Who hacked the Australian Parliament?

Hello, and welcome to Talking Finance, I’m Alan Kohler, speaking to you from Adelaide where we’ve just done a seminar for InvestSMART and what a great event it was.  Now this week we’ve got Michael Pachi, National Political Editor from Macquarie Media, going through the fraught state of Australian politics at the moment.  Kyle Rodda, Market Analyst at IG, tells me what’s going on with the reporting season and what effect it’s having on the markets.  Stephen Koukoulas, Managing Director of Market Economics, brings us up to date with the Wages Index that came out on Wednesday.  And Fergus Hanson, Head of International Cyber Policy Centre at the Australian Strategic Policy Institute tells us about the cyber hack at Parliament House and the implications of it.

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Listen to the podcast or read the full transcript below:

As Australian politics gets more and more fraught as we approach the election, here’s Michael Pachi, the National Political Editor for Macquarie Media.  Michael, the stories today are that the Labor Party is split on the asylum seekers, but is that really true?  Tanya Plibersek just said she’s not sure about Christmas Island, but nobody’s sure about Christmas Island, it’s not going to work is it?

MP:  Look, I think the problem here for Labor is is that last week they were so critical of this move by the federal government to re-open the Christmas Island detention facility and then yesterday when Mr Shorten was asked about this he said, “Look, it’s fine, if the government wants to re-open the Christmas Island detention facility because they feel that’s the best way that they can transfer people from Nauru or Manus Island to Christmas Island to get medical help, well then that’s fine.”   I think people are saying, well hang on, why were you saying last week that it was a very bad move from the government to go down this path, and now you seem to be endorsing it.

But I think going more to your point about Christmas Island being a bad idea, potentially that could be the case because when push comes to shove, Christmas Island simply doesn’t have the facilities there to be able to deal with some of the medical needs of these asylum seekers.  But then equally you can say is that the medical facilities on Nauru and Christmas Island, according to the government, they’re more than adequate and that people probably don’t need to be coming to the mainland or Christmas Island for that matter, anyway.

I suppose the point is we’re getting to the business end of politics now and politicians have to watch every single syllable they say and you’re not allowed to change your mind on anything ever, are you?

MP:  Look, I think that’s right and I think that that’s 100 percent correct that people will pick up on any nuance or any difference in language that they feel that they’re picking up.  Look, in the end, when it comes to border protection, the government really does think that it’s on a winner here.  They think that Labor has made a really bad move by trying to change border policy, even though the changes appear to be minor, I suppose the interesting thing here is that the government feels as though there is enough of a change that could encourage people smugglers to try and sell their trade to asylum seekers wanting to reach Australia but as Labor counteracts, it still does support these turnback policies.  If people do try to come to Australia, it still does support the policy of turning these people back, as they say, where it’s safe to do so.

The government in re-opening Christmas Island, they’re saying that’s going to cost about $1 billion over four years.  You can only assume that that money is going to be used to try and beef up medical facilities on the Island because the local hospital on Christmas Island has only got six beds.  If it starts transferring people from Nauru and Manus Island to Christmas Island, it’s going to have to do a heck of a lot of work to ensure that services on Christmas Island are up to scratch.

The other thing I want to know is, how come Mathias Cormann and Michaelia Cash are still on the front bench?  I mean they’re still Ministers, what’s going on?  In any normal time, they’d be sacked by now, wouldn’t they?

MP:  Well, I don’t know about Mathias Cormann.  I know that the Mathias Cormann situation in getting a free holiday, but then has now paid back for that free holiday is not a good look, because it’s essentially a Liberal Party donor and not only a Liberal Party donor, also the person that gave him the free holiday is the CEO of Hello World, which the boss of Hello World I think, was a Liberal Party Treasurer.  In terms of a look, it’s not a good look for Mathias Cormann in the fact that he rang up the CEO and said to the CEO, can you book a family holiday for me.  Mathias Cormann reckons that he told the CEO to charge his credit card, and that credit card was never charged.  You can maybe suggest that, you know, it was something that went through to the keeper, but it’s not a good look for the Finance Minister not to be checking his own finances.

