Wayne’s World, Recession 2019, Oil, ACCC on electricity, Most Trusted, Bosses of the World Unite, and more

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Wayne’s World
The Recession of 2019?
Oil: a tariff tantrum?
ACCC on electricity
Aldi, Most Trusted
Minack: Bosses of the World Unite
Research and Diversions
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Wayne’s World

This week’s speech by APRA chairman Wayne Byers was a pretty big deal, but not for the reasons in the following day’s headlines.

Sure, it’s interesting that he thinks APRA hasn’t caused a credit crunch, but that can be filed under “he would say that, wouldn’t he?”. And while it’s a bit more significant that he thinks they’ve done enough now in cutting back risky lending and forcing increases in capital, especially for bank shareholders, if he didn’t think they had done enough then presumably he would just do more.

What I found most interesting – and reassuring – were the results of a recent stress test of the banks.

We may be heading into difficult times, what with a blossoming trade war and declining global liquidity and flattening yield curves (see below), so the state of the banks is likely to become important in 2019.

All recessions are credit events, either because of interest rate hikes by the central banks to control inflation (1991, 1982, 1961) or because loan losses erode bank capital and force them to impose a credit squeeze (2008 in the US).

Australia didn’t have a recession in 2008 for a number of reasons, including Treasury’s swift fiscal policy action, but an important reason is that APRA didn’t let the banks go silly in 2005-07.

There were two crises that brought APRA into the game early on during the global credit boom of 2003-2007: the collapse of HIH in 2001 and NAB’s foreign currency crisis in 2004. The steely personality of then APRA chairman, John Laker, in the wake of those two issues meant that the regulator was all over the banks from 2004 onwards, and the banks were simply not allowed to run amok like the Americans.

And APRA has stayed all over the banks after Wayne Byers replaced Laker, who ran the place for 11 years, from 2003 to 2014, with Byers as his deputy in later years.

Here’s a graph that shows the two key actions taken by APRA lately, and their impact: the 10% cap on investor loans in 2015 and the 30% cap on interest only loans.

On Wednesday, Byers said: “the heavy lifting on lending standards has largely been done. Any tightening from here on is expected to be at the margin as banks seek to get a better handle on borrower expenses, and better visibility of borrower debt commitments.”

But then he went on to discuss a recent stress test they had applied to the banks. There were two elements to the scenario:

1. A severe economic stress in Australia and New Zealand, with a significant downturn in the housing market at the epicentre. This is triggered by a downturn in China and a collapse in demand for commodities. The subsequent downgrade in sovereign and bank debt ratings leads to a temporary closure of offshore funding markets, a sell-off in the Australian dollar and widening in credit spreads. Australian GDP falls by 4 per cent, unemployment doubles to 11 per cent and house prices decline by 35 per cent nationally over three years
2. To this APRA added what it calls a “twist” - in addition to the sharp downturn in the economic environment, banks had to consider an operational risk loss event involving misconduct and mis-selling in the origination of residential mortgages. The additional operational risk element served as an amplifier of the stress, adding a further shock to bank balance sheets.

In these scenarios, the banks had losses of $40 billion on their mortgage portfolios, which was equivalent to what happened in the UK in the early 1990s but less than the losses in Ireland the US in the GFC.

In aggregate, common equity tier 1 capital fell from 10.5% to 7% as a result of phase one and then to 6% after phase two, but importantly they stayed above minimum levels.

Byers said: “As importantly, these results have been estimated without assuming any management actions to respond to and mitigate the stress, such as equity raisings, repricing and cost-cutting – all of which would occur in reality and lessen the impact.”

Also, liquidity stood up well. “Despite difficulties accessing funding markets, most banks maintained their liquidity coverage ratios (LCRs) above 100 per cent through the crisis scenario. Some dropped below 100 per cent, but even then, those banks were able to initiate strategies to restore their position to good order within a reasonable timeframe.”

As he pointed out, stress testing is a bit like weather forecasting, an inexact science, but I found it reassuring – not so much for investors in the banks, because bank share prices would fall quite a lot, but for the economy as a whole.

There is another big “BUT”, however: APRA’s controls on the banks have led to a big growth in shadow banking in Australia, which Wayne Byers doesn’t know much about, and doesn’t care, since the lenders are not under APRA control and therefore not its responsibility. APRA has not been stress-testing them.

UBS did a recent study of shadow banking and found that the major banks’ credit growth had slowed to 3.7% annualised over the past three months, which compares to 5% growth for the system as a whole. Smaller banks and non-banks were growing their books at 12% per annum over the quarter to May.

