Well, we’ve given the Super Profits Tax a fair shake of the sauce bottle the last few days, so we’ll mix it up again today before changing tack tomorrow.
But before we get on to today’s Money Morning, a brief announcement…
The guys and gals at the Melbourne Adam Smith Club have been crazy enough to invite your editor to be the guest speaker at their May dinner function.
You can download an invitation to the event by clicking here. So, if you’re in Melbourne and you’ve got $45 to spend on a curry dinner and listening to your editor waffling on for half an hour or so then feel free to sign up for it.
We’ll look forward to seeing you there.
But for today, this…
“Greece on the edge of abyss as riots turn deadly”
So says today’s The Age newspaper. Perhaps now the mainstream commentators and finance professionals might start taking things seriously.
For weeks we’ve seen “experts” telling us that Greece will be an isolated event. That it could have an impact elsewhere in Europe, but it shouldn’t have any bearing on the US or Australia (Australia’s different you see).
Then at the start of this week talk of contagion started to do the rounds. But again, maybe Europe and the UK will go pear-shaped, but that’s all. We’ll be fine. Our lovely banks don’t have any Greek exposure.
But now today we’ve got “abyss” being used.
That’s hardly surprising considering the deep mess Greece and the European Union is in. And quite frankly it’s something that should be taken seriously.
We’re not talking about common-all-garden riots here. We’re not talking about World Economic Forum style riots with a few bags of flour being thrown and the odd urine water bomb splashing across the old bill.
It’s not the type of riot where the participants turn up for a bit of copper baiting and argy-bargy, fully expecting to return to their day job in the call centre on Monday morning. From what we can see it’s yer proper lootin’ and a killin’ civil unrest.
But we’ll see. You never know, it could all blow over before you know it. However, we’d want pretty decent odds if we were going to place a bet on it.
So who’s to blame for the Greek mess? Are the Greeks behaving like spoilt brats? Do they deserve the punishment that’s being dealt to them? Haven’t they received all the benefits of government largesse?
It won’t surprise you to learn that we firmly place the blame on the government. Sure, the Greek public aren’t completely innocent, thinking they could have something for nothing. But when it comes down to it, the prime reason for the current mess is the politicians and their insatiable appetite for power.
I’m afraid it’s the nature of the political beast. And it’s why we believe in a minimalist government.
The more powers that politicians are granted, the more they’ll want. The more they get to control things, the more they’ll want to control other things.
Eventually it reaches a tipping point. The government ends up having its fingers in so many pies its actions have the biggest impact on the fortunes of the economy. You can see that in Greece, and you can see that in, er, Australia…
Just look at what the Fairy Ruddfather has done to the markets this week. The impact has only been this big due to the excessive influence of government.
And it adds further evidence to support our claim that Australia does not operate a truly free market. In a free market with limited government, the government would not have this kind of power and could therefore not make these decisions.
As we’ve pointed out all along, it is the excesses of government that is the overwhelming negative influence on the economy, not free enterprise.
The front page of today’s Australian Financial Review (AFR) has political hack Laura Tingle leading with:
“The war of words over the resource super profits tax has overshadowed how the Henry review has presented the government with a new fiscal policy lever to control the economy. The lever is a new tax which, as a macro-economic policy, could reweight the way the economy works.”
To free-marketeers that kind of statement is enough to make you drop your copy of The Wealth of Nations into your bowl of cornflakes of a morning.
We love the last part especially; it “could reweight the way the economy works.”
See what I mean about the obsession for hapless bureaucrats and politicians to control things? They just can’t help themselves.
The idea that the Resource Super Profits Tax is a new lever to control the economy is just plain madness. But again, it’s the overconfidence of bureaucrats who believe they saved the Australian economy from disaster.
We’d love to hear from Ms. Tingle her explanation of how economies work. Our guess is that she believes it involves politicians and bureaucrats pulling and pushing levers like an old signalman.
Clearly Ms. Tingle and other government and tax lovers have some bizarre idea that economies can be directed at the whim of bureaucrats just as a child can control a toy train set.