Michaelia Cash, I think that that issue’s becoming a little bit more fraught for her, in the ‘he said/she said’ about what federal police were told about the situation with the raids on the AWU offices in Melbourne and in Sydney.  That just seems to be ongoing over the past week where Michaelia Cash is facing scrutiny in these Parliamentary Estimates Hearings.  But look, I don’t think she’s going to go anywhere.  In fact, it seems that she’s managed to hold on to Ministerial roles since this whole scandal broke out.  But as for Mathias Cormann, look I think it was very clumsy, he normally is fairly thorough, and I just think that it’s been an embarrassing look for him, given that he’s also the Finance Minister, to suggest that he’s not looking at his own finances.

Just finally, Michael, do you believe the Ipsos Poll that has Labor at 51 and the Coalition at 49?

MP:  I don’t.  I think no doubt that that Ipsos Poll provided a bit of buoyancy for Coalition MPs but unless there’s a trend showing those figures remain or that it even becomes 50/50 in future polls, I just don’t think that you can take too much away out of what is revealed in one Poll.  Sure, there’d be a few people within the government that would be saying, you know what, it’s not too bad a poll, given the sort of week that we’ve had when it comes to border protection.  But you’re going to need three or four, even more than three or four other polls between now and the federal election showing a similar result, if not better result, to show that you actually are making some sort of noise in the broader electorate.

Yeah, good on you Michael.  Thanks very much.

MP:  No, problems, good on you.

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And now for his take on what’s going on in the markets, here’s Kyle Rodda, Market Analyst at IG.  Kyle, what’s your perspective so far on the reporting season and its impact on the market?

KR:  I think it’s been fairly mixed so far if you break down individual components of what we’ve seen of the companies so far that have reported.  But I think, really, in the environment that we are currently, it’s done nothing to really inhibit that bullish impulse that we’re seeing in equities just in general.  I think significantly there’s signs that perhaps the fundamental environment, the corporate environment in Australia is not offering much in the way of, I suppose, future guidance.  And that perhaps earnings going forward aren’t going to be quite as stellar as they have been in the past, if you can call them that.  But nevertheless, given the environment that we’re operating in at the moment, we haven’t seen, I suppose, stop the bullishly inclined from buying into the market, we’ve seen the market fairly well supported on that basis.  A mixed picture but one that hasn’t got in the way of this, I suppose, recovery rally that we’ve seen over the last six or seven weeks.

It feels pretty bullish, does it?  Most people are talking buy rather than sell, right?

KR:  Yeah, absolutely, and I guess that’s a global phenomenon.  We’re seeing a bit of patchwork in Europe and obviously Asia markets are fairly mixed, but we’re taking a lot of our lead from Wall Street and what’s being provided there.  Again, it’s not the most bright outlook for Wall Street either.  Forward earnings are constantly being downgraded and there’s some major concerns about what’s going on in the market over there and what the outlook is for US corporates.  But by the same token there is still the willingness to perhaps push this market higher and so far there hasn’t been much communication that we’re going to see much of a pullback.  Not necessarily to say that that wouldn’t occur, it’s a very sentiment driven market at the moment with trade war headlines and the like certainly pushing things around.  But it remains a buyers’ market and it’s so far been very, very difficult to get in the way of this rally and it doesn’t show signs yet of abating.

No, it does not and after a very strong first week of February, markets have kind of stabilised and continued to go higher.

KR:  Yeah, if you look at the S&P, it’s a decent reflection of where we’re at at the moment I think, is that there is that kind of key 2815 level on that particular Index, that I think has really been eyed off as perhaps being an inflection point for the market, it really tests the mettle of this rally.  I mean since the December 24 lows we haven’t looked back and the narratives I think is certainly well known as to why that’s the case, to say it’s underwriting the market strengths, we’re comfortable with the way financial conditions are playing out and the trade war as the headline grabber is continuing to deliver, I guess, solid news to justify a bit of momentum changing in the market.