Here’s what that looks like:

Three things flow from this, in my view:

1. Even though the RBA cash rate has stayed at 1.5%, wholesale bank funding costs have been rising with the BBSW (bank bill swap rate), which has gone to a spread of 60 basis points over the cash rate, the highest since the GFC. That’s putting a lot of pressure on the banks that mostly fund their books from wholesale sources (other banks), namely Bank of Queensland, AMP Bank, Auswide and IMB Bank. As a result, they’ve been putting up their mortgage rates.
2. The small bank and non-banks are likely to experience much more of a credit crunch than the majors, which is something APRA is not measuring.
3. Anecdotally the loan to value and interest cover ratios of the shadow banking credit is fine, but there are little or no statistics about this, and as Warren Buffett says you only find out who’s swimming naked when the tide goes out. As house prices fall, and if unemployment were to rise and small business incomes fall, stand by for insolvencies among the lenders that APRA doesn’t watch, or do stress tests on.

The bottom line is that APRA’s stress test is definitely reassuring, but only up to a point. Too much of the borrowing has been and still is being done by lenders that are in the shadows, where APRA can’t see, let alone stress test.

The Recession of 2019?

A lot of the above stuff about banks and shadow banks turns on the question of whether the economy holds up, and whether the record expansion we’ve had for 26 years keeps going.

If it does, no problem. But if the tide goes out, well some bare bums might become unpleasantly visible.

The Australian economy is obviously sagging a bit under the weight of record household debt and under-employment, but as long as the RBA takes absolutely no notice of the inaugural chairman of APRA, Jeffery Carmichael, who called for an early pre-emptive rate hike to get everybody softened up for when they are really needed, then things should be ok domestically.

I thought Carmichael’s call was pretty idiotic, by the way. Let’s shoot ourselves now so we’re ready for being shot later.

The bigger question is whether we’re likely to see a global recession in the next 12-24 months, and on that score there are two things to worry about: trade and liquidity.

I did a big number on trade wars last week Saturday, so I won’t repeat that, except to say that the new list published by the US Trade Representative this week of US$200 billion worth of imports from China that could get tariffed is clearly an escalation from where we were a week ago.

I’ve had a look at the list so you don’t have to … and, well, it’s ridiculous. The earlier list of US$34 billion on which tariffs were announced a week ago was, as I noted, almost entirely manufacturing inputs and capital goods, which was stupid enough.

This one is, as you can imagine, much longer, and is definitely end products and consumer goods.

Here’s a taste, as it were:

• Frozen retail cuts of meat of swine, nesoi
• Frozen meat of swine, other than retail cuts, nesoi
• Edible offal of bovine animals, fresh or chilled
• Meat and edible meat offal of rabbits or hares, fresh, chilled or frozen
• Meat and edible offal of deer, fresh, chilled or frozen
• Frog legs, fresh, chilled or frozen
• Meat of swine other than hams, shoulders, bellies (streaky) and cuts thereof, salted, in brine, dried or smoked
• Live ornamental freshwater fish
• Live ornamental fish, other than freshwater
• Live trout
• Live eels
• Live carp
• Other live Fish, Atlantic & Pacific Bluefin Tunas

(These were the first few items on the list – with hundreds of other seafood items following. And by the way, nesoi stands for “Not Elsewhere Specified Or Included”)

There are also hundreds of chemicals, and entries like this: 4-Chloro-o-toluidine hydrochloride; 5-chloro-o-o-toluidine; 6-chloro-2-toluidine-sulfonic acid; 4-chloro-a,a,a-trifluoro-o-toluidine;& other

…and: Mixture of 5- & 8-amino-2-naphthalenesulfonic acid;2-naphthalamine-o-sulfonic acid;& o-naphthionic acid (1-amino-2-naphthalenesulfonic acid)

The last one, on page 205, is: Antiques of an age exceeding one hundred years.

It’s clear that America is going completely mad.

Two questions arise: will Trump back down before imposing those tariffs; and second, how will China respond if he does.

There’s little reason for the President to back down, especially before the mid-term elections in November, since the rhetoric seems to be proving popular and the economy is strong, and it’s virtually impossible for China to quickly to meet his demands.

So it’s very likely that all of those imports will be taxed – prices will rise, poor people will be hit hard, along with manufacturers, which will presumably cut back on jobs.

What will China do? Well, while the first retaliation was proportionate (US$34 billion for US$34 billion), the next probably won’t be. Apart from anything else, China only imports US$150 billion worth of stuff per year from America, and also Beijing really doesn’t want a full-blown trade war.

So I don’t think the thing to worry about is a major, all-out trade war producing a big decline in either global trade or Chinese economic growth.

UBS estimates the first round of tariffs will reduce Chinese GDP by 0.1%, which is a rounding error, and the second round cut it by 0.3-0.5%, but that’s likely to be offset by domestic policies. Specifically, the current pressure on the Chinese economy is from tightening financial regulations and credit, which could be simply eased off while the tariffs were in place.

