Categories

Archives

A sample text widget

Etiam pulvinar consectetur dolor sed malesuada. Ut convallis euismod dolor nec pretium. Nunc ut tristique massa.

Nam sodales mi vitae dolor ullamcorper et vulputate enim accumsan. Morbi orci magna, tincidunt vitae molestie nec, molestie at mi. Nulla nulla lorem, suscipit in posuere in, interdum non magna.

Rational expectations?

A penny dreadful mining exploration company that I have followed in the past (to my regret) has made losses for each of the past 10 years.  It has several exploration sites that it owns or co-owns,  but none is anything close to a producing mine – indeed at some “promising” sites, only a single drill sample has been analyzed. Several of the sites are in Africa.   The firm is capitalized at about $40m but has cash at the bank of only about $500,000.  Over the past 6 months, it spent $1.7m on “administrative and corporate costs” (it pays its CEO $700,000 annually) and it spent about $900,000 on “exploration and evaluation” activities.  It is scheduled to spend about another million over the next quarter on “exploration and evaluation”.

To me, it isn’t just Bitcoin that raises questions about the rationality of investor expectations.  Of course, the firm might strike it rich  – I might win Tattslotto too –  but a market capitalization of $40m suggests more than a little exuberant optimism.   A reasonable question can be raised as to whether it is a going concern – but new issues of stock to credulous investors can keep it ticking over I suppose.  It has 700 million shares out there now. A few more hundred million will not make too much difference and once the amount of script gets to a billion or so the board can decide on a 10 for 1 share consolidation and start off the money-mining operation again.

The Vietnam War

I watched the ten-part series,  “The Vietnam War” (TVW), now made available at SBS online.  This is a powerful analysis of this almost grotesque tragedy that influenced my own thinking greatly as a young man. It changed me into a person who thought politically. I opposed the American-run war and Australia’s participation in it during my final high school years and most of my years of study at university.  I was an active participant in the Vietnam Moratorium movement and faced the real prospect of being drafted to fight in Vietnam. The war changed my politics simply by forcing me to question basic assumptions about supposed democratic governments.   I came to reject the naive, adolescent notion that citizens can rely on central governments to behave honestly and decently.  They cannot because they do stupid things. Governments tell lies on important issues of life and death and take monumentally foolish decisions that reflect their own selfish interests.

Generally, my view as a youth was that Australia had no business in fighting in this war and that by doing so we were increasing human suffering not improving things.  I don’t seek to revise these views at all but one new aspect of the war did become clear to me as a consequence of viewing this excellent documentary: A  sound and sensible pragmatic reason for opposing participation in this conflict was that there was no possible way the Americans could “win” this non-conventional civil war. Given the anonymity of the respective sides and the negative spillovers from wrongly persecuting the innocent this was a hopeless military task. Indeed,  the difficulties were understood by all three of the US presidents who were concerned with operating most of the war – John F. Kennedy,   Lyndon B. Johnson and Richard M. Nixon.  All were repeatedly advised on the low probability of anything approximating a reasonable outcome from US military efforts. Moreover, this advice came from advisors who were, initially at least, hawkish on the war. Robert McNamara for example argued that even with a massive buildup of US forces in Vietnam, the chances of victory were very low.  John F. Kennedy had the same understanding – at least as a young politician. The American people and the unfortunate troops sent to fight in Vietnam were sold lies by their presidents simply because of electoral considerations and the need to avoid being the “first US president to lose a war”.  This splendid speech by returned marine, John Kerry, makes it clear that this selfish ethic was in force right up to the final point where Nixon did withdraw US forces. Nixon’s dishonest role in extending this conflict is well-documented in this series. The final rapid US withdrawal and the subsequent collapse of US military equipment support to the South Vietnamese army did seem cowardly given the past actions of the US, but given the sunk costs it probably minimized the consequent very considerable suffering experienced by those who opposed the northern communists. Given past US mistakes there was no simple way to extract itself from this quagmire without imposing huge costs on the South.

The  TWV documentary certainly makes it clear that this war was, on both sides, a savage conflict that was immensely costly in terms of loss of life and human suffering.  More generally, it is a powerful anti-war film.  It also reminded me of the links between this war and the racial divides and of the militarization of security services inside the United States.  The killings at Kent State University by US National Guardsmen and the brutality of their attacks on protesters in Chicago’s Democratic Convention in 1968 drove ongoing and, as yet, unresolved social changes that changed America. Cops in the US are still killing innocent black people and cops still patrol US cities like paramilitary forces.