It remains the case that everyone’s talking about when are we going to get a bit of a pullback and where we make the next low.  It doesn’t look like now we’re going to retest those December 24 lows; that would be a very, very big fall.  But we’re still sort of asking where do we pullback to in the next sell off.  But I think the attitude is is that there’s enough momentum in the market just in the short term, despite the downgrades that we are seeing in forward guidance for earnings in the US, that there’s enough risk appetite to go chase yield and risky assets, and that’s supporting stocks.  Like I said, until we see that 2815 level, that’s the inflection point where we can test the mettle of the market, there still seems to be enough flow there to be able to push this market higher at least at that point in time.

Yeah, and as you say, the market seems to be immune from relatively subdued reporting season and downgrades, it’s amazing.

KR:  It is and that’s a concern.  I think the titbit that I’ve managed to take away from the last week or so from the commentary is that quite simply and this is intuitively true and makes perfect sense, is that the S&P has never had an up year when the earnings have been negative.  It makes a lot of sense.  But if you look at the market and the way the markets have traded for the best part of a decade or so is that even very modest earnings can lead to reasonably positive results for equities across the whole year and I think that considering the pretty critical juncture that we are in global markets at the moment, with the global economy slowing down, central banks are taking their foot off the pedal.  That’s probably getting in the way a little bit to the story the markets are focussing on. 

Over the top of what’s happening with the earnings picture, but quite simply, if forward guidance starts to indicate that we are heading for a year of negative earnings on Wall Street, there will simply be too much bad news implied in that for markets to continue to want to push this market higher.  But it would seem until that happens to be the case and that actually materialises, that that flows again, to push the market higher and is being superseded.  I guess that’s the risk in the market at the moment, the potentially opportunity for the next bout of volatility is that if we continue to see this trend, and it is a fairly established trend now that earnings/forward earnings are being downgraded and this will turn very quickly but until then you don’t want to get in the way of a rally, so the market continues to feed upon itself and push itself higher until such a time that there’s tangible evidence in earnings that that’s no longer justified.

Fascinating, good on you, Kyle.  Thank you very much.

KR:  Thanks for having me.

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Now here’s Stephen Koukoulas, Managing Director of Market Economics to talk about the economy.  Stephen, the ABS reported Wage Price Index for December quarter, 0.5%, you had a lovely tweet showing the last eight or so quarters, 0.5% and 0.6%, that’s it for ages.

SK:  Wages are still very flat.  We are getting just this run, this consistent run of quarterly increases of either 0.5 or 0.6, it’s been happening for about three years in fact and if you annualise that figure it’s around about between 2.25% of course.  You do the maths of 0.5% and 0.6%, you’re going to get that result.  While we do have some relatively good news on the unemployment rate down at 5%, showing up late last year, it is not yet translating through to a meaningful or a sustained pick up in wages which of course is something the Reserve Bank, the government, and everybody interested in the economy is looking for, particularly when you’ve got the house price decline eating away at wealth.  You need wages to pick up if you’re going to have a decent level of household consumption growth.

I think your view quite strongly is that the RBA should have cut rates by now.

SK:  Look, I think they should have.  If you take a step back to even the middle to latter part of last year, let alone have a look at where we are now, it’s been clear for some time that the economy is still relatively subdued.  We’re not sustaining 3% GDP which is sort of the growth rate you need to make this wage and inflation conundrum, I guess we’ve got at the moment, start to turn, so we could have stronger growth.  Okay, the banks are obviously worried about financial stability, worried about credit growth, worried about housing bubbles being reflated if they cut too much.  That’s an understandable concern on their part.  But when you’ve got clear evidence that the Fed has probably paused or stopped its hiking cycle, that in other countries around the world you’ve got cash rates that are similar to, or even lower than that of Australia, we could see the RBA trim rates 50 basis points.  You probably wouldn’t get house prices rebounding marvellously, particularly if you keep some of the macro prudential rules in place.  You’d probably get the Aussie dollar lower giving your export sector the driver of growth and rather than houses and the household sector being supported by the rate cut, obviously it will help at the margin, it’s business fixed investment that would also get a shot in the arm with lower interest rates, just lowering the cost of capital for them as they look to expand.