In fact, in a Money Morning exclusive, below is a photo we secretly took this morning of a government bureaucrat in action – not surprisingly he’s sitting down on the job (probably an occupational health and safety thing):
Obviously the lever that’s been pulled right forward is the Australian housing market! “Full steam ahead Gordon…”
Anyway, the Keynesian hordes are still blindly pushing on with their crazy ideas. Not content with getting the global economy into the current mess they are determined to press ahead with even crazier ideas.
Page 71 of today’s AFR has John Freebairn writing:
“The RSPT could be much higher, close to 100 per cent without deterring the investment.”
What is he going on about? Can he seriously suggest that if you impose a 99% tax on something that investors will still pile in?
Apparently Mr. Freebairn holds the Ritchie Chair in Economics at the University of Melbourne. Based on his attitude to taxes we can only assume it must be the Ritchie Benaud chair, because whatever this Ritchie is, he or she can’t have anything to do with economics.
But at least he’s man enough to admit to the charge we levelled earlier this week. That the Super Profits Tax was nothing more than a backdoor to nationalisation:
“The RSPT plus corporate income tax collected will rise with booms, when capacity to pay is greater, and fall in slumps, when capacity to pay is reduced. In effect, government, on behalf of the citizens who own the basic resources, becomes a shareholder in the mining industry.”
The mistake the prof (if he is a prof) makes is that there will be boom times to begin with.
Who in their right mind will invest capital when they know the government is snatching a load of the profits, and where there’s no guarantee the government won’t take a bigger cut when it feels like it.
Companies and entrepreneurs will only invest capital if they believe the return will justify the reward.
All businessmen and women embark on a business in the full belief they have the nous to make money from it (unless it’s property investing of course, where the idea is to lose as much money as possible). Now, that isn’t to say that all will make money. Some will fail spectacularly. But the point is, they have the belief from day one that in the long run they can earn a buck from the venture.
And obviously some business ventures have more risk than others.
It’s pretty unarguable that opening a little coffee shop on Fitzroy Street here in St Kilda requires less capital investment, less risk and lower returns than someone exploring for gold or iron ore in the Australian outback.
But according to Mr. Freebairn, the return on a coffee shop in Fitzroy Street and a gold mine in Western Australia would be virtually the same, if as he suggests, miners’ Super Profits were taxed at “close to 100 per cent”.
Anyone with an ounce of grey matter can tell you that if the returns are the same or similar, it’s only natural that an investor will opt for the investment with the lowest risk of failure.
But aside from all this, there’s potentially an even bigger concern on the horizon. And that’s the impact government meddling will have on your retirement savings. But that reader, we’ll have to leave for tomorrow…
Cheers,
Kris.
{ 21 comments… read them below or add one }
as per previous thread see below extract from the article I mentioned, basically sums up the weasels in Canberra.
The Wall St Journal (News Corporation, buy) is without doubt the most influential global financial newspaper. Below I am going to publish the
entire WSJ editorial on the proposed Australian RSPT. Remember this is what the global investment community reads and acts on.
The Rudd Mining Grab
Australia is the only developed country that didn’t have a technical recession after the global financial crisis, mostly because its mining sector kept feeding
China’s economic boom. Now, the Labor Party government has decided all that wealth creation was a bad thing, and it’s time to levy a 40% “superprofits”
tax on these companies and redistribute the money.
The news was delivered Sunday in Canberra by Prime Minister Kevin Rudd and Treasurer Wayne Swan as the centerpiece of a proposed tax-reform
package two years in the making. They argued that mining companies did so well that they sucked labor and capital out of other parts of the country,
creating a “two-tier” economy. Mr. Swan says he wants companies to be “growing together,” and would use the tax take to build infrastructure, help lowincome
workers with their pensions and “fund” a tiny, across-the-board corporate tax cut.
This economic thinking runs counter to everything that made Australia rich over the last three decades: namely, the embrace of competition and
capitalism, which rewards high risk with high returns. Setting up a mining company is not akin to opening a restaurant. Companies invest billions of
dollars in exploration, build infrastructure to bring their products to a port, and then have to compete in a global marketplace and deal with volatile
prices for their goods. As Rio Tinto recently discovered, the political risks of selling to countries like China are high, too.