The interviews with Vietnamese war participants and their families were a key part of this documentary.  There was both savagery and a great deal of intelligent compassion on the part of the Vietnamese. Both sides of the conflict incurred huge human costs but, in terms of aggregated loss of life and suffering, most of the pain was experienced by the people of Vietnam. Also valuable was the discussion of the moderating role that Ho Chi Minh played in the northern communist movement and, of course, his early impassioned plea to the Americans to help Vietnam secure its independence from the French after WW2.  The beginning of the Cold War thwarted that initiative that could otherwise have saved several million lives.

The tragedy of the Vietnam war obviously devastated Vietnam but also changed the west.  It changed me.

The series is available on SBS online for the next few weeks.  Well worth viewing.

Fire and Fury

Michael Wolff’s “Fire and Fury” is a sustained attack on the Donald Trump presidency. Trump is revealed as a narcissist bumbler who repeats himself. A buffoon who is out of his depth for the job of being President. The White House staff he has surrounded himself with are a barely competent collection of factions competing for his attention but all of whom are individually aware of the extent of the Trump inadequacies. Organizationally the White House is a shambles partly because of the “crash through” philosophy of Steve Bannon and partly through the competing family versus the rest factions. “Fire and Fury” is a sustained attack on the Donald Trump presidency.

There have been so many scandals and incidents during the Trump Presidency that putting them all together is confronting. It is also oddly repetitious. A major flaw in the book it seems is the failure to appreciate the Trump cunning and the more positive aspects of his personality. Those who read this and who encounter Trump publicly or privately are likely to think that he is not as bad as portrayed here. The unrelenting attack, as several reviewers point out, probably helps Trump.

What did I find interesting in the book? The following claims surprised me:

  1. The claim that Trump never wanted or expected to win the Presidential election. He wanted to be a runner-up to the evil Hilary and to make a publicity splash. But once he did win he promptly reversed gear and claimed a great victory.
  2. The key role of a few rich Republican-supporting families (particular that of Rebekah Mercer) in driving a Trump victory. Trump didn’t back himself since he saw his candidacy as inevitably failing.
  3. The extent to which Trump sees himself as a performer on a stage. It is a continuation of his ethic of putting the name “Trump” on buildings he has built for him. Trump is obsessed by the media.
  4. The role of Rupert Murdoch as an advisory to Presidents and as a key part of the American political scene. Apparently, he is still on good terms with Trump even though he is claimed to regard him as a “fucking idiot”. Generally, Trump adores financial celebrities such as Murdoch and Carl Icahn.
  5. The role of the US power elites and particularly of New York’s Jews. For example, on of a billionaire Jewish family, Jared Kusher is a White House employee, is married to Trump’s daughter, Ivanka, and is a friend of Netanyahu. His primary policy concern in the White House is US Middle East policy.   It’s a tight group of financial celebrities. Ivanka, for example, is a close friend of Rupert Murdoch and Murdoch’s previous wife Wendy Deng.
  6. Steve Bannon is no masterful Machiavellian figure. He is just a small time right-wing flog with a much-exaggerated view of his own intelligence. Bannon is a flash in the pan figure who will soon be forgotten. On the other hand, Bannon did drive much of Trump’s early policy craziness.
  7. Everything is ultra personal to Trump. Who likes or who criticises him seems to matter more than any policy stance.  His immediate family (daughter Ivanka and her husband Jarod Kushner) have a central role and are the possible weak link in the Rusian investigations. None seem to have much political intelligence.  The role of Jarod Kushner, raised an orthodox Jew, in driving Trump’s Middle East policies seemed to me astounding.

To Wolff, and of course to Steve Bannon, the Trump presidency seems unlikely to continue. Trump is an ignorant child who seeks approval from those around him but who has neither intellect nor discipline. He is a “fucking idiot”, not only to Rex Tillerson,, but to all those around him. No one is fooled. Nor can some of the considerable talent around him compensate for his stupidity since Trump refuses to be upstaged. I am unsure myself even after reading this book. Trump’s stupidity and lack of suitability for the presidential role seems to be a major asset that keeps 35% of the American people loyal to him.  Those who fume at him seem to derive a “guilty pleasure” from listening to and from exposing this fraud.