One of the details of the wages data out today which I don’t know if you’ve looked at it or not which was quite interesting was that construction wages are growing much more slowly than the total/the average.

SK:  Yes.

Which is kind of weird because we’ve got a construction boom or we supposedly have a construction boom going on.  How come construction workers can’t get a wage rise?

SK:  Yes, it was one of the sort of highlights, I suppose, in the release.  We always look for the little quirky bits of information, but that was certainly one and particularly as housing construction, up until now, has been going gangbusters as they say.  We’ve had the public sector infrastructure spending, construction, by definition, doing really well.  That’s one part of the economy that is supporting growth, so wages not being achieved there.  Look, I suspect, I’m not sure but I suspect it’s because a lot of the activity that’s been generated is clearly less labour intensive.  You’re not getting bricklayers laying bricks, you’re getting these big sheets of concrete slabs making the walls of the apartments that are going up.  You don’t need as many labourers if you like to make 100 dwelling units, you can use these concrete slabs and a big crane.

I’m wondering whether those sorts of changes that are coming through are just leading to perhaps a less labour-intensive building and construction cycle this time around and because of that, wage pressures that were generated in the olden days when we had a construction boom are just not there.  Is this part of the automation – you wouldn’t think construction has got a lot of automation, but it’s just even how the dwellings and these sorts of things are put together with less people.

Yes.  What’s your feeling about the economy generally now that house prices are continuing to fall and we’re starting to see consumption decline, how do you feel about things?

SK:  We get the December quarter GDP figures in early March.  They’re going to be probably pretty subdued.  We do know that retail sales in the December quarter were very soft.  We do know that exports were okay, so that’s probably going to kick in a little bit to growth.  But basically when those numbers are reported in early March it will probably show annual GDP around about 2.5%.  So below that level that we all love to see.  My hunch is that we’re going to be seeing the household sector, housing, remaining very weak.  Thankfully we’ve got the export sector kicking in, despite a softer world economy.  In a strange and slightly perverse way the mine closure for Vale, with that dreadful dam bust, if you like, that killed all those people is a horror thing, but it’s actually limited supply.  Australia, again, has got lucky in that sense that iron ore prices are back in the US$85-90 a tonne region.  Things like that are probably going to cushion any downturn that we’re going to be seeing. 

And, as I mentioned, public infrastructure still doing pretty strongly and we’ll see in the federal budget before the election whether there’s a bit more of a give away in terms of fiscal spending, if you like.  Adding it all up, look the economy is muddling along.  It’s been a little bit like the last four or five years, doing okay.  We’re not in a recession, or anywhere near it, but growth’s just muddling at that 2-2.5%, unemployment probably doesn’t fall much more, the wages growth remains at this 2.25-2.5% range and inflation stays below target. For some sectors it will feel like a recession, for others they’ll do okay, but it’s certainly not a widely distributed upturn in the economy.  More just, as the former Prime Minister said, a patchwork economy.  Bits doing well, bits doing poorly, net-net:  fair.

Although you’re calling for a rate cut, possibly more than one, you’re not predicting a recession?

SK:  No, look, it’s not a recession. I think the things that prevent the recession are exports and public sector spending.  They’re sort of baked into the cake, if you like.  The export sector, despite the slowing global growth is still doing really well.  We’re exporting lots of iron ore, the services side is doing pretty well.  Even manufactured exports are picking up and while there might be a short term hit because of the drought, with agricultural exports of course, I think that exports are going to be okay and public sector spending, which you’ve got to remember is 20% of GDP, it’s a big part of GDP, is also kicking in a bit.