Now the Rudd government wants to impose an arbitrary diktat on one of the country’s most globally competitive industries in the name of “fairness.”
The government claims it settled on the 40% rate by following the lead of other trend-setters, like the U.S. state of Nevada. But why not 50%? or 60%?
The truth is that all windfall taxes, however they are dressed up and sold by politicians, are arbitrary and economically damaging. BHP Billiton
estimates the “super-profits” tax would raise its total effective tax rate to about 57% from 43%, making Australia one of the most burdensome places to
mine in the world. The increased tax burden would reduce profitability, discourage future investment and restrict companies’ ability to return cash to
shareholders through dividends.
That money, instead, will be redirected to the Rudd government, which estimates it will reap 3 billion Australian dollars ($2.8 billion) alone in 2012, the
first year the tax would go into effect. The Minerals Council of Australia estimates mining companies already contributed about 16% of all corporate
income tax revenue last year. BHP alone paid A$6.3 billion in Australian company, state and other taxes over the same period.
and…….
What Messrs. Rudd and Swan didn’t say Sunday is that this bonanza helped fund the Labor government’s unprecedented spending spree, which sentthe country from a A$19.7 billion surplus into an A$32.1 billion deficit in a single year. Lately Australians have been treated to a raft of revelations
about how the Rudd government and the bureaucracy mismanaged billions of dollars of this spending.
Given that record, it’s hard to have faith that Sunday’s announcement is about “fairness” as much as it’s about plugging fiscal holes that the government
itself created. It doesn’t hurt to whip up populist sentiment against big corporations in an election year, either.
If Mr. Rudd really wanted to reform the corporate tax system, he would simplify it and cut Australia’s sky-high rates much more than the proposed trim to
28% from 30%.
That would spur investment, create jobs and ultimately, a bigger tax base. What politician wouldn’t like that?
I agree with all of the points the WSJ editorial makes. You can also see many foreign investors agree via simply voting with their feet in the listed
Australian resource sector and selling indiscriminately. There has been relentless selling of Australian resource stocks across the board since the RSPT
was first speculated earlier last week, with the cost of equity capital for every Australian resource company rising to reflect increased regulatory risk and
lower future returns from existing and planned operations.
You must understand how bad this makes us look in a global perspective. The Federal Government basically said (in my words) “it doesn’t matter if
foreign investors receive lowered returns on their Australian investments”, which I would suggest is the single most stupid thing you can ever say to a
foreign investor. It’s like flipping the bird to foreign investors and look what the market reaction has been. This is also a very stupid strategy
considering Australia, due to its low population and savings base, relies on foreign investment to fund growth (and even fill a wholesale bank lending gap).
This is a majorly negative event for Australia’s perception and relative rating in a global context. As much as people like me always like to talk up
Australia’s prospects, the fact of the matter remains that at just 2% of the world’s global equity indices we are not a “must own” country. But how stupid
are we to give global investors an excuse to “move on” from Australia! This RSPT is going to be used by foreign investors as an excuse to either go
naked or underweight Australia. They are already sitting on huge Australian dollar gains so they can actually sell stocks at these new lower prices and lock
in large US dollar based gains. In the case of BHP and RIO they can sell them here and buy them in London 20% cheaper. But be very sure of one thing;
if our currency also gets on the skids (which I think it will) it will ACCELERATE foreign investor outflows/repatriations from Australia equities.
As I have written in these notes repeatedly, and clearly Canberra never read them, the surest way to make foreign investors head for the exit is to
continually move the regulatory goal posts, let alone tell them you don’t need their help. However, wholesale change to a taxation system of our
major export sector based on windfall taxes (p.s. how is it a windfall profit if you only have to achieve a return above the long bond rate to be taxed?)
when your resource stocks attract a premium rating to the world is simply policy suicide.
Similarly, the other issue is that there is such a lack of detail in the government’s RSPT release that analysts can’t even model potential outcomes in the
resource sector. Again, uncertainty and a lack of visibility leads to a lower P/E and trust me, while the government will never tell you this, the policy is
HURTING ALL AUSTRALIAN’s.