Of more concern is the broader impact on business confidence and investment.

Big businesses have entirely globalised their supply chains over the past decade or two, and the idea that this might have to be unwound because America has gone mad will destroy confidence.

So while the immediate impact of tariffs is inflationary, since they increase prices via a tax, the medium term impact is more likely to be deflationary, by putting downward pressure on economic growth.

The other deflationary factor, of course, is interest rates. The US Fed is hiking, and this week’s producer price index increased the likelihood of several more hikes this year.

Moreover, the yield curve is flattening (that is, short rates are catching up to long rates), which is usually a reliable indicator of recession.

Note that every recession since 1960 has been preceded by a decline in the spread between the 10-year and 3-month interest rate (shown on the chart as an increase, since it’s inverted), but that the yield curve flattened three or four times without being followed by a recession.

In other words, recessions are always preceded by flat or inverted yield curves, but flat yield curves don’t always lead to recessions.

Note also that ANZ’s “probability of recession” indicator has increased much less this time than previously. Not sure what that means.

The other thing worth passing on to you is a piece this week from GaveKal Research’s Charles Gave, in which he opens with: “I have become increasingly concerned that a recession will hit the world economy in 2019.”

He goes on: “My reasoning is simple, and is based on the behavior of an indicator I have long followed, which I call the World Monetary Base, or WMB. Every time in the past that this monetary aggregate has shown a year-on-year decline in real terms, a recession has followed, often accompanied by a flock of “black swans”. And since the end of March, the WMB has again been in negative territory in year-on-year terms. As a result … there is a significant risk of a recession next year.”

Here’s his chart of WMB:

Here are Charles’ conclusions:

“As usual, little is certain. But at this point, there are a number of things that I can say with confidence.

1. Gavekal’s statistical system to assist decision making, TrackMacro, is now registering risk-off for almost every stock market in the world. It has seven components, two of which are the WMB and world trade.
2. The eurozone economies in general, and Italy and France in particular, are not in a position to navigate another recession.
3. China has foreseen the danger of a US dollar shortage and has tried to arrange things in Asia to allow the region to ride out a dollar squeeze. As a result, Asia is likely to be a zone of relative stability in the coming turmoil.
4. For the first time in almost 20 years, cash is an alternative to risk assets. The yen is probably the cheapest currency there is today. Cash should be held in yen.
5. Investors should hedge the equity risk in their portfolios with US long bonds and Chinese long bonds.
6. Investors should avoid financials everywhere, as I have repeated until I am blue in the face.
7. Investors should sell the shares of companies with negative cash flow, especially if they are short US dollars.
8. The big risk is an uncontrollable rise in the US dollar if Europe’s fixed exchange rate system falls apart, much as earlier US dollar liquidity crises led to the collapse of fixed exchange rate systems in Latin America and Asia. Buy calls on the US dollar against the euro.”

(I should add, perhaps, that GaveKal is my most expensive subscription, by far - $15,000 per year – but worth every cent).

Oil: a tariff tantrum?

On the subject of trade wars, there a big sell-off of crude oil this week – Brent crude dropped 6.2% on Wednesday, which most analysts put down to either trade worries, or Libya resuming production, or both.

For what it’s worth, Citi Research reckons it was “machine-driven” and that fundamentals still look bullish, so the dip is probably a buying opportunity.

Tariffs aren’t directly affecting oil, and although Libya did lift its “force majeure” on oil exports, the place is not exactly a haven of stability, and could blow up again at any minute.

ACCC on electricity

The regulators are certainly off the leash these days. The latest to come out snarling is ACCC, on the subject of electricity, but as is often the case, most of the reporting has been off the mark.

First, the ACCC did NOT recommend that the Government “underwrite” new coal-fired power generation. Here’s what it actually says:

“Specifically, the ACCC proposes the government introduce a program under which it will guarantee offtake from a new generation asset (or group of assets) in the later years of the project (say years 6–10 or 6–15) at a low fixed price sufficient to enable the project to meet financing requirements.”

And it must … “be capable of providing a firm product so that it can meet the needs of C&I customers.”

Nothing to do with either “dispatchable” or coal-fired power.

And second, the ACCC is not recommending a regulated, lower price, although it does say the total of its recommendations should result in lower prices.

Recommendation 30 is for a sort of default price, “where a consumer has not selected a market offer before the expiry of a market contract” (a bit like default super, I guess).

The ACCC was quoted in the AFR as saying a regulated offer would be priced slightly above the middle market offer. UBS analysis shows that AGL and ORG’s standing offers are already at this middle market offer, so earnings may not be implicated.