But householders are going to be scaling back the growth in their spending.  Maybe in per capita terms it will be close to zero GDP, and really the population growth is about 1.5%, so if we have GDP slowing to 2%, it will be not that great.  But it’s going to feel uncomfortable when we should be growing at 3%, growing at 2-2.5% is just not good enough.

Thanks for joining us, Steve.

SK:  Thanks, Alan.

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And now to talk about the hack in Parliament House and the implications of it more broadly about cyber warfare, here’s Fergus Hanson, the Head of International Cyber Policy Centre, at the Australian Strategic Policy Institute.  Fergus, it strikes me about that hack of Parliament House that everyone said it was a sophisticated state player, but it couldn’t have been that sophisticated because they got caught.

FH:  Well that’s right.  I think there’s different nuances here, so there’s clearly been something that has given the game away and that might have been some of the intrusion detection systems that they had in place as a result of the previous hack that happened in 2011.  What I read the sophisticated attack as code for is that the attackers have done a pretty good job of hiding their tracks and that’s why the government’s come out and said they don’t know what was taken or how far they got into the networks.  Just that it was a nation state actor and it’s going to take a bit of time to piece that all together and work out what they did take and who was behind it.

Do you think the government knows which nation state it was?

FH:  I think they’d have a pretty good idea about the top suspects.  Once you have a little bit of a look about the trade craft that’s been used you’d narrow it down to a pretty small number of states.  There’s probably only a very small number of states that actually have that sort of capability.  A lot of them are going to be our allies and you could sort of rule them out and partners.  You come down with a pretty short list to begin with and then it’s just really a matter of making sure that you’re not being duped by someone who’s laid some false or misleading evidence and really getting your ducks lined up to make sure that you make an accurate attribution.

It’s a short list of two, isn’t it, China and Russia?

FH:  Well that’s right and I think given the previous form you’d have to say China is right up there at the top of the list.  They’ve informally attributed to a number of attacks.  They’ve gone after the Australian National University, they’ve gone after the Bureau of Meteorology, they’ve gone after the Parliament before, they’ve gone after defence contractors.  They’ve got a lot of form in this area.  But you probably don’t want to rule out Russia either.  I mean it’s gone after democracies all around the world.  It’s got an agenda of trying to weaken the western alliance system.  Australia may have been a bit of a side project for them, just to throw a bit of chaos into the system in the lead up to the federal election.  You’d probably want to keep your options open to begin with, but I’m pretty sure it will narrow down pretty quickly.

Just say it is China, so Russia is not a big trading partner of ours, China is and we’re kind of supposed to be friendly with them.  If it is China who’s hacking into Parliament House and potentially trying to undermine the Australian democracy, what does the government do about it?

FH:  Well the government’s been put in a pretty interesting position because it’s come out and raised this with the Australian public in a very early stage of the process.  They don’t even know what was taken or who was behind it.  But they’ve teed themselves up for eventually making an attribution and this would actually be the first time that Australia’s made an attribution to a nation state independently of other countries.  We’ve always been part of other coalitions, big multi-national attacks, but this one is just a specific attack targeting Australia.  Now, whether they should come out and do that, I think they should.  If it is China, clearly, they know that this was the wrong thing to do.  Clearly, they know they would have been doing the wrong thing and acting inappropriately.  I think it is appropriate to call them out and we don’t have to worry about what the repercussions of calling them out are going to be.  If it’s in a country’s national interest to take a particular position I think we need to be bold enough to do that.  We’re a big country; we’ve got plenty of leverage with China as well, so I think we should come out and do it.

The other question that arises is, surely, it’s the case that everyone’s doing this kind of thing now.  China and Russia might be doing it in the most malign way, but wouldn’t we be doing it too?