Despite the spin from Canberra that foreign investors are the loser of the RSPT the truth is almost ALL Australians who have a super fund are. BHP
Billiton Ltd is 65% owned by Australians. I would suggest almost every Australian super fund, including industry super funds, has some direct or
indirect exposure to BHP Billiton Ltd.
BHP Billiton Ltd has 3,356,081,497 shares on issue. BHP Ltd shares have fallen around $7.00 per share since the Resource Rent Tax was first
speculated in the press. That equates to $23,492,570,353 in lost market capitalisation. Australian’s own 65% of that $23.5 billion lost market
which equates to $15.2 billion. Well done Canberra, you just lost Australian investors in BHP Ltd $15.2 billion and I would argue that $15.2
billion loss is across almost every Australian who has a super fund.
But wait there’s more; The negative sentiment from the destroying of Telstra ($20 billion market cap loss itself) and now the devastation of the resource
sector is spreading to the broader market with the ASX200 now -7% below recent highs and commanding an ever widening P/E rel discount to its 10
year average P/E, and a widening performance discount to the OECD world. That -7% index loss equates to A$82 billion wiped off the value of our
benchmark equity index, and I can tell you that government policy has been the major factor in driving that fall. Again, almost all Australian
super funds have exposure to that $82 billion paper loss.
Again, this reminds me just how ridiculous the Henry Tax Review recommendations are. Put more into retirement savings yet simultaneously devalue
Australian assets via new taxes. Genius, pure genius.
While there have been dramatic pullbacks in Australian resource stocks and better value is apparent, I want to remain tactically underweight (as I have all
year) as the market digests the long-term ramifications of any RSPT. Remember this also coincides with the seasonally weak period for commodity stocks
globally, while the short US carry trade is also under heavy pressure as we have warned (DXY +1% last night, industrial commodities creamed). Chinese
data is also starting to disappoint, while Chinese property prices are also wobbly. I just think we have some time on our side hear before trawling through
the trading carnage in the resource sector. Sure, selectively there are resource stocks that have fallen enough and I will try and pick a few as the weeks go
on, but do not underestimate what a blight this proposed RSPT is on Australia’s perception in the eyes of foreign investors.
This is a majorly negative event for Australia’s perception as a stable and safe investment location. That must effect our global P/E rel even if a
RSPT tax never becomes law. It must also lead to the discount rate foreign investor’s use in their Australian models rising to reflect increased regulatory
risk. I see the P/E rel of the ASX200 not only reflecting the earnings potential of its constituents but also the broader perception of “management of the
Australian economy”. Even the WSJ is questioning that economic management ability now, and that is not good for the relative rating of our benchmark
index, while foreign investors continue to vote with their feet (via selling) in terms of management competence of the Australian economy.
If you don’t believe me, look at your screens. The price action never lies, but politicians do
The resource tax is the ‘politics of jealousy’. Rudd’s advisors have done the statistics and calculated the proportion of voters in favour of this ’share it with the aussie battlers’. He will probably call for an early election in July/August. The spin machine will push some social issues such as health care/ paid parental leave to sway the voters a bit more. The long term view of the resources contribution to the Australian way of life has been transformed into a need it now tax cash flow to fulfill the excessive spending by Canberra.
The distrust the international community will now have in Australian policy makers will eventually cause a slowdown in immigration along with an internal increase in social problems, as the younger generation have no future prospects in developing skills ‘on the job’.
hi etch – still just one star *********
You say tax is theft of private property but I would argue there is an inherent contradiction in that without taxes – and hence without Government – private property would be unenforceable. Who would stop your neighbour coming over to your house and helping himself to whatever took his fancy? There would no police to arrest him, no courts to try him, and no prisons to lock him up in. You could of course stay at home all day with your loaded gun, home schooling your kids (in this society all the private schools kids risk being kidnapped), or you could organise with other like minded people and pay for security guards. This money could come out of your incomes and be pooled and that could pay for the guards – that is of course if they were prepared to leave their own homes unprotected. The money you contribute could be called an expense as opposed to a tax, which should make you feel better about it. Of course by then New Zealand would have invaded and seized all the mines because we no longer have a defense force either. And we couldn’t get away from them because the roads are full of potholes and none of the traffic lights work any more. Utopia can be a Bummer.