In other words, the 7% or so drop in the share prices of AGL and Origin Energy this week look like an over-reaction, and a short term buying opportunity. I say, short term, because I’m still negative about the long term because power customers will be going off grid, en masse, although subscriber Bruce (last name withheld) has been writing to disagree with me about that.

He wrote: “I tried to go 'off grid' earlier this year because my actual electricity consumption was some 10% of my actual bill. The other 90% was the access charge (I designed our house to be frugal and we have 5Kw of solar).

“I learned that even if I was to go off grid, I would still be up for the monthly access charge.

“I live at Tweed and the distributor is Essential Energy. Some time ago, the NSW Gov't split the distribution to NSW (ie. Newcastle, Sydney & Wollongong) and the rest of the state (ie. Essential Energy). As an aside, it did that so all rural distribution supply is paid for by Essential [even the cables from the power generators to NSW - meaning that Sydney energy prices are 18% less than that of Essential).

“I understand that the NSW Gov't have introduced a regulation to the effect that if a resident lives in an urban area, and power lines pass their house, and at the time of the instigation of the regulation, then the resident MUST pay the access charge. It's a bit like a Council charging the sewer access charge for a vacant residential property where the sewer is in the street.

“I got told this 'arrangement' has been adopted by all states. 

“The net result is that it is useless for me to go off the grid to 'save' myself from the horrendously expensive access charge.

“If my advice is correct, you may want to revisit the implications for energy distributor shares.”

I replied to Bruce that I was mainly talking about big commercial users, like shopping centres and warehouses putting solar on their roofs, and also firms like Telstra buying directly from solar farms through offtake agreements (which Telstra has done).

But I also think households will do it too, eventually – it just might take longer.

Aldi, Most Trusted

James Kirby told me about this during the Money Café podcast on Thursday, and it smacked my gob.

According to Roy Morgan Research, Aldi is now the most trusted brand in Australia. Here is the top 10 list from Roy Morgan’s website:

1. ALDI
2. NRMA
3. Bendigo Bank
4. Qantas
5. Bunnings
6. Kmart
7. ABC Network
8. IGA
9. Australia Post
10. ING

I think that’s a telling list. It shows the importance of price when it comes to trust, and specifically, the presence not only of Aldi at the top but also Bunnings and Kmart.

I shop in all of those stores and the low-price culture is obvious everywhere, not just on the price labels. That’s why they are trusted – they are clearly doing everything possible to keep prices lower.

The only one I find puzzling, to be honest, is ING. What is a Dutch multinational bank doing at number 10 on a list of the most trusted businesses in Australia? Why is it above all of CBA, ANZ, NAB and Westpac? That really is a shocking indictment on our big 4.

Minack: Bosses of the World Unite

My friend Gerard Minack produced a fascinating report this week headed: “Bosses of the World Unite”, about how the labour share of GDP has fallen in most developed economies over the past 30 years.

He concludes the piece thus: “I think the next downturn will lead to more aggressive and unconventional policies, and in many countries that will likely include reducing corporate power.”

It’s an interesting and important subject, in my view, that I rang him up and recorded our conversation, so I could include the transcript in today’s Overview. It’s below, but first, here are some of his charts in the report:

And now here’s our conversation:

Gerard, it was interesting this week, there was an ACCC report on power which showed that the duopoly or oligopoly of power companies are responsible for the electricity increases and they want regulation. But you’ve been on about this a bit and it’s been getting you steamed up and you put out a report saying, ‘Bosses of the world unite.’ Tell us what you’re on about.

Yes, indeed, Alan. I think one of the big issues not just in Australia but globally is growing corporate power, and I’m referring both to their power in selling markets where you’ve seen increasing oligopolies and monopolies, but also in the markets that they’re buying in which is labour markets. It’s one of the reasons I think we’ve seen wages disappointingly weak in many places including Australia and one of the reasons that we’ve seen the wage share of GDP fall in most economies over the last two or three decades.

There’s lots of factors behind that but one that does get me heated up, in a sense, is a change in the way policy has operated over the last 25-30 years. I mean, initially in the full thrust of the Reagan/Thatcher reforms and their acolytes around the world, a lot of what was introduced was appropriately pro-market policies, deregulatory policies, privatisations that made good sense. Obviously, in Australia we had the Hawke/Keating version of that and to give you one example, it made no sense for the Australian government to own an airline, so yes, let’s sell Qantas, let’s sell Telstra.

But what it’s been perverted into in my view is less pro-market and more pro-business policies and that’s a very different thing. Every business person loves to get moats around their business, barriers that favour them and increasingly that’s what government has delivered them.

Gerard, is what we’re talking about a pendulum in fact, that you think it’s swung too far?

