The spin continues.
Today’s The Age reports, “ANZ bumper proft [sic]”.
Source: The Age
We assume a “proft” is the same as a profit.
The paper explains:
“ANZ Bank has posted a record first-half profit of $2.664 billion, up 38 per cent on the corresponding period last year…
“Mr Smith said Australia’s economy was now entering a ‘new normal’ phase and the impact of the global financial crisis had largely washed through…
“Mr Smith said, while the housing market was not in a bubble, housing affordability was still a concern.”
We won’t even bother commenting on the last statement. We’ll just show you a picture instead:
Source: ANZ Bank
The light blue area is ANZ Bank’s exposure to the residential mortgage market. 59% of ANZ’s loan book is exposed to residential mortgages. [cough]
The dark blue area represents “institutional” lending, the medium blue “commercial”, and the olive colour “other retail & wealth”.
In other words, just 17% of ANZ’s lending is directed towards commercial enterprise. The majority of its lending goes towards propping up the housing bubble.
Yet if you listen to most mainstream commentators, they’ll tell you how important a strong banking sector is… and how if it wasn’t for Australia’s strong banks, the economy would be in a dire condition.
While it’s true the inevitable banking collapse will be pretty miserable, the ultimate outcome will be for the better. Because the current banking set-up inhibits the economy from growing.
Besides, holding gold and silver will provide some insurance against the meltdown.
While we’re on the subject we’re wondering if Australia has found its own Peter Schiff.
Over the weekend we stumbled across our old pal, Wesley Legrand from Grand Private Equities in Adelaide, schooling Sky Business Channel host Peter Switzer on the value of gold. You can catch the interview here.
False prophets and profits
Anyway, back to our point. The fact is, the banks are false prophets. They do nothing more than gain central bank and government support for their activities, and then once they’re established they ensure continued support by warning of the consequences of withdrawing the support.
It’s similar to US Treasury Secretary, Timothy Geithner’s series of letters to the US Congress. He warns about the dire consequences if the US government is denied the ability to go further into debt!
In reality, banks aren’t the economic saviours they’re made out to be.
The banks and the people who run them are just bean-counters and pen-pushers… they’re long on bureaucracy, but short on initiative.
Think about it, when was the last time a bank identified and supported an innovative new business? And I mean properly supported it. I don’t mean giving a business a loan where it has to post residential property as security.
Because as a Money Morning reader recently pointed out to us, that’s just another housing loan disguised as a business loan.
And it’s true. When a bank asks you to post a property as security, what the bank is really saying is, we don’t like your business idea, but we do like your house… so have the money and we’ll take your house if you fail.
And why do banks favour housing? Because it’s backstopped by the government of course. Unlike businesses which can be much harder to stop from collapsing.
Trouble is because the banks know this, it concentrates their loan book. Rather than diversifying their exposure to naturally lessen risk, the banks take advantage of their special gift from the government and central banks – that is to take as much risk as they can reasonably get away with. Because the taxpayer will ultimately provide a bail out.
The concentration of risk has resulted in the current house price bubble. If they hadn’t shifted so much of their lending towards housing the bubble wouldn’t have been created and the collapse of the property market needn’t happen.
Missed opportunities
But that’s not all. There’s also the missed opportunity.
Thanks to the banks only lending about one-sixth of their loan book to commercial enterprise, entrepreneurs find it hard to gain access to capital.
Let me show you what I mean. Remember the graphic I showed you above. Here it is again:
Source: ANZ Bank
From left to right you’ve got institutional lending, commercial lending, residential mortgages and finally other retail and wealth loans.
Now take a look at this interesting snapshot. It’s from the 1978 ANZ Bank annual report:
Source: ANZ Bank
You’ll notice that just one-quarter of the trading bank lending in Australia was to persons – we’ll make a guess this includes mortgages. In New Zealand it was even less – about one-sixth.
But look at the rest of the numbers: manufacturing alone accounted for 17% of the bank’s lending. Today the bank’s entire commercial loan book accounts for 17% of all loans made by the bank!
In 1978, total lending to the business sector made up over half of all the bank’s lending. Yet today it’s a pathetic 17%.
It’s a perfect illustration of how the banking sector has all its eggs in one basket – the house price basket. No wonder they’re so keen to downplay the idea of a housing bubble.