good thing an Adam Smith club. thanks for sharing. Ken Henry is the one to chase down. the market in votes and investment dollars will deal with Rudd. nobody has noticed but our nett foreign liabilities have soared even as our debt has stabilised. know how? hot money buying shares in what? resource stocks and banks … and who was out there flogging those assets? Austrade …. yep used to do exports and now does selling off the farm equity. bugger about that Ken Henry though, bugger about that AUD as the hot money goes at the same time as the sticky money into resource assets has its forward earnings and risk value estimates and turned on its head. bugger about about the supposed 4 pillar banks too as the AUD crashes and the interest rate swap counterparties for the funding are found to be smoke. not even their “independent” super arms can save them with capital raisings while starving small business this time around
poor fella my country
Tel – “The price action never lies,”
Is this supposed to be a truism? It is far from obvious to me, and there are many examples where the price action is nothing but a lie. For example, the Goldman Sachs manipuation of the oil price to nearly $150 not so long ago, and the ongoing suppression of silver and gold prices. The price action in cases like these are deliberately created lies about the availability and value of the underlying assets in question, designed to mislead and fleece those not in the know. What say you?
Love your work Kris, keep it up, as serious as it all is you still make me LOVL sometimes, thanks for that.
Whohoh – is the AUD price of gold flying, or what?
http://www.perthmint.com.au/metalPrices.aspx
Ah, Rob, why do you want to spoil people’s illusions?
Rob..I hear what to are saying and to a point I agree.
However, there is “balance”. By that I mean, if you tax “incentive” to prosper, you have effectively “killed” it. If business takes risks and a whole lot of investment, then if there was no “pot of gold” at the end, why take those risks? Hence, where would the workers then gain their employment. No logical individual complains about tax as long as it is fair and, above all, it is well spent. Regrettably we currently have neither in this country.
I had to have a chuckle when you said:
“Who would stop your neighbour coming over to your house and helping himself to whatever took his fancy? There would no police to arrest him, no courts to try him, and no prisons to lock him up in.”……isn’t that currently the case???
cb…#10…Yaaawwwwn…..what do you want me to say???
GB..looking good heh!! But hey don’t be surprised if it comes back a bit. Remember…two steps forward, one step back. As you move down the track look back and then see how far you’ve come.
Nick – i bought some more yesterday and only because i couldn’t get there on wednesday
As for the super tax I still think there is something fishy and its not just revenue based.
KRUDD gained his political education in China as ambassador didn’t he??? If so, its easy enough to make some comparisons
1. The super tax is being used to cool down the resources sector or slowdown the flow of hot money
2. The BER, insulation, NBN etc… is a massive misallocation of resources – China has mastered that!!!
3. Comrade Conroy demanding internet sites be blocked – the great firewall of Australia
4. Bigger government and legislation giving them more power – just look at the extra power the police have now
GB…..so it was you who caused the price to jump? Lol.
I am with you on “As for the super tax I still think there is something fishy and it’s not just revenue based.”
Being a cynical bugger, I don’t trust Rudd’s motives on the “super tax” any more than I did his Copenhagen /ETS /Climate change spin. Remember his good mate Fitzgibbon who was on the “payroll “ of Chinese? Do you think he’s sitting in a paddock somewhere? I could tell you some stories about him!!
Just after 2:30 PM Eastern today, the U.S. stock indexes crashed nearly 10% in several minutes of panic. And all because of…
…Greece?
Greece, dear reader.
If you believe that one, then please — stop reading. I can’t say anything you’ll find helpful.
But if you remain tuned to this station, I will observe that the nonsense began instantly. At exactly 2:45 PM The New York Times put up a headline which claimed “Stocks Plunge on Concerns Over Greece.” The story itself reported absolutely nothing NEW about Greece, for the simple reason that there IS nothing new. Everyone who cares already knew the relevant facts about that country’s financial crisis. It’s been in the news for weeks and months.
