And just like that at least some of the uncertainty hanging over the Australian market has dissipated. Or has it actually increased?
It seems to us that by agreeing to a 30% Mineral Resource Rent Tax (MRRT) on iron ore and coal and a 40% tax on on-shore oil and gas, the big miners have conceded to this principle: the government is allowed to increase the tax rate on any commodity that goes up in price.
Why do bank robbers rob banks? Because that’s where the money is!
Recently, the mining sectors big earnings drivers have been coal and iron ore. But in the future it will be any commodity – gold, uranium, or rare earths elements – that starts generating revenues that earns the government’s attention.
The revenues should be generated for the companies and shareholders that took the risk to find and extract them in the first place. But the government has burrowed its way into the relationship quite nicely and dug in like an Alabama tick. The miners achieved certainty all right – the certainty that the government can and will change the law whenever it needs revenues to make up for irresponsible spending.
The share market may not see it that way today. But we reckon the long-term consequences for Australia as a desirable place for foreign investment are negative, based on today’s deal. But then, perhaps we are just overly curmudgeonly about the whole idea of spreading the wealth around. Still, it seems like a fraud has been foisted upon the Australian public…that everyone is entitled to benefit from the risk-taking of others without taking any risk at all…because the resources “belong” to all Australians.
The resources would remain stuck and stranded in the ground forever, generating no royalty, tax, employment, or capital gain, or benefit for anyone if it weren’t for private enterprise. But we’ll leave off arguing the point for today. It’s just another lost battle in the long war against the encroaching power of the State. Just another day at the office in the modern world really. The State is King. Long live the State!
The State did, however, make a few concessions, namely that the tax will kick in at 7% above the long-bond rate. And by only taxing the resources that are really making a lot of money for producers, the tax will only apply to about 320 firms, instead of 2,500. In other words, only productive and profitable firms will be punished. And of course, none of it kicks in until July 2012, by which time, if the Mayans are right, we’ll all have just six months to live anyway.
By the way, you can tell that Julia Gillard is a skilful user of language, which makes her extremely dangerous as a politician, and frankly, extremely dangerous to individual liberty. This is not just a criticism of Gillard but of all lawyers and politicians, all of whom are admittedly low hanging fruit if you’re looking to take pot shots at public figures. But let’s not forget what’s been accomplished.
Seven percent above the long bond rate is about 12%. But 12% sounds much bigger than 5%. So the miners win by forcing up the rate at which the super tax kicks in. But referring to “7” instead of “12” sows just a little bit of semantic confusion about the net size of the concession the government has made, making it seem like less of a concession to the public.
Also note the change in name from Resource Super Profits Tax – a name calculated by the Rudd government to portray the miners as greedy profiteers – to the Mineral Resource Rent Tax – a name designed to disguise the inherently predatory and opportunistic nature of the tax by making it sound reasonable, sensible, and inevitable.
The point? Naming things matters. What you call them goes a long way toward defining them in the public mind. An innocuous name can often conceal the true nature of thing. As Dr. Zapatka said in our classical rhetoric class, the first step in characterisation is appellation!
All of that said, the fog-lifting here in Australia may have a muted impact on the upside in local shares. Why? The news from the rest of the developed world still sucks. Specifically, the U.S. housing market continues to be a weeping, festering wound in the side of markets (and specifically U.S. banks with huge exposure to residential housing).
The National Association of Realtors in the US said its pending home sales index fell by 30% in May. To some extent, this was old news, or news you could have anticipated. The tax credit for first home buyers in America expired in April. Once it did, there was a huge drop-off in activity.
Come to think of it, that’s kind of what’s happening in the entire world right now, isn’t it? The various stimulus measures in the U.S., UK, China, Europe and elsewhere have run out of puff. For awhile, they succeeded in boosting lending and demand and creating the illusion of growth and recovery.
But if you’ve ever built a fire, you know why spending money you don’t have isn’t a long-term plan to a healthy economy. A really good fire needs hot coals that have heated up for a good long while (hot coals being sound money, transparent law, capital investment, free trade, and low taxation).
Those coals can burn logs and generate a lot of warmth and light. On the other hand, if you just keep chucking on balled up newspaper to a fire (fiat money), it goes up in a nice pretty explosion of flame, but flares out quickly and you’re back to where you began – shivering in the cold, starving, and destitute.
What about China, though? In the great scheme of global imbalances (pointed out yesterday by Bill Gross) everyone is hoping the growth of domestic demand in the developed world (higher spending rates and lower savings rates) will keep the world turning. But will it become the great engine of global warmth?
Hold that thought! One side note to this theory is that if high-saving developing nations spend more domestically, they will have less money to invest in government bonds in places like the United States. In other words, higher consumption rates in the developing world could mean higher interest rates in the developed world, which would not be good for heavily indebted borrowers.
The bigger issue, though, is whether the very same forces that led to a credit boom and asset bubbles in the Western world have already hit China. We believe they have. And if you want anecdotal evidence, please note the success of the IOP of the Agricultural Bank of China – China’s third-largest bank by assets. It met strong demand by institutional investors in China, according to Bloomberg.
As we noted last week in an e-mail update to subscribers of Australian Wealth Gameplan, investment banks have a way of supplying the market with exactly what it demands. One example is securitisation of debt via mortgage bonds that yield more than government bonds thanks to a synthetic structure.
Another example is the IPO of the Blackstone Group in late June of 2007. Blackstone was one of the largest private equity players in the huge private equity boom of 2006 and 2007. Loading up balance sheets with heaps of debt to make big takeovers was all the rage at the time. And you should have known that when Blackstone’s insiders were ready to sell a piece of their very profitable business to the public, the big profits were already made.
Since its IPO, Blackstone is down 74%. It closed at $9.40 after Thursday’s New York trading, having IPO’d at $36.45 in 2007. Its performance is twice as bad as the S&P 500 in that same time. The S&P 500 is down about 30% from the June 2007 level – although now that it’s breached the 1040 level, our trader friends tell us to “look out below.”
After Chinese lenders went on a US$1.5 trillion lending boom in 2009, it’s hard to say just what the quality of the assets are of China’s third largest bank. But the fact that the bank is being sold to the public now has at least a nice symmetry with Blackstone’s IPO. History doesn’t repeat, but it often rhymes. If the assets are trash, and history rhymes, what rhymes with trash?
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