Should Economic Nationalism Be the Wind Beneath Qantas’ Wings?

Last week a British Member of the European Parliament explained to his fellow politicians why it would be entirely appropriate for voters to storm the parliament and hang them. This week, more heart-warming news comes from Ukraine.

Rather than taking out their fury on politicians only, protesters decided to pull down a statue of the famous Russian communist Lenin.

To be fair, it probably had more to do with him being Russian than communist. The Ukrainians are angry about their government aligning itself with Russia instead of the European Union. Sounds good until you realise the European Union is probably more communist than Russia these days. There’s just so much irony in all this.

What’s really going on is the return of nationalism. The economic doldrums in Europe and parts of Asia are turning people into patriots. Ugh. There’s a German song which mentions how ‘patriot rhymes with idiot‘. And the Germans would know.

Whether it’s in the East China Sea, Ukraine or the British euro-sceptic movement, people are turning to their nationalistic emotions for reprieve from economic disappointment. That suits politicians just fine of course.

For an idea of where this leads, you can look at the run up to the Second World War. Or China and Japan today. The Japanese media is all over predicting war with China. Five different magazines all reported on how a military conflict would unfold. The Japanese Times provided a summary:

Sunday Mainichi (Dec. 15) ran an article headlined “Sino-Japanese war to break out in January.” Political reporter Takao Toshikawa tells the magazine that the key to what happens next will depend on China’s economy.

“The economic situation in China is pretty rough right now, and from the start of next year it’s expected to worsen,” says Toshikawa. “The real-estate boom is headed for a total collapse and the economic disparities between the coastal regions and the interior continue to widen. I see no signs that the party’s Central Committee is getting matters sorted out.”

In an article described as a “worst-case simulation,” author Osamu Eya expressed concerns in Shukan Asahi Geino (Dec. 12) that oil supertankers bound for Japan might be targeted.

“Japan depends on sea transport for oil and other material resources,” said Eya. “If China were to target them, nothing could be worse to contemplate.”

Economics and war have always been tied together. We might have to move our conference forward if the Japanese and Chinese keep at it like this. Otherwise the predictions of our guest speakers will come true before they get to make them publicly.

Of course, Australia isn’t immune to this economic nationalism. Our corporate behemoths are sputtering. Whether it’s Holden or Qantas, everything is an issue of national importance for the government to stick its grubby big fingers into.

The government’s action on Qantas was the talk of the town over the weekend. Shadow Treasurer Chris Bowen made Labor’s position clear when he answered a journalist’s question that yes, Qantas is ‘effectively‘ too important to fail. So will Tony Abbott be pressured to rescue the company with a bailout or open the flying kangaroo to foreign ownership? The Chinese are already expressing interest.

Standard & Poor’s downgraded Qantas’ corporate credit rating to BB+. That means that the debt of our national carrier is now officially ‘junk’. But don’t worry too much, that rating doesn’t factor in government support. After rejecting the foreign bid for Graincorp, Joe Hockey may be stuck in a corner. His boss said this: ‘If it’s a choice between a greater foreign stake in Qantas and taxpayer subsidy I ask the people of Australia – what do you prefer?‘ He may not get the answer he was expecting if the Chinese come up with the biggest bid.

One of the many ‘solutions’ to Qantas’ woes, because letting a business go out of business is so 19th century, is to get rid of the planes. An airline without planes? Now that sounds like a plausible plan.

Financier Greg Woolley reckons he can get together a consortium to buy Qantas’ planes and lease them back again. The idea being to get Qantas cashed up again. He told the Australian Financial Review, This proposal would allow Qantas to retain the frequent flyer business, retain Jetstar and allow it to focus on operational performance and growth.

Our advice to you is to use up those frequent flyer points soon. Maybe you can retire to somewhere less nationalistic…and expensive.

Speaking of which, investment bank UBS labelled Aussie bank shares the world’s most expensive in a report. But apparently that’s OK because they pay high dividends.

Value investing expert Greg Canavan would have a giggle if he read that. If the banks are ‘expensive’ that implies the market is expecting some sort of growth. But paying out high dividends is a hint that the banks aren’t reinvesting their profits to generate that growth. Something has to give.

Buying bank stocks for their dividends is as close as you can get to the old ‘picking up pennies in front of a steamroller’. Or perhaps we should say ‘singles from Mitchell Johnson’. Banks fail. And not like companies fail either. A bank can go insolvent overnight if depositors want their cash. People in the US, UK, and Ireland learned all this recently. Why don’t Australians get it?

So our iconic companies are struggling and our most important blue chips are overvalued. What about resources, is there any saving grace there?  Well the fruits of all that mining investment will take time to show up in the data. But our exports to China are already surging to record highs, up 60% year on year. Bad news is, that’s the only major trading partner with which we’re growing our exports.

All in, our trade deficit is blowing out. It almost doubled in October, with the Aussie dollar briefly trading below 90 cents as a result.

If trade deficits, overvalued banks and international conflicts are all too confusing for humble Aussie investors, just turn to the man running the show, Reserve Bank Governor Glenn Stevens. He reckons that the boom and bust cycle of an economy is set to return to Australia after a good 22 years.

Of course, central banks create the boom and bust cycle in the first place by messing about with interest rates. So it’s very ironic to hear Stevens tell us that a recession is in the cards eventually, with a ‘probability of…more or less 100 per cent‘. But at least he’s admitted there will be a downturn.

The really interesting part of what he told the Wall Street Journal is that he reckons the RBA can keep the cyclical downturns nice and mild. After a 22 year run without a recession, we seriously doubt there will be anything mild about a recession in Australia.

The question remains ‘when’. Dan Denning has an answer here.


Nick Hubble+
for The Markets and Money Australia

Join Markets and Money on Google+

Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

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