So the story did NOT become “worse” today, or more “threatening” today. This was not the day Greece became “the first of several dominoes in Europe that could fall.”
Then there’s the U.S. dollar rally this week — is “Greece” the reason? Or, is this week part of a rally that’s been underway all year, contrary to the conventional wisdom but in agreement with EWI’s forecast?
Crude oil futures fell 3.6% today. The CRB Commodity Index is down nearly 6% on the week. “Greece” again? Or, part of “The Great Credit Contraction” spelled out in the May issue of The Elliott Wave Financial Forecast?
Neither the word “Greece” nor the phrase “Greek financial crisis” appear in Bob Prechter’s latest Elliott Wave Theorist. But, you may recall that issue’s headline, which I quoted in a recent email message I sent you: “A Deadly Bearish Big Picture.”
Here’s what else my email said:
If you’ve read any of Prechter’s books or heard him in an interview, you know that overstatement is not his style. When he says the “Big Picture” is “Deadly Bearish,” that is exactly what he means.
The past week has brought that “Big Picture” a lot closer. The issue at hand is what YOU need to do as an investor. Market tops are a process — in recent months, you’ve probably found the top of this bear market rally frustrating indeed.
Yet the brief version of the story is simple: The frustration is over. It’s time to get in front of where the trend will go from here.
Our charts, analysis and forecasts are a few clicks away. Follow this link to begin.
Regards,
Robert Folsom
Robert Folsom
Elliott Wave International
cb – been out kicking myself all morning as I was only considering more gold yesterday and ended up buying some silver. Anyway I guess it’s all good as long a the AUD starts (keeps) heading south. Your point about the manipulation of prices is a fair one, however I reckon that the author was referring to oz equity prices in that article and in the context of the “unintended consequences” of the pollies actions. Gotta go gold has eased up a little since early trade and I need to do some math!
Nick – As you are aware, fundamentally, I agree with you about what should and should not be done. As I have stated before, I would start with three 50% cuts:
1. Cut the number of parasites and minions by half.
2. Cut the wages of the remaining ones by half.
3. Cut all taxes being collected by half.
Simple, and probably much much better than any nitwit politician is going to come up with.
However, the question of the resource rent tax has been criticised by Sayce and others mostly on grounds that it is somehow unconstitutional, that it is theft, that it is nationalisation and this sort of garbage. Because of this, I took issue with the arguments, seeking to show that the reasons and premises marshalled do not support the desired conclusion, and that, if the government needed to increase the tax take, then putting the burden on companies that can afford to pay its employees two – three times the average wage, would be a better way to do it than raising the money from sections of the economy that have been under the hammer through the GFC and are teetering on the edge even as it is.
I still cannot see anything wrong with this argument, but I have to emphasise that it is a conditional argument, and not a defence of what Rudd is proposing to do. What I think he would be better off doing is ther three primary cuts I have listed above.
Tel – Ah, I could not tell you about all such occasions, where I sensed that I had the right idea, and then got beaten to the punch by events that would not wait for me to take action. No matter, there will be other opportunities, and besides, silver is good. I have just checked the latest prices, and it seems that even with this latest jump, the AUD price of gold is still below the 10% pullback point of its all time high, which, in my books, is still a buy for firing off a quarter or a third of total intended amount, reserving the rest for future pullbacks.
Etch – I do not believe that these markets are free and fair. They are rigged and manipulated, and the latest 10% drop in a matter of minutes was no accident. A large player, who wants to create panic, can do this at the drop of a hat, and off the edge the lemmings jump. Worse, I believe that it was a test, an exercise, for much bigger ones that they will unleash at times of their own choosing. Or it was a controlled shock, which is part of slowly taking the market down to wherever they want to take it down. We don’t know, but with the scam high frequency and programmed trading toys of the big boys can, and will, move the markets in any direction they choose. That is why I keep well away from the share market and will invest only in those investments where I can have more or less direct control over the assets in question. Even that is dangerous enough. For my liking, anyhow.
cb..#19..excellent observation. I agree with your “prognosis”.
scare-market=scam-market
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