The possibility of a crash

The arguments by Willem Buiter on the possibility of an exuberance-induced global recession seem reasonable to me.  Stock and property markets are exuberant, particularly in the US  while bond markets are moving into recession because we all know that interest rates are rising and will continue to rise.  There has been a prolonged US expansion since 2009 and Donald Trump’s inappropriately-timed tax cuts will lead to additional exuberance that, given almost full employment in the US, will likely need to be trimmed by even tighter monetary policy than currently envisaged.  Tighter future monetary policies are a risk that create the possibility of recession and a stock and property market crash.  The poorly timed US fiscal expansion will create a huge US fiscal deficit of 5.5% of GDP  that may raise questions about US financial solvency and the possible monetization of the US deficit.  There could well be a Trump-induced recession.

All these thoughts are possibilities only but possibilities that need to be accounted for in making current investment decisions. For Australia the fear is one of contagion.  A US recession inducing a recession in China and new challenges for our paper-thin energy and commodity price revival.

Merry Christmas to All

Christmas is a celebration of what is guessed to be the approximate birth date of Jesus Christ. It is an important occasion in almost all civilized societies for both Christians and Non-Christians alike.
In Australia, the number of people who describe themselves as Christians has fallen from 71% of the population in 1996 to only 52% twenty years later in 2016. I have been a non-believer – although an increasingly much more tolerant one – for my entire adult life so I am gradually acquiring more companions. Christianity, in fact, faces the prospect of being a minority belief – part of the ‘counter-culture’ – in Australian society. But while formal adherence to Christianity may be fading the ideas that underlie it remain, by-in-large, an important positive force in our society. Christmas remains important to many of us – both the secular and the religious.
I lack empathy with multiculturalists and those from other religions who see the widespread respect paid to Christmas as something offensive to atheists and non-Christians. Given my early Christian upbringing, I still feel comfortable celebrating the message of hope, forgiveness, friendship and kindness that Christmas brings to us. I have a long-standing respect for the values that the man Jesus Christ espoused. The birth of a baby indicates the hoped-for possibility of living in a better world. The materialism associated with Christmas does make me reflect. Do  we devote to much time to the emotional impact of Christ’s birth and not enough to the thinking and reasoning part of his life as John Carroll claims? Most of us enjoy giving and receiving gifts. One can be too puritanical about such matters. Most of us enjoy some of the incidentals of Christmas – carols being sung, food and wine being imbibed and homes being brightly decorated. At the very least these are a valued part of our cultural traditions.
The idea of hope associated with Christmas and the belief that the world can be a better place because of the birth of a boy is a beautiful parable. I do not believe that to appreciate the beauty of this notion that one, in fact, needs to accept the idea that the young boy is the ‘son of God’ or our ‘saviour’. It is enough to think about our prospects for renewal and for trying to live a life that reflects Christian values of kindness and forgiveness even if not of Christian theology. It is these values that Jesus taught throughout his life that are important to us as well as the symbolism of his birth.
No religion – Christianity included – should ever be seen as having the last word on anything. One of the great advantages of living in Australia is its openness and the freedom of choice it offers with respect to religion. But the wisdom of many religions, freed from their bigotry, can guide us towards living happier, more fulfilled lives. Whether you are thinking about what job you should take, what partner you should live with or how you should deal with the neighbors and with outsiders, the message of Christianity has something to teach us all. God might be irrelevant in all this – we are after all human beings – but the core message of Christians and the hope of Christmas is not.

North East Link

The North-East Link Project in Melbourne seeks to connect the Western Distributor with the Eastern Freeway. There is much to this project – including a widening of the already-jammed Eastern Freeway – but the biggest feature of this project is its cost. Namely, $16.5b. Some claim the price could go as high as $21b.
 
This is, by far, the most expensive road transport project in Victorian history. Like most major recent transport infrastructure proposals, there seems to be no cost-benefit analysis that supports the project. If I am wrong please point me in the direction of one.
 
Arguments for the project include the fact that (i) there is currently heavy congestion due to trucks in local roads around Heidelberg (I live nearby and can verify this), that trucking demands are forecast to grow strongly over future decades (also true) and that the planned 5 km tunnel under the Yarra River will avoid major environmental damages. There have been some qualitative estimates of time savings.
 
I like the last point but don’t like the huge associated costs being incurred without any overall cost-benefit analysis. It is just hard to get your head around a $16b cost. If I capitalize it at a 4% discount rate over an unending time horizon that is $640m annually forever. The time and inconvenience costs that the project seeks to avoid must be large. Moreover, will the project remain viable for long. The Eastern Freeway and even the link to Eastlink are now already heavily congestion as is the Western Distributor. Even with widening works completed and set to be initiated, there are doubts about whether this project will be an effective one longer-term.
 
