We said we would make one quick comment on the Rudd Rescue Plan. Not only are we convinced that the plan is a waste of money – and Turnbull’s alternative at half the cost is just as pointless by the way – but there are two worrying arguments being put forward by many who are in support of it.
In fact there are more than two, but we promised to keep it brief.
The first is the notion that a permanent tax cut is bad because not only will it take longer for it to get through to consumers but that it will have a negative future impact on the economy because it will lead to bigger deficits.
Madness. Of course that is only true if you maintain government spending at current levels. There seems to be absolutely zero support from anyone arguing that government spending should be cut. It’s often talked about politicians being ‘tax and spenders’ and in this case ‘tax cut and spenders’ but where is the political animal who supports ‘tax cut and spending cuts’?
Nowhere to be seen.
The second problem is that years of surpluses has now given politicians, the media, economists and the public the false idea that going into deficit will not be a problem because we can easily go back into surplus in a few years when the economy recovers.
That is of course another flawed argument, and it is the fascination of running a surplus that is to blame. As we recall, the previous Liberal government took several years to almost entirely pay of federal debt of just under $100 billion.
It was able to do this not because they were any more conservative fiscally than Labor (for they were not) it was because they were able to grab billions and billions of dollars worth of ‘unearned’ revenue thanks to the boom that saw employment levels and tax receipts soar to record levels. In addition they were able to flog off the last significant state owned utility, Telstra and use that to pay down debt – along with a bunch of wasteful government spending.
Future governments are unlikely to have the same luxury. That is why, as we wrote earlier this week, talk of government going into a small deficit for a short term is not to be believed.
The government is looking to get approval for up to $200 billion of debt. It will spend that in a flash and come back for more.
Long term debt and potentially higher taxes will be the order of the day. And before we know it the word Trillion will be just as common in Australian economic language as it is in the United States.
Why This Bank Can Never Stop Moving
In the meantime, reporting season is well under way. A few companies have already come out with results that have surprised the market on both the upside and the downside.
This morning, the company that can only be described as the Australian barometer of financial largesse over the last five or six years is in the process of giving an operational update to investors and analysts.
Based on the share price action yesterday, either a few big investors got the inside info on some bad news, or the market in general didn’t like Macquarie buying up a natural gas business in the US. A quick glance at the price action for Macquarie Group shares yesterday tells you the story…
Source: CMC Markets Stockbroking
It opened up near $25 and then, well, it just fell off the proverbial cliff. It closed the day down at $22.87.
This morning Macquarie unsurprisingly was issued with a ‘speeding ticket’ by the ASX wanting to know if the company knew of any reason for the big movement. As is usual with these enquiries Macquarie responded in the negative.
So, what does the presentation contain? Is there anything in there that should have caused investors to run for the exit? Well, let’s take a look.
At first glance you could argue that it doesn’t look that bad. We are at the beginning/middle/end (delete as you think appropriate) of an economic downturn, you can hardly expect them to be still raking in millions of dollars worth of profits.
What we will say is that actions speak louder than words. Macquarie can go on as much as they like in the presentation about strengthening the balance sheet, but one thing remains clear. As far as we can see it’s the same old tried and tested business model for Macquarie.
You only have to look at the announcement yesterday of the acquisition of a gas business from Constellation Energy in the US.
On the one hand you can say, “good on ‘em for not being spooked by the market.” On the other hand, as a shareholder in what is supposed to be a blue chip company you must surely be asking whether it is optimism or bravado to keep on buying up infrastructure assets.
Recently we’ve taken a look at the balance sheets of the major banks. Contrary to popular perception they didn’t look quite as secure as everyone would lead you to believe. So let’s put the Macquarie balance sheet under the same microscope.
If we go by the numbers on the interim results released in September, Macquarie has shareholders equity of 5.8% of liabilities. If we add in the cash it generated from the share issue in January then that takes it up to 7.4%.
Compared to the Big 4 banks, Macquarie’s position is much healthier. If you recall, the Big 4 ranged between 4-5%.
But that’s not the major potential problem with Macquarie. Although, you would think, given its exposure to riskier assets it is appropriate that it has a bigger buffer. Which it has.
The problem with the whole Macquarie business model is something that your editor has been writing about for a long time. It is the fact that Macquarie can’t sit still like the major banks.
For the major banks they don’t have to be active. Providing they don’t have super high levels of bad debt – the jury is still out on that one – they can continue to rely on interest income. Sure, they may find that falls if there are fewer borrowers, but they can fairly easily take the hatchet to expenses if required.
Take ANZ Bank as an example. In its 2008 annual report, ANZ generated $32.6 billion of revenue from interest. All other revenue combined was just $3.9 billion.
Compare that to Macquarie which in 2008 generated $6.6 billion in interest revenue and $7.4 billion in all other revenue. That’s what we mean when we say that Macquarie can’t sit still and survive on ‘passive’ revenues.
It has to keep working to bring those revenues in. That means it needs to keep earning fees from its infrastructure funds. It needs to keep signing big infrastructure deals in order to charge the infrastructure funds a fee. It needs its brokers to keep writing commissions, and it needs its institutional trading desks to keep turning over portfolios.
It’s not going to be an easy task. As we write, Macquarie Group [ASX: MQG] shares are up by 7% this morning. We can only think that the company has done an excellent job at ‘selling the dream’ in its presentation to investors and analysts this morning.
Comments on this entry are closed.