I think it’s swung too far and part of the corruption of the process is the phobia about public sector debt which has meant that the private sector’s come along and offered ways to government to fund things that gets the debt off the book but ends up costing us a lot more. I mean, you can see a lot of examples of that. Down in Melbourne where you’ve got the widening of the Tullamarine Freeway which the road owners contributed to, but by extending the tenure of their ownership the effective cost to taxpayers is going to be three or four times what it would be if it had have been conventionally debt funded.

The electricity privatisations are another example. What we’ve done is we started off privatising sensible companies, as I said, like Telstra, like Qantas – these are businesses in competitive sectors – and now we’re selling off assets or businesses that are in natural monopolies that makes no sense to have in private hands or if you are going to have them in private hands they have to be regulated fiercely.

But of course, what you tend to get is regulatory capture and the whole system being gained and in my view, it boils down to almost a medieval tax farming where the government sells the right to the private sector to gouge users of particular assets and we’re seeing it all over the place, from the world’s most expensive airport car parking, to what was amongst the world’s cheapest energy, to now the world’s highest energy. We’ll see what happens with the port fees, we’ll see what’s going to happen with the land registry offices that are being privatised. I mean, it’s a completely natural monopoly. Lord knows what we’re going to be paying to access that information in the future.

One of the interesting charts you had was showing a 40 year rise in a return on equity which is unsurprising, but a decline in business investment. In a way, that sort of feeds into your idea of secular stagnation, that business investment has been declining. Explain why that has been happening or how it fits into your thesis?

Yes, in a sense it’s a tell that something’s gone wrong. When I learnt economics at university in the late 70s, early 80s, one of the stylised facts that we were taught was that margins, profit margins and profit shares of GDP tend to mean revert and the mechanism that keeps these things in check is competitive markets so that if industry or a company is making above average returns, that would attract competition, it would attract capital and that new capital would push down returns and conversely if returns were poor you’d have capital leaving the sector.

So it’s exceptionally unusual to have seen this 30-year pattern of rising profits and lowering capex, something is not working and it’s left us with very high-profit shares which is obviously corporate income. What do corporates spend their money on after they make profits? Well, by and large it’s capex. Because we’ve had profits go up and capex gone down, corporate saving has gone through the roof. If the key symptom or cause of secular stagnation is this idea that we have excess saving, who’s doing the extra savings?

It’s not governments, they’re running deficits. Household saving rates have fallen in most places over the last 10 years. The big change in savings behaviour has been corporates, so this explains two things. Firstly, it explains why we’ve got these very low interest rates, because corporates are making a lot of money and not doing a lot of investing, but also explains why secularly stagnating has been absolutely terrific for investors because it’s gone hand in hand with this rise in profit share, falling capex spend. The gap between those two things is free operating cash flow for corporates, so they’ve been able to increase their buybacks, increase their dividends, increase everything that’s good for investors.

I suppose two questions arise from that. Firstly, will it continue to be good for investors and secondly, will there be a turnaround at some point, will the pendulum swing back and will that start being bad for investors?

Well, I think there are some limits on how far this can go. The flipside of the rising profit share has been the declining wage share of GDP – this is all about how we’ve sliced the cake – and it’s my view that if you keep on putting too much pressure on wages, ultimately you kill the consumer. It’s a circular income flow, what businesses pay their workers their workers tend to recycle as demand for the business product. If you do push wages too low you do kill your own customer base, so that’s one limit.

But I think a far more pertinent point is what you suggested with your second question, will the pendulum swing again? And this gets to the rise of populist politics which I think has several strands but one of them clearly is an anti-business strand and I think we are effectively seeing the blowback against some of these changes. You can see here in Australia the unpopularity of some recent privatisations, the complaints people have about tolls, about parking charges at airports, about electricity costs now… I think, yes, the pendulum will start to swing back.

I think we may have to wait for the next recession globally before it swings back aggressively, but you could in a sense argue that we may have hit an inflection point. I think these things as often is the case is led by the US. In my view, in terms of how investors should look at the new administration, I think we may already have hit peak Trump. The first 18 months of the administration, Trump gave investors nice news, he gave them deregulation and he gave them tax cuts. Now we may be getting bad Trump with not just protectionism but direct interference in individual corporate decisions, as we’ve seen just recently in a couple of tweets targeting specific companies.

That may be the inflection point, I’m not saying it’s going to matter immediately, although I think the protectionism issue is important for markets. But I think on a five-year view the pendulum will swing more aggressively. Anti-business, hopefully pro-market in a sensible way, but it will carry some risks for investors.

Just finally, on the protectionism and the trade war that seems to be building, what’s your view about that and whether it will move us from secular stagnation into cyclical downturn?

