THE DISTILLERY: Stability stress

The big story for Australia over the weekend wasn't the new capital rules for banks. They come in fitfully over the next decade and we may have another crisis or many of us, so they could be dead before they are applied in their entirety. No, the big yarn was the way the Chinese economy is not collapsing, as many excitable local and international analysts have claimed it could or might. Yes, China's consumer inflation is up, but it's still a bit less than Australia's was  in 2007 (3.5 per cent versus 4.7 per cent annually). There were some niggles – iron ore imports fell 13 per cent in the month and steel production only eased slightly and reached a six month low. But imports of oil and copper jumped, retail sales were up, and industrial production rose. And there was no change in monetary policy, which was feared by some commentators. Surprisingly, local analysis was light on this morning, especially of the fall in iron ore imports and steel production.
 
The Australian Financial Review wrote today: "China's economy showed surprising strength last month as it sailed towards a soft landing despite global economic weakness." And: "Signs that the Chinese economy may have stabilised and corrected a sliding trend from previous months could put Australian shares in a sweet spot over coming months." The Australian depended on a Wall Street Journal story in its business section, which was aimed at American readers, not Australians.
 
On the whole, the figures didn't fit the doom and gloom scenarios. The Australian's David Uren, however, make the very valid point that: "The long-standing debate between China and the US is again at a flashpoint, while Japan is aggrieved that China's central bank is pushing up the value of the yen. The investors' flight from the euro may also gather speed under renewed concerns over the sovereign risk."
 
The big story in US markets is the continued fall in trading volumes (six of the first eight months of this year have seen volumes on Wall Street under the levels of 2009) as retail investors in particular abandon direct investment, mutual funds etc. Over the weekend, Bloomberg reported that a company called Liquidnet, a stockmarket trading platform used by big US investors (such as mutual funds), had sacked 45 staff because of falling trading volumes.
 
It's been a story covered only sporadically here. But Fairfax's Stuart Washington had a good attempt at the weekend: "A number of voices in the Australian market fear there have been fundamental changes to the financial landscape that are yet to be fully understood and which raise questions about just how valuable equities should be regarded by investors as they contemplate the changed environment. Worse, their arguments mean there are few havens for which investors can reach, given government bonds, their other great mainstay, are trading at historically low prices. How these views square with Australia's economic good health is one of the mixed messages in the markets."
 
And this morning he looks at the lack of comprehensive prudential rules in funds management: "Strange as it may sound, you can go into business as a responsible entity of a fund with $50,000 and take in an unlimited amount of investors' money. That's right, for what passes as a deposit on a Sydney house these days, you can set up your shingle and offer your services as a fund manager taking in hundreds of millions."
 
There were also reports this morning that we might know soon what the NAB will do about its bid for AXA APH: "National Australia Bank will decide on the future of its stymied bid for wealth management rival Axa Asia Pacific 'in the next few days'. The bank's revaluation comes amid firming expectations of a revamped proposal from Axa's original suitor, AMP," The Australian wrote.  
 
The Australian's Michael Stutchbury introduced us to the reality of Australian politics and economics in his Saturday column: "But Australia's mining boom means some regions and industries must fall behind while others lead the charge. The Reserve Bank's interest rate policy is the lever to ensure this happens. The independent central bank is the final line of defence to stop Canberra's new politics blowing up the economy. Reserve Bank rate hikes will hit the heavily mortgaged suburban commuter belt Gillard has now put down Labor's priority list. Yet higher interest rates could also drive up the dollar - now at US92 cents – and squeeze Labor's new rural cobbers." Some of this pain will be the price for Australia's political fracturing and loss of reform momentum." Watch the independents, and some in the federal opposition and Labor Party, starting moaning when this happens.
 
The Sydney Morning Herald's Ross Gittins continues to expose the falseness of the federal Opposition's anti-debt and deficit campaigns: after all, they allowed our two biggest debts to get bigger when in government: "One of the most remarkable, but unremarked, features of the election campaign was the extraordinary fuss made about a net federal government debt expected to peak at a mere $90 billion, while not a word was said about Australia's net foreign debt of $670 billion – and rising. Similarly, despite all the feigned concern about the size of federal budget deficit, nothing was said about the current account deficit, which is almost always much bigger. This just proves politicians carry on about what it suits them to. It hasn't suited the opposition to bang on about the current account deficit because it was consistently high throughout the Howard government's 11 years - meaning the net foreign debt just kept getting bigger."
 
As private equity eyes off Foster's wine business, along with a couple of other corporates (Keycorp, for example), The SMH's Ian Verrender wonders if this is a trend, or a last desperate fling: "It is entirely possible that, as its new corporate mission, Foster's has decided to become a trendsetter rather than a dedicated follower of fashion. For years now, no one has thought of using the private equity buyer ruse; not even private equity firms. Between 2005 and 2007, private equity firms splurged $US1.6 trillion on a wild spending spree as they gobbled up corporations across the globe. That has since slowed to a trickle. The firms they bought are overloaded with debt and in some cases, private equity firms themselves are in trouble. One, Candover, went under just a fortnight ago. As for the rest, they have had trouble raising either the equity or the debt to fund multi-billion-dollar purchases. And many of their original investors want their cash returned."
 
And this morning Ross Gittins says: ''The dismay with which economic rationalists have greeted the ascension of Julia Gillard's 'weak and hopefully short-lived government' is overdone. What we're getting is different from what we expected, but I'm not convinced it'll be any worse...It is likely there'll be a fair bit of public debating of policy options between the government and the indies. It will be a messy process. And it's guaranteed the opposition and the Murdoch press will portray this as disunity, indecision and chaos".  
 
And Fairfax's Adele Ferguson continues her campaign against the way company collapses are picked apart by some in the greedy professional classes. This time it's the failed Business Australia: "The BA companies' unregistered managed investment schemes, which collapsed in 2005, provide another example of liquidators, lawyers and others feeding off the carcass and taking whatever is left. In the BA companies' matters, investors lost $15 million, and the more than $8.5 million that was available to creditors got swallowed up in fees... It's another glaring example of how the Australian Securities and Investments Commission cannot be relied upon to protect investors, despite complaints," Ferguson writes.
 
Tough times for business, and its fashionable to blame the government, as the The Age's Malcolm Maiden tried to do at the weekend (which mind you, the ACCC's tougher attitude on mergers and competition has been apparent for a year, not just since the election): "The election is over, but there's an inescapable feeling that the government is still in the room, and eating all the canapes. Over at NAB, chief executive Cameron Clyne learnt that the Australian Competition and Consumer Commission remained opposed to his planned $13.3 billion takeover of AXA Asia Pacific. And Virgin Blue's new head, John Borghetti, was hit on two sides, with America's Transport Department opposing a proposed trans-Pacific alliance with Delta, and the ACCC coming out against a separate alliance between Virgin Blue and Air New Zealand." And this morning, the AFR reported that "Virgin Blue's chief executive officer John Borghetti and major shareholder Richard Branson have warned that the airline will have to change its newly formed strategy if the company cannot persuade regulators about the merits of two international alliances that were rejected last week."

Ah, the old Australian story – competition is an idea supported in theory by business, which is lousy at practising it unless they can set the rules to suit themselves.