“It is a general popular error to suppose the loudest complainers for the public to be the most anxious for its welfare.”
“We have slid back into old political culture. It is a struggle between the influence of vested interest on policy and the influence of the national interest.”
–Today is one of those days where, if you’re masochistic enough to pick up a newspaper and read it, you just have to grit your teeth and resign yourself to the fact that envy, self-righteousness, and arrogance are permanent attributes of the human species. You can even put them in a nice suit, in front of a podium with a lot of microphones and a big report. But they are what they are.
–Before we get stuck into the sense of entitlement pervading Australia’s governing class, there is energy to discus, albeit briefly. Queensland’s Environment Minister Kate Jones announced a new law yesterday that will ban mines (mostly coal-seam-gas projects) in areas where it could damage farming. The law is designed to protect Queensland’s “Food Bowl” basins from development that could ruin arable land.
–The announcement won’t affect any of Queensland’s advanced mining and CSG projects. Santos (ASX:STO) has already committed $16 billion to its Gladstone LNG project. BG Group—whose managing director Catherine Tanna was recently appointed to the Board of the Reserve Bank of Australia by Treasurer Wayne Swan—has also committed $15 billion in investment to its Curtiss Island LNG project.
–Neither the Federal nor the State government will be keen to upset multi-national partners who have committed billions to building an LNG industry in Queensland. Queensland reckons the Gladstone project alone will generate some $120 billion in export revenues over its life. And the State government is already licking its chops over nearly $1 billion in annual royalty revenue from approved projects.
–As a matter of fact, there’s over $200 billion worth of LNG proposals floating around the country at the moment. Not even all of those plans have to become reality for Australia to become the world’s largest exporter of LNG (mostly to Asia). But what if it comes down to a fight between farmers and energy companies?
–New South Wales slapped a 60-day moratorium on all new coal and CSG projects in late May. The new regulation will mean a big slow down in exploration licences for coal seam gas and conventional oil and gas in the State. And just this week, coal and gas-friendly Western Australian Premier Colin Barnett said his government would not permit any coal mines in the Margaret River region.
–Contrary to what you might hear in the press, this is not shaping up as a battle between food and energy. After all, if it came to a choice between eating and putting petrol in the car (or powering an electricity plant in Seoul or Tokyo) most Australians would quite sensibly choose lunch, or dinner. Australia is a big country with lots of potential mining and gas districts, including older ones that can be revitalised with new drilling techniques.
–But get ready for the full-on PR war from the anti-coal crowd. They are determined to fight against any growth in Australia’s oil and gas industry. We’ve already seen some of the mail here at our St Kilda headquarters. But despite the alarm, we’re not hoping to turn the country into a resource-depleted, environmental wasteland with toxic water and coal-dust-choked barren landscapes.
–But what the last few weeks have told us is that not all the planned LNG development in Australia is going to happen. For one, you have a lot of projects competing for the same capital and labour. There just aren’t enough drilling rigs and drillers to operate them. But the political fight is a factor too.
–Our prediction? Coal-seam-gas and coal-bed-methane plans won’t get any more traction. Off-shore expansion of conventional LNG will continue. And established oil and gas producing regions that aren’t in competition with farmers and ranchers might start to see a lot more investment. Stay tuned.
–Did you miss the scintillating discussion of bank capital requirements we went into earlier this week? The story got even juicier when CSLA analyst Brian Johnson said in a note to clients that Australia’s big four banks would have to either cut dividends or raise capital to meet the minimum capital standards required by the Basel III international banking rules.
–Johnson wrote that, “While domestic investors are generally comfortable with the Australian banks’ assertions of capital sufficiency, international investors are not.” Johnson reckons Aussie banks will need 8.5% of their assets to be held as “core capital” or “tier one” capital. These are assets that are highly liquid (can be converted to cash quickly) and considered very high credit quality (something like government bonds, or something that’s earned a high rating from an impeccable qualified credit-ratings agency).
–Johnson’s critique was fairly modest. He said if banks had to meet an 8.5 tier one capital requirement by 2013, they’d have to raise $16 billion in new capital. ANZ would be short $1.9 billion in capital, Commonwealth Bank would be short by $3.7 billion, NAB by $5.5 billion and Westpac by $4.9 billion, according to Matthew Drummond in Tuesday’s Australian Financial Review.
–Actually $16 billion isn’t a small amount of money, is it?
–The chat is that the Basel III standards only require that 7% of bank assets be considered super strong. The higher 8.5% level comes into play if the banks in question are determined to be systemically important. Johnson reckons the Aussie banks are fine at 7% and not fine at 8.5%.
–What did the banks say in response to Johnson’s report? “We are well capitalised so we await the APRA guidelines but we are comfortable with our position,” a Westpac spokesman told the AFR’s George Leonidis. For its part, “Commonwealth Bank cannot speculate on the new Basel rules until we have a clear understanding of how they will be applied by APRA domestically but at this point we remain comfortable in our position.”
–Don’t worry then, according to the banks. They are well capitalised. There is nothing to fear. It’s not like banks own a lot of mortgages. And it’s not like home prices fell by 1.2% in Australia’s capital cities in the first quarter.
–Oh wait. Home prices did fall by 1.2% in the capital cities in the first quarter. But anyway, you can be sure that Australian banks, like all the financial institutions that claimed so in 2008, are “well capitalised”. If they say it, it must be true.