Well, the first thing to say, and obviously I’ve got no particular insight into Mr Trump, but it just strikes me that the only area of constants in his views over 30 years he’s been saying things on the public record has been his protectionist slant. He’s flip-flopped on a lot of things but he’s never flip-flopped on that. The first point I make to people, I think the market’s been too complacent in the risks surrounding a turn to protectionism. The second thing is, although the numbers are large, they need to be put in context of, a $17 trillion US economy, so slapping tariffs on $2-300b worth of Chinese imports, I don’t think is a decisive economic development.

Yes, it will add the decimal point level to inflation and yes, the decimal point level may dampen growth, but I don’t think that should be the key concern. I think it’s a much bigger issue for markets however, much more of a matter for them partly because they’re at very expensive valuations so when you price for perfection it’s not good if things turned out to be not so perfect. But the more important point is protectionism can disrupt business models, disrupt margins and supply chains. That can be a big deal for some sectors and some markets.

I think it is a new factor adding to risks, it’s not the only factor adding to risks – obviously, we’ve got the central bank, the Fed, tightening which is never normally good for equity valuations. I just think we’re seeing an accumulation now of risk factors that in my view I think that we should be pulling back equity exposures and you now at least for a global investor have the option of getting some sort of return in the safest asset of all which is cash in the US. For years there over the last post-GFC period the cry of many investors was TINA (there is no alternative), there is no alternative to risky assets like equity because cash was giving you nothing. Well, now there is an alternative and I’m recommending to my clients that they take use of that alternative and get a little bit more defensive.

Great, Gerard, thank you.

Thanks, Alan.

Research and Diversions

Research

Why Trumps’ trade war will fail. Actually it is referred to as a trade war, but it might be more productive to think of it as an international tax standoff. 

The state of the US economy in 11 charts (it all looks pretty good).

Less than half of employed Australians now hold a “standard” job: that is, a permanent full-time paid job with leave entitlements.

The entire history of steel. 

Yanis Varoufakis: Europe is sliding back into the 1930s and we need a new movement. Without changes, he says, the eurozone is “doomed”. 

John Mauldin: debt is being defined way too narrowly. “A debt occurs when you receive something now in exchange for a promise to give something back later. It doesn’t have to be cash. If you borrow your neighbor’s lawn mower and promise to return it next Tuesday, that’s a kind of debt.”

Here’s the Grattan Institute report that says high electricity prices are here to stay and the Government can’t do anything about it – because most of the price rises have been caused by things beyond its control.

The US Embassy’s frank assessment of Brexit: the economy is gonna tank, the British Government isn't interested in telling people they got it wrong, worst kind of inflation, Brexit ends up not helping people, leavers are absolutely terrified.

The war on normal people: "The reason why Trump is our president today is because we automated away four million manufacturing jobs in the swing states. The effects of automation are self-reinforcing. Once a mall loses its anchor store, it often goes into a death spiral, and many of the large chains with anchor stores are already in bankruptcy or close to it.”

Paul Krugman: Trump’s Potemkin economy.

The power of the Internet arose from its edges: innovation, growth, and freedom came from its users and their contributions, rather than from some centrally controlled core of overseers. But today there is a powerful centre to the net—and a potentially uncompetitive and unrepresentative centre at that.

The faith filter: How conservatives parse the news

As Mueller closes in, Trump’s allies are urging him to go nuclear.

Max Hastings’ fabulous profile of Boris Johnson: “brilliant, warm, funny – and totally unfit to be PM”.

It's now been a year since Victoria introduced stamp duty discounts for first home buyers. Since then the total Melbourne market has risen just 1%, but properties at the lower end (lowest quartile) have outperformed the market every month, and are up 9% in the year.

This is the website of Moley Robotics. Play the video on the home page – it’s amazing.

Cement is responsible for more than a third of the world’s carbon emissions, but it is also perhaps the most essential ingredient in an economy’s growth. We’re stuck with it.

Why stationary storage may be more important to lithium than electric cars

Energy is the key to everything. It “is the foundation of everything humans do in this world. Without energy in its many forms we cannot live.”

The US is $19 TRILLION in debt. “BUT the US just has to pay $225 Billion a year to service that debt. That's only 7% of GDP, down from 17% in the mid-90s. So we're actually financially healthier than 20 years ago. And if you subtract out what the US owes the US (yes, we owe money to ourselves), then the national debt is just $13 Trillion and our debt obligations go down to about 3 or 4%. If your salary was $100,000 and you had to pay just $4,000 a year to service all of your debt, you would say, "no problem". Let's take on more debt.”

Not too big, not too small – the advantages of mid-caps.

Want to know what happens with full employment? Look at Des Moines, Iowa, where low unemployment is slowly but surely tipping the balance of power away from employers and towards workers.

Sigma’s plunge unearths a surprising story of disruption.

