Shorten Sounds Siren

Tax Grab. Hit the Rich. End dividend cash perks.

Bill Shorten has declared, if elected PM, that he will instruct the ATO to keep any surplus franking credits in the Government’s coffers. This has predictably, and rightfully, raised howls of protest.

Investors have come to rely on the ATO’s annual refund cheque to partially finance their living expenses.

According to the The Sydney Morning Herald on 12 March 2018 (emphasis is mine):

Labor will target more than 1 million Australian taxpayers who own shares in a $59 billion revenue push that would take its heaviest toll on retirees, as Bill Shorten wages war on “unfair” cash refunds and ramps up attacks on the rich.

In a bold move that hurts wealthier voters, the Opposition Leader will reveal plans to help balance the budget by cancelling cash refunds worth an average of $5000 a year to taxpayers who own shares and claim tax credits on their dividends.

Shorten is looking for the path of least resistance (or lifting the least heavy tax rock) to find some spending money. Spending money which will be lavished upon his political masters and finance a vote buying campaign.

Not one red cent of the projected $59 billion in revenue will go to deficit or debt reduction.

It is an out-and-out tax grab to satisfy the ‘spend, spend, spend’ cravings…we know that.

But there is something else at play here.

Shorten — like most politicians, central bankers, analysts and investors — has fallen into the ‘extrapolation’ trap.

He thinks what has been — an average of $6 billion in annual franking credit refunds — will continue for the next decade.

But what happens if tomorrow is not a repeat of yesterday?

Government has form on this.

This is from The Australian on 11 January 2011 (emphasis is mine):

The Reserve Bank sold most of the nation’s gold reserves more than a decade ago because the board believed its price would remain flat.

They believed also the commodity would not play a role in a future financial crisis.

The decision to sell 167 tonnes of the bank’s reserves has cost the nation about $5 billion based on today’s soaring price of almost $1400 an ounce.

A board paper recommending the decision to sell conceded that gold served as “insurance against a breakdown in the international financial system”, but it then dismissed the need for holding this valuable asset.

The RBA revealed in July 1997 that over a six-month period, it had sold 167 tonnes, reducing Australia’s reserves to just 80 tonnes.

The RBA’s sales…[returned] just $2.4bn for the gold that was sold…

The same amount of gold would be worth about $7.4bn today.

The decision to sell the reserves was approved by then RBA governor Ian Macfarlane and then treasurer Peter Costello.

With the benefit of hindsight, we can see the RBA Governor and Treasurer — unfortunately — almost picked the bottom of the gold price. The conventional thinking had extrapolated what ‘had been’ into the future…and how spectacularly wrong they were.

Gold - London PM Fix 1995 - present 16-03-2018

Source: Kitco
[Click to enlarge]

And the RBA wasn’t the only one. Many other western world central banks also unloaded their ‘useless’ gold holdings.

And in true style, when did central banks start buying again?

This is from a 19 September 2016 edition of The Guardian:

Central banks have boosted their gold stocks by almost 10% since the financial crash, reflecting its renewed attractiveness as a safe haven in an environment of uncertainty and low or negative interest rates.

China and Russia have led the switch to gold away from foreign currencies, especially the US dollar, to shore up their reserves. Western nations, including the UK, have halted several decades of mass sell-offs.

According to the Official Monetary and Financial Institutions Forum (OMFIF), central banks have swooped on the gold markets every year since 2008 to become net bullion buyers, adding more than 2,800 tonnes, or 9.4%, to reserves.

If you ever wanted a contrarian indicator…follow government decisions.

When did Treasurer Swan dream up the Minerals Resource Rent Tax?

Surprise, surprise: 2011. The height of the commodity boom.

Minerals Resource Rent Tax 2011 16-03-2018

Source: Trading Economics
[Click to enlarge]

When is Shorten making a grab for tax dollars?

After the Fed has spent the last 10-years, and trillions of dollars, blowing the biggest share market bubble in history.

Perfect timing as usual from our boy genius in Canberra.

If ever you needed a signal that the share market’s days are numbered, Shorten’s projected tax grab is the loudest siren you are going to hear.

In February 2017, I wrote an article about the impact The Great Depression had on ‘blue chip’ companies to pay dividends. Here’s an extract:

In 1929, the [S&P 500] index produced average earnings of US$22.60… three years later, earnings had fallen to one-third of this figure.

It took nearly 20-years, for earnings to reach the US$22 level again.

When a share market suffers a fall of 80%, you can be assured there will be economic consequences. People have less money to spend. Less money going through the cash registers means less corporate profits.

If businesses are earning less, guess what happens to dividends?

They are reduced or even, cancelled.

In Barrie A. Wigmore’s rather lengthy book ‘The Crash and Its Aftermath: A History of Securities Markets in the United States, 1929-1933’ there’s a treasure trove of data on what happened to shares during the Great Depression.

Here’s a selection of blue chip companies and the level of fall suffered from 1929 to 1933 and dividend being paid in 1933.


Source: Port Phillip Publishing
[Click to enlarge]

Three of the seven ‘blue chip’ companies ceased paying dividends. The other four appeared to be paying a high level of dividends…but all is not what it seems.

In the case of Gillette, that 13.77% dividend was calculated on a share price that was 95% lower than it was four years earlier.

To explain this, here’s another extract from the February 2017 article:

To keep this exercise simple, we’ll work in whole numbers.


Source: Port Phillip Publishing
[Click to enlarge]

In dollar terms the dividend had shrunk over 80%…from $4 per share in 1929 to $0.70 per share in 1933.

When (not if) the share market goes through a significant correction, and struggles to respond to stimulus efforts, dividends will be cut. Shorten’s proposed tax grab is going to end up as a ‘grab bag of nothing’…a bit like Swan’s mining tax.

Prior to counting his ‘tax chickens’, Bill Shorten should acquaint himself with the Tobin Q ratio.

For those who are not familiar with this valuation method, Advisor Perspectives gives this explanation:

The Q Ratio is a popular method of estimating the fair value of the stock market developed by Nobel Laureate James Tobin. It’s a fairly simple concept, but laborious to calculate. The Q Ratio is the total price of the market divided by the replacement cost of all its companies. Fortunately, the government does the work of accumulating the data for the calculation. The numbers are supplied in the Federal Reserve Z.1 Financial Accounts of the United States of the United States, which is released quarterly.

The following chart tracks the Tobin Q ratio back to 1900.

Tobin Q ratio back to 1900 16-03-2018

Source: Advisor Perspectives
[Click to enlarge]

The current reading is the second highest in history.

Please tell me why this peak will not suffer the same fate as the previous five (one of which preceded The Great Depression)?

The market’s days are numbered…it’s simply a matter of when, not if, this market collapses.

Shorten’s announcement was further confirmation of this inevitable outcome.

When the expected tax dollars do not materialise, where will PM Shorten get his much needed spending money from?

Pension cuts? Higher tax rates? The abolition of zero tax on super funds in pension phase?

That’s what we should be more concerned about.

In the meantime, you should be very thankful that Shorten has given you the clearest of signals to SELL.


Vern Gowdie,
Editor, The Gowdie Letter

Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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