime mortgages were designed to fail, and could bring the financial system down with them. But when Fed chairman Alan Greenspan dismissed them as out of touch, and insisted that all was well, too many believed him because he was Greenspan, or suppressed their doubts for fear of being seen as not with it. Conformity was allowed to overrule common sense. The US and Europe drifted into disaster. The lesson should have been obvious, yet I've not seen it referred to by any commentator, and it seems to have had no influence on the way we conduct economic debates in Australia.”

Colebatch goes on to point out that six months ago, there were too few commentators seriously questioning the reluctance of the federal government and Reserve Bank of Australia to pull the dollar down. The writer argues that benefits of a high Australian dollar have been too tightly confined.

Today, with the federal government still committed to a budget surplus, writes Colebatch, it’s up to the Reserve Bank to reduce interest rates. Indeed The Australian Financial Review’s economics editor Alan Mitchell also makes this exact point this morning.

The Distillery wholeheartedly welcomes Colebatch’s championing of contrarianism and his point that few were questioning Canberra’s reluctance to prioritise the Australian dollar six months ago.

But boy oh boy arguments of all stripes about the Australian dollar are easy to counter.

To highlight this, Fairfax’s Michael Pascoe makes the solid point that the US dollar’s weakness is just as critical a story as the Australian dollar’s strength. And while the US dollar is the world’s base currency, it’s not the only type of note we do business in.

"Have a look at the Australian dollar's exchange rate with our two biggest trading partners, China and Japan. At around 6.6 renminbi to the Aussie, we are not far away from the 6.4 at the start of 2004. The Aussie certainly dived with the GFC first hit, but it's been worth 6-point-something RMB for most of the past eight years. Against Japan, the Aussie dollar started 2004 at 81 yen and that's where it is today. In between, it's run to more than 100 and dipped below 60, but draw a line through it and you get something in the low 80s, which is also about what it was worth 20 years ago. Oh, and what was the iron ore price in 2004? About $US16 a tonne.”

But Colebatch’s core point is correct. The government and the RBA underestimated the currency problem and too few called them on it.

Part of the reason why the Australian dollar is such an enduring topic of conversation is the disagreement over the state of the economy itself.

Remember how our unemployment rate is the envy of the developed world? How does that fit into a critique of the responses from the government and the RBA? Why kick the dollar when our economy rocks?

A related story to this economic litmus test is the way companies are communicating their not-so-hot results to shareholders. The Australian’s John Durie story this morning on the fallibility of "underlying” profit numbers is well timed.

"Most fund managers will tell you cashflow comparisons are the best ways to track company performance with the accounting standards based on numbers of less importance. The Australian Securities & Investments Commission boss Greg Medcraft is not overly fussed so long as the accounting-based or reported-based numbers are given prominence and the so-called underlying numbers are clearly identified. Analysts like to follow the underlying numbers, which strip out extraordinary items, but in most cases it is the company that decides which numbers to strip out. That is where some confusion lies.”

In some instances, underlying profit numbers are a reasonable reflection of how a company is travelling. But in others, the figure is about as useful as the calorie count of a Big Mac when the horrid beef, the surgery bread and the plastic cheese are stripped out.

The remaining slice of pickle is top shelf.

Speaking of corporate reporting, Fairfax’s Adele Ferguson writes that Australia’s business giants are not looking forward to the upcoming AGM season with a string of remuneration reports up for a shareholder vote.

The Australian’s Glenda Korporaal reports that the newspaper’s roundtable with some of the top company directors believe that Australia needs to become much more active in its consideration of Asia’s role in the country’s economic future.

The Australian Financial Review’s Matthew Stevens is pretty certain that investment banker Mark Carnegie is seriously considering lending a hand to embattled mining tycoon Nathan Tinkler.

Fairfax’s Michael West rips into the banking industry on their claim that the short-selling ban on financial stocks during the global financial crisis, which the banks requested, actually ended up costing them money.

And finally, Fairfax’s Peter Hartcher has a terrific article on a hidden drag that the US economy has developed over the last two decades. A new study says white Americans have fallen behind in education levels and it has shaved an average of four years of their life expectancy.


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