The result is less credit flows through to business, including entrepreneurial business. It means just as private enterprise can be crowded out by government spending, private enterprise can be crowded out by a misallocation of resources by retail banks.
And that’s exactly what’s happened. That’s despite the fact that it’s entrepreneurs and genuine capitalists who provide the real benefits to any economy.
Economic progress denied
While researching for the latest issue of Australian Small-Cap Investigator, we read Thomas J. Misa’s, A Nation of Steel.
It tells the story of “The Making of Modern America, 1865-1925”.
You may wonder what that’s got to do with Aussie small-caps. Simply this: it’s a story of progress and innovation.
There are plenty of interesting stories in the book. The key ones being how entrepreneurs and businessmen sought to adapt and improve the economy through innovation.
For instance, at the time iron was the most used material for making railroad rails. But it had limitations. It was relatively brittle and less durable compared to steel.
However, steel was expensive – about five times the cost of iron.
But by the 1870s, all that was about to change. And it was thanks to a man named Henry Bessemer. Partly by accident, he invented a process “for making steel by blowing steam or air through molten iron.”
This process caused the rapid decline of the iron railroad industry as the cost of steel rail production fell by 80%. But this change didn’t happen easily or overnight.
As Bessemer noted at the time, as he was experimenting with his new process:
“Then followed a succession of mild explosions, throwing molten slags and splashes of metal high up into the air, the apparatus becoming a veritable volcano in a state of active eruption.”
At the time there was no guarantee the Bessemer Process would be a commercial success. Just as there’s no guarantee a new business today will be a commercial success.
But that’s why entrepreneurs and capitalists are so important to an economy. They aid progress. They put their ideas and their money on the line in the hope they’ll make a fortune.
Whereas bankers simply use the privileges given to them by governments and central bankers to inflate a once-safe asset class into an asset class that’s riskier than small-cap shares!
An asset class that used to account for one-quarter of a bank’s balance sheet but that now accounts for three-fifths of it.
Innovation leads to more innovation
But there’s more to innovation than just creating “a veritable volcano”. In the case of Bessemer and his new process, the innovation didn’t stop there. As with all innovations, the discovery of something new leads to more discoveries.
That’s where US engineer Alexander Holley appeared on the scene. A contemporary of Holley’s noted at the time:
“Holley seems to have at once broken loose from the restraints of his foreign experience. Where Bessemer left the process which bears his name, Holley’s work began. Very few of the features… of Mr. Bessemer’s practice as thus given were embodied in the American work.”
In other words, Holley adapted and improved. Innovation breeds more innovation. In fact, even though Bessemer is probably a better known name than Holley, it’s Holley’s innovation that developed into the open-hearth method of steel production. A method that’s still in use today for steel production – although even that has been improved upon with newer processes.
Facebook is another good example of adapting and improving an idea. Last week your editor watched The Social Network on Foxtel. We don’t know how much of the movie is factual and how much is artistic licence.
But nevertheless it makes a valid point.
According to the movie, Facebook founder Mark Zuckerberg, was accused of [ahem] borrowing the idea for Facebook from fellow Harvard students, the Winklevoss twins. They had come up with an idea to allow university students to interact with each other on a new social networking website – we forget the name they came up with.
According to the film, they asked Zuckerberg to work on the idea with them. But again, according to the film, Zuckerberg though their idea sucked (or should that be “zucked”?). He allegedly took their basic idea and turned it into today’s fifty-billion dollar valued Facebook.
What did the Winklevoss twins do? Not much at first, they just carried on trying to develop their business. But eventually they sued.
Of course, what they should have done is use the art of quid pro quo… they should have taken note of Facebook and its popularity and used those ideas to adapt and improve their own product – you take our ideas, we’ll take yours.
Who knows, if they’d done so, maybe their social networking website would now be the market leader.
That’s entrepreneurialism. We’re sure someone famous said, “there’s no such thing as a new idea”. And that’s probably true. Social networking isn’t a new idea, people have interacted socially since Adam was playing fullback for the Arsenal.
Zuckerberg and the Winkelvoss twins just took an old idea and adapted it… one more successfully than the other.
But if entrepreneurs are denied capital from capitalists because capital is being consumed by housing and fancy financial derivatives, how can there be any progress?
Well, you’ll still get progress, it’s just that it’s harder to achieve. Entrepreneurs aren’t just competing with other entrepreneurs for financing, they’re competing with housing estates and negatively geared property investors.