Diversions

A 75-year Harvard study has found the secret to a happy life. Thank God for that. Now we know. Happily, it’s pretty simple and pretty interesting.

This neuroscientist had a stroke and figured out the meaning of life (there isn’t one, apparently, we just contribute to a greater purpose in the universe, which I think is a bit of a cop-out. I would have preferred “42”.)

Goodness me this is a fascinating piece. A tech expert, Douglas Rushkoff, has a meeting with a group of billionaires about the future of tech. But it’s not what he expected. “The Event. That was their euphemism for the environmental collapse, social unrest, nuclear explosion, unstoppable virus, or Mr. Robot hack that takes everything down. This single question occupied us for the rest of the hour. They knew armed guards would be required to protect their compounds from the angry mobs. But how would they pay the guards once money was worthless?”

Here’s a good piece detailing how the Thai cave rescue was carried out, in case you’ve been in a coma for a few weeks and haven’t read one yet.

Remember when children born from IVF were called “test tube babies”? It sounds rather archaic now. Well, the first of them turns 40 this month. This piece is an interesting look at how IVF changed the world.

Henry Kissinger (95): Philosophically, intellectually—in every way—human society is unprepared for the rise of artificial intelligence.

Then again: Our Robot Overlords Might Be Delayed: Research in artificial intelligence seems to have hit a wall.

The ultimate paper plane (video): this guy created a replica of a Boeing 777 entirely out of manila folders, right down to the tiny seats and moving landing gear. Yes, but the question is why? And why didn’t he do something useful instead?

Television is caught in the depths of a nostalgia spiral. Take a closer look at ABC’s reasons for exhuming Roseanne from the sitcom graveyard, and its downfall becomes less surprising: in an attempt to connect to a modern audience, they tried to recreate the past. 

I am a celibate sex worker. (No, not me – the person who wrote this piece, silly.) Single-serving intimacy is one of the benefits of being a sex worker, because it’s emotionally safe and contained. 

There are 10,000 stars for every grain of sand on earth, and probably trillions of planets. So where are all the aliens? Yes, well I’ve seen Men In Black – they’re here already!

https://www.youtube.com/watch?v=1fQkVqno-uI

What if Hitler had defeated the Soviet Union: The economy of the occupied territories was entirely subordinated to Germany's needs. The exchange rate of the rouble to the Reichsmark was fixed at 10:1, irrespective of inflation. The population was left without any cultural life of its own.

Estonia is making public transport free.

Next year, for the first time, we’ll spend more time on the internet than watching TV. (Mind you, a lot of the time on the internet involves watching TV shows).

Progress and possibility in numbers. For example - 2040: the year by which Norway hopes all of its short-haul flights will be 100% electric.

The average American woman is 5’3″ tall, has a 38″ waist, and weights 168.5 pounds. She wants something upward of size 14. What the industry still calls “plus-size” is actually the mainstream

The Economics Of Fishing The High Seas: a grim picture of the fishing industry from satellite data. States subsidise fleets to overfish the oceans.

Is there really fungus on everything we touch? Do we really breathe in fungi with every breath? (Yes, in case you were wondering.) Fungi, it turns out, are the unifying evolutionary thread for all complex life on land. No fungi, no us.

Extract from the book, called On Disruption, by Katherine Murphy (the best political journalist in Australia, in my humble opinion).

This is one of the best things I have read about mental illness, by a journalist with a mental illness.

Consider the Lemur: It is probably best not to take advice direct and unfiltered from the animal kingdom – but lemurs are, I think, an exception. They live in matriarchal troops, with an alpha female at their head. When ring-tailed lemurs are cold or frightened, or when they want to bond, they group together in a furry mass known as a lemur ball, forming a black and white sphere that ranges in size from a football to a bicycle wheel.

We all have our favourite Sherlock Holmes stories, but which ones did Arthur Conan Doyle like best?

Yikes! “Shark pulls woman off yacht by her finger.” She’s fine though.

Happy Birthday Joe Satriani, 62 tomorrow. Here’s his excellent instrumental hit, Always With Me, Always With You.

https://www.youtube.com/watch?v=VI57QHL6ge0

Facebook Live

If you missed #AskAlan on our Facebook group this week (or if you don’t have access to Facebook) you can catch up here. And we've just given the Facebook Livestream its own page where you can also opt to just listen to the questions and answers.

https://www.youtube.com/watch?v=b--hwjsHm98

If you’re not on Facebook and would like to #AskAlan a question, please email it to hello@theconstantinvestor.com then keep an eye out for the Facebook Live video in next week’s overview.