FH:  I think there’s very big differences in how states use cyber capabilities.  I think Australia takes pretty seriously its obligations to comply with international law, it’s a very active participant in UN discussions around appropriate behaviour in cyberspace.  Whenever you talk to the people who are working at the coalface of this, they’re always talking about the legal obligations that they’re under.  If you look at the activities of countries like China stealing western companies’ intellectual property, that’s clearly a breach of the own agreements that it signed up to itself.  If you look at what Russia has done with trying to sway elections in democracies around the world, that’s clearly a breach of normative behaviour.  I think there’s very different use cases for cyber and I think they’re pretty clear of what’s a breach and what isn’t and I don’t think Australia is engaging in this sort of activity around the world.

Just finally, Fergus, do you think that this is where the next war will be fought?

FH:  I think this is absolutely going to be a critical domain in any future conflict.  What I think is really interesting about this domain is that it’s possible to engage in quite hostile activity in a situation that’s quite a long way short of traditional armed conflict.  Whereas in traditional warfare, it’s pretty obvious when you’re in a state of war or not. There’s bullets being fired, there’s missiles crossing over borders.  Here you’ve got a situation where you can engage in quite hostile activity even potentially activity that sways elections one way or the other and you’re not actually in a state of traditional war, you’re in a state of this sort of grey zone conflict and I think we’re going to see more and more of that activity as people’s capabilities develop.

I suppose what you’re talking about is this is a form of conflict where people don’t get killed.  Most wars are all about killing human beings, whereas this is something different.

FH:  At the moment you’re not seeing people dying as a result of cyber attacks but I think that is about to change.  We’re right on the cusp of having the very first deaths caused by cyber-attacks.  At the moment, if your computer is broken into and crashes, it doesn’t really have any real-world physical impacts on yourself in a sort of dangerous personal sense.  But if you’re in a driverless car and the whole country is running on driverless cars and there’s an attack on that network, there you’ve got a situation where potentially hundreds or thousands of people could die and that would be a very different type of attack to the ones we’ve seen to date.

Yeah, right, I hadn’t thought of that.  Wow!

FH:  The really interesting thing I think about this sort of threshold that we’re about to cross is all of these devices that have been connected up to our homes, our roads, our corporations are all going to start having potential life and death implications if they’re corrupted.  You think about this convergence between IT systems and operational technology that runs systems like power plants and water treatment facilities.  They’re now joining together and if they’re cracked into and disrupted you potentially have loss of life happening in those plants.  If you think about your family home where you’ve got consumer devices connected to the grid, there you’ve got the potential for homes burning down, for example, or people being badly burnt in a smart shower.  You’ve got car networks where people are going to be driving around via autonomous vehicles, there you’ve got potential for accidents.  You’ve got autonomous planes where they could be interfered with.  There’s lots and lots of areas where increasingly I think we’re going to start seeing serious injuries and deaths caused by cyber incidents.

I suppose the point being that it’s going to be possible if it isn’t already to bring a country to its knees without dropping a bomb on the main city.

FH:  That’s right, I think right now we are already in that situation where if you made a concerted effort, you could really bring a country to its knees very quickly through cyber-attacks.  We’ve seen attacks on the Ukrainian power grid where Russia was actually able to disconnect the power in parts of Ukraine for quite a few hours.  But we haven’t yet seen a nation state sort of really throw a huge amount of resources at crippling a country and I think when we do see the first example of that, and there’s several countries already with that capability, it’s going to really cross a threshold and we’ll start to really think differently about the risks from these technologies.

Fascinating stuff, great to talk to you, Fergus, thanks.

FH:  Thanks very much Alan, I really appreciate it.

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Happy Birthday, James Blunt, who turns 45 tomorrow.  Now, I’ve never heard of James Blunt but Greg reckons he’s good and I believe him, he’s apparently had a lot of hits over the years and Greg’s favourite would have to be ‘You’re Beautiful’.  So Greg’s pretty beautiful, so here it is!

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That’s all from me, have a great week!