If the project is “essential” then the primary reason for it must be the massive population growth that Melbourne is forecast top experience up to 2050. The immigration-driven population by that time will be something north of 10 million. I think it is important to recognize these costs as an implication of trying to derive benefits from a larger policy-driven population.

The case for enhanced Australian company tax cuts: Modified re-post of an April 2016 post

This issue is again on the agenda because of the US decision to massively cut corporate taxes from 35 to 20% of corporate profits.  It is not the same intellectual case as for the US economy but many of the same issues arise.  The growth in the US deficit as a result of these cuts will be large and there are questions about the extent to which investment will increase given the relatively low level of US unemployment.  As with the US, there is a case for reducing corporate taxes to induce less effort to transfer price profits out of the country.  Australia has already agreed to cut corporate taxes on small companies but should the cuts be extended to all firms including large corporations?

It is important that people take the time to understand what is really at stake here and not just fall into the simplistic and incorrect line that increased profits will only go to increase dividends paid to the rich and salaries paid to corporate bosses.  There is much more to it than that. Continue reading The case for enhanced Australian company tax cuts: Modified re-post of an April 2016 post

Skidelsky on the case against liberal migration policies

I agree with parts of the Robert Skidelsky argument supporting restrictions on immigration but not with others. I agree that the value of diversity are overstated (we want some but shared values also of value and we do not want ISIS) and that public sector tax benefits from immigration are like a Ponzi scheme. But I disagree with the Skidelsky analysis of labour market effects.
 
Skidelsky says that more migrants mean lower wages but that, in time, the benefits to capital owners will encourage more investment thereby offsetting the initial wage decline. Skidelsky argues that the lag between the initial wage and the final investment effects is likely to be excessively long.
 
This is generally a wrong view of standard immigration arguments. Wages do fall and profits do increase but the standard economic argument is that gains to capital exceed losses to workers. It is a trivial bit of microeconomics to show this. Thus the argument against migration is that while it realises efficiency gains – total incomes rise – it worsens the functional distribution of income. Thus the argument against immigration is a distributional argument.
 
I have neglected capital flows and the easiest assumption is that there is perfect capital mobility internationally. Then the initial wage fall creates a boost to the marginal product of capital that creates a capital inflow. Theis occurs until wages are driven back to their initial levels. Then wages for the original workers are as before but the economy has a larger capital stock. All gains from the initial migration accrue to the new migrant arrivals.
 
If capital is imperfectly mobile – the realistic situation – then the outcome is as somewhere between the situation of zero international capital flows and perfect capital mobility so that economic outcomes are, again, on balance, bad for local workers.
 
The economy gets bigger in this latter case and the new arrivals as well as local capitalists gain advantage but workers in the original pre-immigration economy lose out.
 

Australia’s migration and humanitarian programs

Australia’s population growth rate is rocketing along primarily because of our migration and humanitarian programs.  These make up 54% of our total population growth.  Our migration program in 2015/16 took in 189,770 people gross and about 20,000 less than that allowing for permanent emigration.   The gross figure is within a smidgeon of the highest level ever recorded (190,000 a couple of years back) while the humanitarian program intake was 17,555 entrants which is the highest level of intake for 30 years.  The total gross intake was 207,325 people. Useful source documents are here (for migration) and here (for the separate humanitarian program).

Most of our regular immigrants come from India and China while about half of the humanitarian program come from the Middle East  (in 2015/16 4358 from Iraq, 461 from Syria, 1714 from Afghanistan, 337 from Iran).

The migration program for 2016/17 and the planned program for 2017/18 is basically a replication of recent trends with an intake of 190,000 being targeted (here). The humanitarian program will increase through to 2018/19 when it will amount to an intake of 18,750 which will create a new record intake over the past 30 years (here).  The bulk of this increase will reflect the 2014 commitment by the Australian Government to refugees from Syria and Iraq.

Australia is growing its population using the migration and humanitarian programs at the greatest rate for decades.

Advising investors not to believe in active investment strategies

Some of the fees charged by local investment advisors, such as local accountants, seem more than hefty. Particularly when investments are in equities. Often there is a fixed fee of around $300 per month or $3600 per year. There is also often a trailing fee of 1% of the value of the portfolio. Thus on a $1m investment with gross earnings of 5% the total annual fees would be $13,600 which, ignoring taxes, would be 25% of the total return. A big slab since it would now take about 20 years for your investment to double if all returns were reinvested whereas it would take only 14 years without the fees.
 