–And in any event, if credit growth remains tepid in Australia—it grew 3.3% for the year ended in April, which, as you can tell from the chart above, is well down from the double-digit average over the last 15 years—demand for housing finance will obviously be tepid too. The banks won’t have to worry that 35% of every dollar loaned is borrowed in the wholesale funding market. They can rely on increased deposits to make housing loans.
–One disquieting quotation from the New York Times article linked to above is worth keeping in mind. “Our view right now is that the asset prices in the fixed-income market will begin to stabilize over the next six months, which will serve as an inflection point for improvement in fixed income later in the 2008 calendar year,” said Lehman Brothers Chief Financial Officer Erin Callan on September 11th, 2008.
–Lehman filed for bankruptcy four days later and was delisted from the New York Stock Exchange on September 17th, just a week after its CFO said everything was fine. Even a debt for equity swap with a massive haircut for bondholders wouldn’t have been enough to save Lehman.
–Of course we’re not suggesting that Australian banks are sitting on assets as toxic and noxious as those that brought down Lehman. But are they over-estimating what might happen to those assets in a crisis? Time and again we’ve seen analysts focus on liquidity worries and not recognise that the real issue with bank balance sheets is solvency, with asset quality being the heart of the issue.
–It’s still the heart of the issue in Europe. BlackRock CEO Laurence Fink tells Bloomberg that, “The banking system in Europe owns all this debt…If we restructure one country, we’re now basically putting huge capital stress on these banks. Before we restructure any country, we’re going to have to restructure the banking system in Europe.”
–He says, “The European problem is way beyond Greece…Greece is the most immediate problem. I find it very difficult to restructure Greece without the understanding that we’re probably going to have to restructure Ireland and restructure Portugal.” Coincidentally, the euro price of gold is slightly off its highs, but still traded at a historically resonant price of €1066—1066… the year the Norman Conquest of England began.
–And finally, speaking of conquests, all hail the conquering hero Ross Garnaut! Yesterday, the people’s champion threw down the gauntlet to anyone in Australia who does not respect his authority. He has claimed that the scientific evidence now shows, “beyond a reasonable doubt”, that man-made carbon dioxide emissions are causing the Earth to warm, or the climate to change, or something, or both.
–Thus ends, apparently the debate about the science. The government’s man—who by the way has been paid $265,700 of your money to reach a conclusion that happens to support the government’s policy—has spoken. If you’d be good enough to shut your mouth and your mind now, he can get on with the business of saving Australia and the world from its own greedy foolishness.
–In the final (thank goodness) part of his eight-part climate review, he announced three big plans yesterday: how to split up the $11.5 billion dollars he reckons will be raised by establishing a price for carbon emissions, the establishment of a non-political independent authority to determine what the level of greenhouse emissions in Australia should be each year, and an independent agency to determine how emissions-intensive industry should be assisted in paying the new tax.
–That is a full day’s work, even by government standards. But it’s about what you’d expect from a dedicated believer in an intrusive, meddlesome, and punitive State. He wants two new government agencies and the power to discriminate over who gets all the money that will now be flowing through government coffers.
–Oh, the hubris. Garnaut doesn’t trust the political process to set a target for carbon emissions. So he wants a committee set up to do it, which sounds a lot like the Reserve Bank setting the price for money with interest rates. Great, just what we need, an unaccountable, un-elected group of smarty-pants men and women telling us how much to pay for something, except in this case it will be energy instead of credit.
–Why do authoritarian civil servants distrust democracy so much? Probably because it interferes with their ability to impose on the world their own pet ideas and theories about how you should live.
–Perhaps the worst part about his diabolical, bullying, morally self-righteous, and intellectually arrogant plan is that the proposed independent agency will be in the position of passing judgement on which industries get assistance and which do not. The proper word for this kind of review is: discrimination.
–Now, we are not against discrimination. It means exercising judgement. And in individual cases, we’re all for it. But we’re dead set against it when a law is set up that allows unelected apparatchiks to penalise or reward industries based on their own whims (or judgement).
–This uneven application of an opaque law is fertile ground for corruption, the dispensation of political favours, and bribery. It’s how things are done in countries where the rule of law gives way to the rule of smart men who know better than everyone else what we all should do.
–And in a testament to his own self-belief, Garnaut had the audacity to criticise the business community for acting for its vested interests as opposed to the “national” interest he claimed to be acting for. Having portrayed power generation and industrial companies as polluters, rather than as employers and productive enterprises delivering valuable goods to Australia, he goes one step further and asserts that they are acting contrary to what is good for the nation.
–If name calling were a form of argument, we’d call Garnaut a jackass. But name calling is not a form of argument. So we won’t call him a jackass.
–But we will say this is a standard and devious debating tactic of those who believe that the State improves your quality of life more than Enterprise: accuse them of acting for selfish and greedy reasons and tell everyone you are acting for “the public” and “the nation”.
–What’s good for the public and the nation is a democratically governed Australia with a vibrant economy in which public policy debates are not unilaterally shut down by unelected civil servants. To be quite honest it’s astonishing how the mainstream media and so many people in official public life take this so seriously. It’s a clear exhibition of how strong their faith is in centralisation, State power, and coercion by law. You can almost see the smog of moral righteousness emanating from Canberra too.
–But perhaps as a shill for big business and a shallow, crass, vulgar American we are not being serious enough about saving the planet. We know this position makes us unwelcome in certain social circles. However we’d be more than happy to bet that in 10 or 20 years, all these earnest climate changers and carbon taxers will look back with embarrassment on today’s events. If they have any shame, that is.
Markets and Money Australia