I ask you, if you’re a bank manager and you read in a business plan about “mild explosions”, “molten slags” and “a veritable volcano”, are you going to lend someone $300,000 for a process that could change an entire industry and economy, while creating untold profits?
Or would you instead throw the money at a negatively geared property investor who tells you he’s going to lose money on a property for the next ten years?
Sadly, we know exactly what the bank manager would do.
Cheers.
Kris Sayce
For Money Morning Australia
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So after two whole days my comments at #4 are still “awaiting moderation” Are they really that “explosive” – I thought they were quite tame.
Years ago when we was 21 YOA we (my wife and myself) started a small business that much to our astonishment made a lot of money really quickly, but we soon found making money was only the start.
In fact we had made so much money that at the end of the first year the accountant asked, “How are you going to pay your tax?”
“We thought you said we have made a lot of profit, so just use the profit to pay the tax no problems?” we replied.
“Yes you have made a lot of profit, but it’s all in your stock and debtors, and remember you only started with 100 bucks? You have had five employees and you have taken money out of the income so that’s wages now that’s more tax, you had better get out and collect your debtors and reduce your stock real quick, or else you are in trouble?” he said with a sympathetic smile.
The next year we were ready, but then he asked, “How come you two haven’t had any wages this year, and how come you have doubled your turnover but halved your wage bill do you think the tax dept will accept these numbers?”
Struth we were in it again but we got through it’s what an entrepreneur does best improvises, sometimes truth gets a bit mangled but we got through.
The next year we were really cocky we have it right this time we boasted to each other, but boy were we wrong. This time our accountant said, “You haven’t paid the new wages tax and now you have topped the $2,000,000 turnover so there are all sorts of add on’s you have to pay, don’t you watch the news or read the papers, it’s all been reported?”
This time I was angry and said, “How the bloody hell are we going to find time to watch t/v or read papers, bugger this it’s time to get out of this rat race?”
My wife said, “The cleaner gets a bigger wage than us it’s not worth the trouble, every week it’s, do we get a wage this week dear or is there no money left for us? then at the end of the year after us both working 60 hours a week and the staff getting more than us for one wage why should we carry on. The only ones getting anything out of our wonderful business is you the staff and the tax dept, I am sick of it to let’s put it up for sale, your right dear lets sell up.”
Hmm said our prophet of doom, “You have a very valuable business which you started with 100 bucks, now let’s see you have a $2,300, 000 turn over this year and a 25% net margin, so yes it’s very valuable. Probably worth $5M but you will have a $1.5M capital gains tax so you better budget for that, but in the meantime you need another $200,000 to pay your current tax bill so you better let me have a cheque as soon as you can?”
Here we were both experts in what we were doing which was why we had done moderately well, but we couldn’t pay our tax. What was worse we were the experts but we got the least weekly pay it didn’t make sense.
So we went to the bank for a loan, the bank had our home for a mortgage security but it was nearly paid off. The bank manager was happy to see us and said, “Of course we can lend you the money to pay your tax, it will be a pleasure. You have very little left to pay on your mortgage so we will write you a new mortgage, and let’s give you some working capital as well, what say you get net $400,000 and then you can have extra working capital, but we can see you have a great business. Now let’s see a business loan is 11% variable yes we can have that for you within two weeks, but that’s only because you have been great customers.”
“Don’t sound real great to me that 11% it sounds awful expensive to me, why is it going to be that much and what term is it for?”I asked timidly.
“Oh don’t worry about that this is a tax deductible loan, so it’s really cheaper than your housing loan, and don’t forget you will now have house that when you sell it will be tax free isn’t that wonderful?” he said looking to me as if he was a great white shark who was eating us, but what choice did we have.
But the years went by we didn’t sell because no one wanted a specialty business like ours, and we had sacked our do nothing accountant and had found one that knew all the angles, but he was bloody expensive. I said to him one day, when he presented his bill, “Mate you are bloody expensive cant you ease it off a bit you are sending us broke?”
“Sure I can do that but you can pay the extra tax because we won’t spend the time on your affairs that we have to do now, please yourself but you need to check out the service you are getting?” he said with an amiable smile.
Of course we decided to pay what choice did we really have none. One day the new accountant said to us, “If you want to sell why don’t you go public yours is a great little company you can make a bucket of cash, and still hold 51%, so you can have it both ways.”
Ever the pragmatist I asked yeah how much.