An alternative might be to charge clients $50 for a copy of Burton Malkiel’s A Random Walk Down Wall Street*, and a once-and-for-all $500 fee for assistance in opening up, for example, an efficient CommSec account**, along with a brief introduction to the Vanguard no-load mutual funds, exchange traded funds or to the low-load mutual funds such as Argo Investments or Milton Corporation. Capitalized over 20 years the transactions cost of doing this would fall from 25% of the investor’s total return to a tiny fraction of 1%. Moreover, this move is consistent with almost all evidence on equity markets that passive investment strategies outperform active management.  Should re-tool as a low-cost financial advisor and do this? Probably not although anyone else is free to pursue this approach. 
I mention this because, as an economist, I am often asked for financial advice.  My response is that I have no investment advice to give beyond reading Burton Malkiel’s book.  Generally, I believe in “efficient markets”***. In particular, if you have limited assets when you retire there are no miracle ways of accessing high-income returns. You need to learn to be frugal and budget to live within your means and can claim the aged pension.
*Malkiel is an enlightened believer in “efficient markets”. With a few exceptions, he does not believe in “stock picking” but prefers “no-load” mutual funds.  Malkiel is excellent on retirement planning where he favors a major proportion of investments being in REITs and fixed interest securities.
** One which includes direct debit of dividends or their reinvestment in dividend investment schemes.
*** Again following Malkiel I occasionally punt on investments about which “bubble-like” dreams can be built. But this is a risky business and I limit it to 1-3% of my portfolio.

Policy proposal on North Korea

The best deal offered so far in the ongoing conflict with North Korea comes from China. It is:  Abandon your nukes and we will offer you protection. This gives the North what it wants, namely,  protection from externally-imposed regime change. The North’s nuclear capacities are primarily defensive.Moreover, the policy is credible since China does want a buffer between itself and the “west” (the US allies of South Korea and Japan) and, most importantly, helps prevent huge possible loss of life in the North and South and in Japan. It gives time and incentives for internal reform of the wayward North. It addresses the core concern with North Korea which is their ownership of nuclear weapons and their ability to use and sell these weapons.

Moreover, the Chinese policy is credible since China does want a buffer between itself and the “west” (the US allies of South Korea and Japan) and, most importantly, this policy helps prevent the huge possible loss of life in the North and South and in Japan were there to be an armed conflict. It gives time and incentives for internal reform of the wayward North. It addresses the core concern with North Korea which is their ownership of nuclear weapons and their ability to use and sell these weapons. In time the Pyongyang regime may be bribed or induced to voluntarily surrender power.  A pre-emptive strike runs the risk of the regime seeking to go out with a bang rather than a whimper.

Moreover the Chinese policy package is not purely passive – it has ended coal imports from the North (a major source of foreign exchange) and is considering further sanctions.

The US approach is the brinkmanship game of ramping up threats against the bully regime (which is using nukes entirely to protect itself) while leaving the US with the option of a pre-emptive strike. This policy will either not work because the incentives are misaligned or will likely end in a bloodbath.   Every nation party seeks eventual regime change in the North but the slow and steady policy path proposed by the Chinese is plausibly less costly than the impulsive militarism of Trump and his generals.

On this foreign policy issue, China is showing leadership whereas the US is moving to antagonize further the obnoxious Great Leader.

Population growth and urban development

One useful issue raised by Tony Abbott, Dick Smith and, with less coherence, by Pauline Hanson, is the size of Australia’s immigration intake. Do we want cities of Melbourne and Sydney to have populations of 8 million by 2050? Do we wish, under a high immigration intake scenario, seek to double our total population by then?  I definitely don’t. Our cities are large and congested now and a doubling of their population would make them unpleasant (and ultra-expensive in terms of house prices) places to live in – if not for me then for my children and their children. Moreover, the natural environment of Australia is one of the most remarkable on the planet – I’d like to conserve it as well as provide a home base for people.

Then there seem to me two ways out. Either one of two options: (i) Dramatically cut the immigration intake so that our population tapers off at a few more million than it is now – perhaps at 27 million. The immigration program would be designed to offset the significant emigration that occurs from Australia each year and from the shortfall in natural population growth required to maintain population size. Or (ii) Develop new cities at a sufficiently rapid rate so that net growth in the major population centers is reduced to zero. I prefer option (i) because I cannot see the option (ii) working satisfactorily.