Next Week

By Craig James, CommSec

Australia: Money for nothing

• The mid-winter lull in economic data continues in Australia. However, the all-important June employment report is issued on Thursday. Tourism and business sales data will also be keenly observed.
• The week kicks-off on Monday with the “Overseas Arrivals & Departures” publication from the Australian Bureau of Statistics (ABS). As well as providing data on tourist arrivals and departures, there are figures on longer-term migration flows. Tourist arrivals fell by 1.9 per cent to 756,300 in April, down from a downwardly-revised record high of 770,800 (previously 771,600) in March. Departures rose by 1.3 per cent in April to a record high of 923,400, up from 911,200 in March. Over the past year a record 800,240 permanent and long-term migrants moved to Australia, up by 4.0 per cent.
• On Tuesday the minutes of the last Reserve Bank Board meeting are released. Each meeting there is a special issue or topic that is discussed. And that discussion can prove useful in gauging member views on interest rate sensitivities. For example, wages growth remains a key focus of Board members. In the July 3 policy Statement, the commentary highlighted that, “there are increasing reports of skills shortages in some areas”. Economists will be keeping an eye out for some evidence of this development through its business liaison program.
• Also on Tuesday is the regular weekly gauge on consumer confidence from Roy Morgan and ANZ.
• On Thursday the ABS issues the June employment report. Job-creation has slowed in recent months with 12,000 full-time jobs added in May. The unemployment rate is at six-month lows of 5.4 per cent and the last time it was lower was 5½ years ago in January 2013. And key leading employment indicator – the Bureau of Statistics’ job vacancies – was at record high levels in May with the strongest annual growth rate in 7½ years. Economists tip an increase in total jobs of around 15,000 during the month.
• On Friday the CBA Business Sales Indicator is released for June. Growth in economy-wide spending slowed in May, growing at the weakest trend pace for over a year. The BSI rose by 0.3 per cent in trend terms in May. And the annual trend growth in sales held at 7.7 per cent – the fastest growth for 3½ years.

Overseas: China data blockbuster

• Over the coming week China economic growth, investment, production, retail sales and house price data are all issued. In the US, retail spending, housing, industrial production and the US Fed’s Beige Book will be in focus.
• The week begins in China on Monday when the much-anticipated June quarter GDP report is released, together with the June monthly retail sales, investment and production activity data. Growth appears to have decelerated in most industries, including construction, consumption, service, manufacturing, employment and trade.
• Chinese production was strong in April, but weakened in May. And the June official manufacturing purchasing managers index was softer, signalling weaker growth momentum. A rebound in retail sales is tipped in June after annual spending growth was the slowest in 15 years in May. Fixed asset investment is expected to moderate further as the economy rebalances. Overall, annual GDP growth is tipped to fall by 0.1 per cent to 6.7 per cent.
• Also on Monday, US retail spending data and the New York Fed purchasing managers’ index is released. Consumer spending surged 0.8 per cent in May and a further 0.6 per cent lift is forecast in June.  
• On Tuesday China house prices data is scheduled to be issued. Out of the 70 cities the National Bureau of Statistics monitors, more cities saw housing prices increase in May compared with April.
• Also on Tuesday in the US, the National Association of Home Builders releases the activity survey for July, industrial production and weekly data on chain store sales are issued. Sentiment among US homebuilders fell in June to equal the lowest level this year, reflecting sharply elevated lumber costs. And industrial production is tipped to rebound by 0.5 per cent in June after a contraction in manufacturing output in May.
• On Wednesday the US Federal Reserve takes centre stage. In the most recent Beige Book – a national survey – Fed officials characterised the economy as performing well. Manufacturers raised production, banks reported stronger loan demand and home builders’ activity was robust. Trade worries will be a key focus in June’s edition.
• Also on Wednesday US housing starts and building permits are issued for June. In May, starts posted the biggest increase since July 2007, up 5 per cent, led by a 62 per cent surge in the US Midwest.   
• On Thursday the weekly data on new claims for unemployment insurance is issued, together with the influential Philadelphia Federal Reserve manufacturing gauge and Conference Board's Leading Economic index. Seven of ten leading indicators increased in May, with building permits, manufacturing workweek and initial claims down.   

Financial markets

• The US company reporting season continues. FactSet is forecasting S&P500 earnings growth of 20 per cent for Q2 18.
• On Monday Bank of America, BlackRock and Netflix report. 
• On Tuesday, Goldman Sachs, Johnson & Johnson, United Continental and UnitedHealth are amongst those reporting.
• On Wednesday, Alcoa, AMEX, eBay and Morgan Stanley report.
• On Thursday, earnings are due from Bank of New York/Mellon, Domino’s Pizza, Microsoft, Nucor, PayPal, and Travelers report.
• On Friday, Baker Hughes, General Electric, Honeywell, Schlumberger and State Street report.

Last Week

'Last Week' from AMP Capital will return in the next Overview.