“Oh about $100,000 up front including the prospectus,” he said.
My wife and I choked on that but in the end said yes and gave him the money, the cheque was cleared the next day and we haven’t sighted him since.
A few years later a real estate agent appeared at our door asking if we wanted to sell our house.
We remembered what the bank manager had said about tax free sale of our home so we said yes we will sell, that started the shit. He invited us into his office and when he found out our home was debt free he suddenly looked like our bank manager, a bloody shark.
“Did you say you wanted to sell your business as well?” he asked. “Because we specialize in selling businesses such as yours now let’s see yes we can do something for you, but we can set you up through a merchant bank or we know a solicitor who can do that for you, would you like to meet with them?”
The upshot was we did and instead of selling anything, they convinced us to borrow $5M and invest it with the bank, a well known name. They told us wonderful stories about how we could leverage our borrowed money by 10 times and have fifty million to invest and they showed us all sorts of charts. They meant bugger all to us, but we nodded trying to look intelligent.
My wife and I mulled it over and reckoned that since we had started with 100 bucks that’s all we could lose, no one told us about margin calls etc; so we decided yes we could only lose what we started with, so let’s do it and we did?”
I am not going to go through any more of this garbage, but I know if my wife had worked for a big firm she would have made and earned big bucks. As for me what can I do but start all over again but this time a lot wiser, it doesn’t pay to be a nice guy when all around are bloody cockroaches. And let me say they aint all in the USA; we have thousands of them right here in Sydney Australia, white collar crims galore.
Sadly my wife isn’t going to work with me anymore, reckons she wants a wage she can spend not one that’s just whats left over after the staff is paid, and besides if inflation is going to stick on 2-3% whats the point of being self employed, let the govt hire the staff if they are so bloody smart. She is also pissed because her parents worked hard paid off their home, and then got smart talked into the same shit as we did.
“Anyhow now we rent a house, our business is being ruined by smart arses from the bank that were very good at telling us how to run the business because we were amateurs. I need a job because we have three kids to feed. I will wait until they send the business down the tubes and offer them 2% in the dollar, but we will still be losers? Oh and they sold our house valued at $2,350,000 for $950,000, smart arse bankers probably one of them bought it for themselves?”
Whats more important what did we learn. 1/ Keating used to boast about his bloody levers, they are all full o shit, him and his fancy levers and smart alec talk. 2/ what hands on experience do politicians and beauracrats have? None yet they think they know it all. 3/ what about bankers? They are the greatest con merchants of all time. 4/ why are so many homes under water ie debt to asset. Well first we all thought we were smart because inflation paid our homes off, then the con merchants came after all of us two dollar millionaires and kidded us to leverage their homes, invest and make a fortune. Then after that they started lending to mugs and over leveraged them, which was the second wave. 5/ Superannuation what a jack pot for the smart arses once again, but the little bloke gets nothing. Then those dipsticks in Canberra waffle on about how small business is so important, bullshit they don’t even know what small business is all about. 6/ what should the inflation rate be? None sack the bankers and change the entire system before the WEST goes broke. 7/ Is small business worthwhile? Not at present there are too many impediments and add on costs now ie collecting the GST. The govts are killing entrepreneurial flair. They want big govt and big companies, but they want the little bloke to work for nothing, stuff them I am going back to sleep.
Have a great day!
I love Vince’s story, Yes its typical of banks etc, I have a similar story but all ends well. We had a company with had high turnover, high inventory and owed us a lot of money also had the same tax problems BUT I was lucky enough to sell my business, not for the amount that I wanted BUT it was enough to start our new business. We approached various banks wanting to borrow money (The main one being ANZ), I got the “We absolutely love your business idea, but because this type of business has never been done in Australia before, we have nothing to compare it against so we are unable to lend you the money.” Our next step involved selling our home, we bought at a good time and had quite a bit of equity in it, so we sold up, the house was snapped up within a week of going on the market 24 months ago. We used the money to start our business now 18 months on, I have my 19 yr old son running the business 5 days a week, I and my wife only work 2 days, and in the last 12 months we have holidayed in Europe for 3 months, the USA for 2 weeks and we are again off to Europe later this year, we still dont have a house (who would risk buying one now) and we rent, but we have a great income, work 2 days a week and we have absolutely no debts and we are loving life. we have a high cash flow without the tax problems and very few employees. Role on our next business venture.
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