The option of creating new cities would require the creation of 10 new cities (or the augmentation of existing small cities) by 2.5 million people each over the next 30 years of so.  It is a big task made difficult by the practical difficulties of socially-engineering where people will live.  This is the reason that academic areas such as “regional development” have fallen into such disrepute. Australia has only a handful of large cities now but the imperatives of doubling our population by 2050 would require the creation of 10 new cities the size of Brisbane or Perth.   Those who wish to pursue the high migration intake – the Housing Industry Association that represents the construction industry and the various business interest groups must explain clearly how this task will be carried out.  Otherwise, they must rationalize the creation of large megacities in all the current capitals.

The standard response on the left to such concerns is to claim that those expressing them are “racists” which is true in the case of a few but overwhelmingly untrue.  It is not the composition of the immigration intake that is being questioned here but its aggregate size and the implications of current intakes for how Australians will live in the future.  An additional foolish response is the claim that we need more young immigrants to balance the aging of our population.  This is Ponzi scheme reasoning  – let us take in more now to delay the problem that will be worse in the future because of our current efforts.  With a bigger population and a declining birth rate the problems will get increasingly worse not better.

A final argument is that by taking people from the overpopulated parts of the world (China, India, Africa) we relieve population pressures there.  That is true but, with reduced population pressures, these short term effects will be plausibly offset by increased births in those immigrant source countries.  China has already abandoned its “one child per family” policy and India will soon overtake China as the most populous nation on earth.   These countries will become “developed” over the next half century or so and will impose crippling demands on the global environment as a consequence.  They should, to the contrary, be forced to face up to their population problems now.

I used to believe that economic manipulations (entry charges, congestion taxes etc) could handle the issue of rapid population growth in Australia’s favor. I no longer do.  High house prices as a consequence of immigration-driven population growth as well as high rates of urban disamenities such as congestion and pollution are not being addressed by economic instruments such as taxes and charges. Indeed, I was naive to think they ever could be.   The charge towards a high population Australia needs to be stopped.  A small bunch of political figures are raising such issues and they deserve to be listened to.

Social media-induced failures in the market for news information

The web and social media, such as FB, comprise an innovation that, in some ways, makes us all worse off. For example, FB undermines the printed media because individuals almost endlessly provide hyperlinks to it, thereby providing an open access alternative to buying the content by, for example, purchasing a newspaper. The result is that the newspapers decline in circulation and suffer economic adversity for reasons linked to a failure in the market for information This, in turn, leads to cost cutting and staff redundancies in newspapers and other media which feed back into lower quality journalism, to lower quality pilfered links in social media and, ultimately, to a more poorly-informed public. News, once published, can be digitized in many ways and. to some extent, this always involves a public good type of market failure – one newspaper can pilfer from another, for example.  But this type of theft becomes much more severe when millions of web users have access to this type of pilfering by simply citing a hyperlink.

The only way to get, at least partly, out of this downward spiral is to get rid of the externality here by rigorously defending the property rights of the commercial media to the news they provide. That applies both to individual users of social media and to news gathering organizations that rely primarily on pilfered material for their such matter.

It is technically possible to prevent hyperlinks to published material but much harder to prevent lengthy quotation of pilfered material. Of course, no-one likes to pay for material that they are currently accessing for free but the alternative is an ever-diminishing level of effort in providing news and the end of such things as investigative journalism. This disadvantages us all because we all then operate “in the dark” in settings where a knowledgeable few can set the social agenda.

Kenneth Arrow RIP

Kenneth Arrow was, with Paul Samuelson, one of the two greatest economists that the world has known since at least the time of Lord Keynes.  I read of his death at age 95 this evening.  An astonishing man, he wrote on a myriad of aspects of modern economics and he wrote well and with great insight. A great applied mathematician he was also a skillful craftsman of the English (and French) languages. A   profound intellect, he influenced a whole generation of economists.

Simply put: I idolized the guy. Continue reading Kenneth Arrow RIP

Vietnamese civet coffee

Vietnam is the second largest coffee exporter but its coffee has a low international reputation and much of it ends up in instant coffee brews.  In fact, there is a substantial coffee culture in Vietnam with (non-alcohol serving) coffee shops operating everywhere (I made the unspeakably bad error of judgment of asking for a beer in one – I got it though the owner had to raid her husband’s supplies!).  Vietnamese coffee does take a bit of getting used to –  it has a thick somewhat chocolatey taste and is quite strong. But, like the best coffees served in the West, the best Vietnamese coffee is very concentrated and served in specialist coffee shops – one magnificent shop next to my hotel in Hue served far better coffee than in the up-market hotel next to it.  I grew to like Vietnamese coffees and will purchase them given half a chance.  Certainly worth a trial though they are different.

