Hedge Clippings | Friday, 11 December 2020

From Gloom & Doom in 2020, through to Zoom, and in 2021, Boom!

As we've mentioned previously, 2020 has been a pretty extraordinary year. However the icing on the cake (is that one metaphor too many?) would have to be The Westpac-Melbourne Institute's index of Australian consumer sentiment, which now sits at a 10 year high.

This is surely the snap-back to end all snap-backs, and one just hopes it's not like the proverbial bungee jump, where you never quite reach the previous level before going into a series of dips, and eventually coming to rest at rock bottom. But, as they say in the classics, "maybe this time it's different".

And all the indicators are that it is different this time. It was certainly the shortest, sharpest recession, and it elicited the fastest, most drastic, and financially dramatic government response that in any other circumstance would have been considered totally irresponsible. The same could be said of Victoria's lockdown, which while it attracted much criticism at the time, was in hindsight the only available option open to Daniel Andrews.

So, assuming Australia is not struck by a "second wave", we now have consumers and households who, having been the recipients of financial support they were not expecting, and not having much opportunity to actually consume, have built up their household savings (or raided their super), and now appear to have a pent-up, relief driven urge to spend it.

And while overseas travel is still a long way off, they only have one place in which to do so.

Many businesses meanwhile, depending on the sector they are in, have also benefited from the government's job keeper and other programs, or for the tradies, a renovation boom and the prospect of a massive infrastructure pipeline. The local tourism sector might be missing the overseas traveller, but they've been replaced by locals, many of whom will spend a lot more than some of the backpackers they replaced.

Enthusiasm and confidence is infectious, and will flow from consumers, through to business, and thus through to employment. Happy Days.

Of course trade with China remains a problem, and one that is unlikely to be resolved in the short or even medium term. It may be easy to say, but possibly there is a silver lining there in the long term as well.

Certain sectors, such as agriculture and education, had possibly become overly reliant on one dominant customer. So being forced to diversify their risk by having to seek out new markets, whilst painful in the short term, could lead to a more robust and broad customer base in the long-term. Paul Keating once famously said "this is the recession Australia had to have", and maybe there is an element of that logic in having to search out new markets.

The release of COVID vaccines will further boost consumer confidence, but is unlikely to see overseas travel - in or outbound - taking off (excuse the pun) in the short term. Not only will it take some considerable time to roll out vaccinations across a sufficient proportion of the US, Europe or the majority of the world's population, but one would assume that the depth and extent of the pandemic's grip will significantly delay a return to normal.

Which takes us to the great unknown in 2021, namely what sort of President will Joe Biden turn out to be, and how quickly will his presidency impact on both the domestic and international stage? 

The other question of course is how Donald Trump will behave at Biden's inauguration?

One would expect predictably!

News & Insights

Video interview with Rodney Brott from DS Capital

Hedge Clippings | Friday, 04 December 2020

It's been what one might call a Topsy-Turvey year. We understand that is not a very technical or well-recognised financial term, but from where we sit (or stand) it seems to sum it up. Topsy-Turvy it might have been, but compared with where we were in April or May, or where Victoria was during their winter lockdown, Australia seems to have fared relatively well all things considered.

We are certainly fortunate to be an island nation, tucked away down at the bottom end of the globe. We are fortunate not to have had the chaos that has enveloped Europe and North America, and seems likely to continue to do so for a while yet in spite of the recent announcements regarding the release of COVID vaccines.

In reality of course it's been a shocker of a year, thanks to COVID and its aftermath. The domestic economy has been battered, but has amazingly bounced back from one of its worst quarters of financial growth to record one of its best. There is a significant cloud on the horizon for the agricultural and education sectors as they struggle to deal with their largest trading partner, but the reality is probably that they became complacent and over-dependent in the first place.

If nothing else, both Australia and the world are now seeing the Chinese government's true colours. Exporters might as well get used to it and find new markets, even though in the short to medium term that will be a painful exercise.

While on the subject of painful exercises, sooner or later Australia's own government (of whatever hue) needs to bite the bullet and address the issue of our highly inefficient tax system. Yesterday the OECD released "Revenue Statistics 1965-2019" which showed that at 60% we have the second highest dependence on taxes raised from income and profits among 37 advanced countries.

This isn't even close to the OECD average of 34.3%. Equally, the GST makes up just 11.7% of total tax revenue, compared with the OECD average of 20.4%. Part of that issue of course is that the GST is only levied on less than half of Australia's overall consumption.

In spite of this, Australia's overall tax level is 28.7% of the economy, which is below the OECD average of 33.9%. This tells us two things: firstly that the major source of taxation revenue that the government relies on, whether it be company tax or personal income tax, is inefficient and in many ways counter-productive.

Secondly, and the politicians in Canberra must know this, they lack the fortitude or ability to address the issue at the ballot box. Last week's Hedge Clippings had a whinge about Australia's superannuation system which, when all is said and done, is another arm of the taxation system.

So we are left with two highly inefficient and overly complex systems. One of our ongoing dreams is that the GST will be raised and expanded as a tax on consumption, such that the higher the consumer's level of spending, the more they contribute. That at least would lead to a simpler collection system.

Another is that there should be a strong incentive (or should that be a penalty) to encourage superannuation funds to invest long-term in infrastructure projects, thereby merging the opportunity with the need for investment into that sector.

Of course it's not easy for the government, when a logical and sensible plan to limit cash transactions to $10,000 (as is required in the banking and financial services sector) was this week dumped, or should we say torpedoed, by the cross benches. That luminary from Far North Queensland, Bob Katter, somehow described the proposed ban on cash transactions as representing a danger to Australian freedoms "greater than the danger to our lives through terrorism".

Meanwhile, One Nation Senator Malcolm Roberts claimed that the ban "criminalises the use of legal tender, cash, for everyday Australians".

What planet are these two on? If Katter and Roberts don't realise it, terrorism is financed through donations made in cash, simply because it's untraceable - or difficult to trace. And it is the criminals that use wads of cash greater than $10,000 to conduct their "business", not everyday Australians.

The mind boggles! But it's Friday. Where's that glass of pinot?

News & Insights

Staying Overweight Japan by Arminius Capital