And the Vietnamese do sell the ethically challenging civet coffee which comes from the bowels of a civet cat who selectively choose the best civet beans and then excrete such. It is, in fact, literally “shit coffee”.  Against my better ethical judgment, I bought a packet at Hanoi airport. Good smooth coffee with, if anything, less of the chocolatey taste of the standard Vietnamese coffees but with a fairly intense flavor. These civets “generate” good coffee. The Economist article below provides a more complete review.

http://www.economist.com/blogs/prospero/2012/01/coffee-vietnam

Testing connection with FB

A major issue with my WordPress blog is its inability to consistently connect with Facebook whereI spend too much time these days. I have refreshment all settings and this post tests whether a connection has been achieved.  I used the WP blog for 10 years so I would dearly like to get things working again. Helpful advice appreciated.

What does Xmas mean?: Annual repost.

Xmas is a celebration of what is guessed to be the approximate birth date of Jesus Christ. It is an important occasion in almost all civilised societies for both Christians and Non-Christians alike.

In Australia the number of people who describe themselves as Christians has fallen from 71% of the population to only 64% in the 10 years to 2006. I have been a non-believer for my entire adult life so I am gradually acquiring more companions. As Kevin Rudd said recently, Christianity faces the prospect of being a minority belief – part of the ‘counter-culture’ – in Australian society. But Christianity remains by-in-large an important positive force in our society and Xmas remain important to many of us – both the secular and the religious.

I lack empathy with multi-culturalists and those from other religions who see the widespread respect paid to Xmas as something offensive to atheists and non-Christians. Given my early Christian upbringing I still feel comfortable celebrating the message of hope, forgiveness, friendship and kindness that Xmas brings to us. I have a long-standing respect for the values that the man Jesus Christ espoused. Most of all, the birth of a baby indicates the hoped-for possibility of living in a better world. The materialism associated with Xmas does make me reflect – but most of us enjoy giving and receiving gifts. One can be too puritanical about such matters. Most of us enjoy some of the incidentals of Christmas – carols being sung, food and wine being imbibed and homes being brightly decorated. At the very least these are a valued part of our cultural traditions.

The idea of hope associated with Xmas and the belief that the world can be a better place because of the birth of a boy is a beautiful parable. I do not believe that to appreciate the beauty of this notion that one, in fact, needs to accept the idea that the young boy is the ‘son of God’ or our ‘saviour’. It is enough to think about our prospects for renewal and for trying to live a life that reflects Christian values of kindness and forgiveness even if not of Christian theology.

No religion – Christianity included – should ever be seen as having the last word on anything. One of the great advantages of living in Australia is its openness and the freedom of choice it offers with respect to religion. But the wisdom of many religions, freed from their bigotry, can guide us towards living happier, more fulfilled lives. Whether you are thinking about what job you should take, what partner you should live with or how you should deal with the neighbours and with outsiders, the message of Christianity has something to teach us all. God might be irrelevant in all this – we are after all human beings – but the core message of Christians and the hope of Xmas is not.

Internationally diversifying your share portfolio

The case for diversifying your equity portfolio internationally is obvious given that Australian equities are such a small component on the overall international equity market and given the strong growth potential in many newly emerging markets.   One way of doing this – that I have in the past thought was a sound idea is to buy “low load” (low transaction cost) exchange traded funds from firms such as Vanguard.   I have increasingly developed reservations about pursuing this path.

Consider the VEU fund from Vanguard. It has very low management costs (around 0.15%) and covers all the world markets except for the US – investment in the US itself is covered by a variety of other funds.  It sell as around $58 Australian and is freely traceable at normal brokerage fees.  The difficulty for me is that it sell as a 61% markup to its asset backing.  Its popularity has made it expensive.

What would make sense here are funds that make available investment in the range of equities covered by VEU but which are available in perfectly elastic supply at a slight markup to asset backing.  That would facilitate diversification but without the hefty markup.

The difficulty here is that in a downturn the premium over set backing is likely to fall.  In a downturn the assets will be valued at less but the markup over asset backing would likely be less too  creating large capital losses.

There are a few investment funds out there that currently sell at a discount to their asset backing.  One is Argo Global which invests mainly in US infrastructure assets (electricity, toll roads, airports).  It is currently selling for around $1-70 but its asset backing is around $1-90.   It charges much higher fees (around 1%) and has nothing like the coverage of the Vanguard ETFs but, on balance seems to me a better bet.

The above is not to be construed as advise to buy or sell anything.  It is mainly intended to clarify my own investment thinking and to receive feedback.  I am not a qualified financial advisor.

Thoughts on Australian company tax reform

Introduction. One of the important constraints on tax reform in Australia is widespread ignorance about notions of tax incidence. A mistaken theory of tax incidence – the “flypaper theory” – suggests that taxes impact on those groups that they are directly levied on.  So, payroll taxes and superannuation levies fall on the companies they are levied on.  Economists call this type of incidence “nominal incidence” and distinguish it from “effective incidence” which shows who ultimately bear the impact of a tax.  Nominal incidence varies from effective incidence because agents can take actions that transfer the tax to others.  For example, to a firm a payroll tax and a superannuation levy are simply additions to the cost of labour employed. Firms, therefore, pay wages that are reduced by the size of these charges and the effective incidence of the tax is on labour, not the firm.  These are fairly obvious examples of the distinction between nominal and effective incidence that many will understand.  But some confusions are pervasive and are damaging to the case for sensible tax reform.

One of the worst confusions is with respect to company taxes – more specifically to taxes on the profits of incorporated enterprises with shareholders. Here there is a confusion about the effective incidence of a tax and an incorrect view of the way such firms operate. Let us first consider the case of corporations that are primarily domestically owned. We then consider the case of Australian firms where equity is primarily owned by foreigners.  Finally, we consider the role of government budget constraints.  Does cutting back on company taxes when governments have a binding need for a certain level of revenue, force reliance on taxes that are even more distorting than the company income tax?

These notes are subject to revision although I will note at the end any significant changes. This is work-in-progress.

Continue reading Thoughts on Australian company tax reform

Foolish Labor policy on natural gas

The Labor Party propose restricting natural gas exports from Australia to ensure greater availability (and lower prices) for domestic gas supplies.  This is a poorly thought through policy proposal.

The basic economics of international trade suggest we will export goods we can produce more cheaply than those produced in our export markets.   Therefore, when we do export  goods, the price will rise for domestic consumers assuming that a single price is charged both domestically and internationally. Moreover, competitive, profit-maximizing firms seeking to optimize their returns will force a single price.  Thus, local consumers are worse off as a consequence of exporting.  This is not only so for natural gas but for other products we export – beef, wine, and many other products provide recent examples.

Economics 101 teaches that these losses are exceeded by the gains to local producers who naturally earn extra returns from being able to export at higher prices. This is the source of what economists call the “gains-from-trade” in exporting.  Our consumers are worse off but our producers get greater gains.  We pay more for our beef when we export it but gain more than we lose through the increased value of our exports.

An exception to this argument can arise if the companies doing the exporting are multinationals who can transfer price away the profits they earn so that Australia gets no gains net on the supplier side and loses on the demand side as well.  Several points here. (i) If multinationals cannot transfer price and face the same tax liability as local firms on the true profits they earn then there is no problem provided that, when if they purchased the Australian assets, they did so at their true value accounting for their future export potential.   Cutting back on transfer pricing options or using tax-raising measures such as output- or revenue-based taxes are ways of addressing the transfer pricing issue. These are “second-best” policies that come into their own because true profits cannot be readily identified. (ii) The core issue of foreign ownership of natural resources such as mineral deposits (and land) needs to be addressed if transfer pricing cannot be addressed.  If foreign multinationals will pay premium prices for Australian natural resource assets simply because they understand they will be able to secure extra profits from cheating the taxman then there may be a case for imposing controls on such purchases. (iii) In practice, for natural gas sales, it seems unlikely that the issue of transfer pricing cannot be addressed so that issues of immiserising foreign ownership become less urgent in this case.

Chris Bowen and his AWU mate, Scott McDine, who wrote the AFR article I link to, want to set up a regulatory agency to assess the case for gas exports on the basis of the “national interest”.  These weasel words should send shivers down the spine of every thinking Australian.  They will certain scare off investment in this currently troubled sector of the economy.  Firms such as Santos and Origin Energy (both dominantly Australian owned) are already facing real difficulties – indeed issues of corporate survival – recovering the billions they have invested in natural gas because of the recent decline in the prices of gas.  The proposed Labor policy will increase the real problems faced by such firms and again Australia would shoot itself in the foot were such policies to be introduced.

These authors claim that other countries (particularly the US) do not allow markets to determine gas prices and restrict supplies onto international markets.  Those policies benefit Australia by providing extra returns to Australian exporters because of these artificial restrictions.  But the general point here is that Bowen/McDine are restating the oldest argument in the world for protectionism – we should do it because others do so.  This is nonsense. If other countries seek to damage their national self-interest Australia need not follow suit.