Posted by Andrew Pegler on May 04, 2011

There’s a brave new world coming and it wants your leftover pizza.

We live in a wasteful world. But imagine if all this waste was not only useful but a driver of the global economy. Well you’ve just glimpsed the future, according to the writings of James Bradfield Moody and Bianca Nogrady in The Sixth Wave.

Since the Industrial Revolution, the economy has surged forward in waves of innovation, known as Kondratiev waves after the Russian economist who first identified them in the early 1900s. Kondratiev waves are periods of time – an age if you like – characterised by massive changes in technology and in the markets that fuel and fund it. Five waves of innovation have occurred, starting with the Industrial Revolution:

• The Industrial Revolution – 1771
• The Railways – 1829
• Electricity – 1875
• Oil – 1908
• Information and Telecommunications – 1971

These waves usually start in a time of turmoil, inspired by the need to solve a problem. They usher in a period of stability and prosperity before entering a final stage characterised by global economic downturn. According to the authors, we are now moving towards the end of the communications innovation wave.

And the sixth wave is…

The perfect storm of climate change and dwindling resources is driving the sixth wave, which will be about doing more with less, i.e. resource efficiency.

Speaking of efficiency, did you know only 15% of the fuel energy in your car actually goes into running it? The rest is lost as heat, pressure and noise. Whatever your politics, most agree the days are numbered for carbon belching into the atmosphere uncontested. Right now the smartest kids in the room are throwing lots of cash at renewable energy technologies – (a lithium miner in WA just won an award for its groundbreaking project using solar PV and wind in a hybrid model to reduce its reliance on diesel). Amongst other projects, investors are also funding ways to extract value from landfill waste and to control water evaporation from dams.

With the world’s population expected to hit eight billion by the end of the decade, and a developing world keen to enjoy the high life, the future must lie the clever use of our dwindling resources.

Andrew Pegler – 21 January 2011

Sorry folks, the pre-GFC halcyon days of low interest rates are gonski.

Wayne and crew may be getting on their high horse and making it easy to transfer your business between banks, but they won’t have a significant effect on the cost of borrowing.

Cost of borrowing? Our banks have to pay interest rates on the money THEY borrow, from the big banks overseas. Yep, just like us, our banks borrow too. That’s because our collective deposits are never enough to cover our collective demand for loans. To this end our banks will borrow $130 billion over the next year.

Pre-GFC, non-banks like Rams borrowed cheaply on global markets and undercut the major banks. They cashed in on the tides of fantasy money sloshing about the global financial system and, in turn, so did we. That tide has since gone out.

To quote ABC’s Stephen Long, “It was a time built on a lie and the cost of the money to banks was underpriced and wasn’t sustainable”.

The disappearance of this cheap money means higher lending rates. It also means less competition in our banking sector because non-bank lenders can’t undercut the big boys, and errr… they ain’t around anymore anyway. Additionally, overseas borrowing is now more expensive for our banks, as per the laws of supply and demand, thanks to the various bailouts in Europe, which have soaked up a lot of money.

On the subject of interest rates, HSBC economist Paul Bloxham reckons they’ll rise soon. Interest rates will be a weapon of choice for bludgeoning down the inflation stoked by flood-inspired rising food prices. And with an economy close to full employment, expenditure on reconstruction and repair will push up wages, further increasing inflation.

BTW, I am sticking with my prediction: the cash rate will end the year at around. 5.5%.

Andrew Pegler – 7 January 2011

Within a decade we’ll be sentimental for the days when the U.S. was economic superpower and global stabiliser.

The peace and prosperity we’ve enjoyed since the Berlin Wall fell in 1989 (and arguably since the end of WWII) is unparalleled. But like air, you’ll only notice when it’s gone. Having world-leading powers – Germany, Japan and the U.S. – all bonded by the mutual assurance of prosperity and peace will come to be seen as an historical oddity.

The future won’t be so agreeable. China, India and Brazil will want to do it their way. (And keep your eye on Mexico; it’ll be a force if it can control the drug cartels.) Within a decade we’ll be sentimental for the days when the U.S. was economic superpower and global stabiliser.

Julia Gillard has declared 2011 her year of action. A big part of that will be putting a price on carbon. I’ve explained an ETS here. Dragging the nation into such huge change will be bigger than, but similar to, the introduction of the GST. Prices will rise and politicians will spend taxpayer money to compensate those with the most clout at the ballot box in 2012.

Interest rates? After sacrificing the goat and trawling through the entrails, then reading the tea leaves as reflected through a crystal ball made in China, I reckon the only way is up. Barring unforeseen invasions by time travelling dinosaurs with thermonuclear lasers for eyes, the cash rate will end the year at about 5.5%. ‘Nuff said.

The U.S. now lags China, Japan, India and South Korea as a destination for Aussie exports. Rapid growth in Asia, led by China and India, will continue to drive Aussie growth in 2011. In other words, we no longer catch a cold when the U.S. sneezes.

The banking competition debate will heat up as Wayne tries to construct the 5th pillar. Burned by Kevin’s crash-or-crash-through approach to the mining super profits tax, he’ll proceed slowly, get punters onside and try take the sting out of the Big Four’s inevitable PR counter attack. By the end of the year the banking landscape will be altered, by the people for the people.

The Australian economy will remain the envy of developed nations thanks to farming and mining driven by the deluge of rain and the torrent of demand, respectively. Inflation will be contained by three key factors: a high AUD subduing prices, sluggish domestic demand and the quirks of a multi-speed economy.

The AUD in 2011? The Chinese will probably succeed in slowing their growth to around 8%, which is still very good. This will see us grow about 3%, which is also very good. Add in low unemployment and massive demand for our dirt and rocks, and the AUD will fluctuate between .96c and $1.10. Mind you, this could all unravel if global growth weakens, another sovereign debt crisis unfolds, U.S. interest rates rise, and Australia’s and/or China’s property bubbles burst.

Stay gold people, and keep silly this safe season.

Andrew Pegler – 7 January 2011

Within a decade we’ll be sentimental for the days when the U.S. was economic superpower and global stabiliser.

The peace and prosperity we’ve enjoyed since the Berlin Wall fell in 1989 (and arguably since the end of WWII) is unparalleled. But like air, you’ll only notice when it’s gone. Having world-leading powers – Germany, Japan and the U.S. – all bonded by the mutual assurance of prosperity and peace will come to be seen as an historical oddity.

The future won’t be so agreeable. China, India and Brazil will want to do it their way. (And keep your eye on Mexico; it’ll be a force if it can control the drug cartels.) Within a decade we’ll be sentimental for the days when the U.S. was economic superpower and global stabiliser.

Julia Gillard has declared 2011 her year of action. A big part of that will be putting a price on carbon. I’ve explained an ETS here. Dragging the nation into such huge change will be bigger than, but similar to, the introduction of the GST. Prices will rise and politicians will spend taxpayer money to compensate those with the most clout at the ballot box in 2012.

Interest rates? After sacrificing the goat and trawling through the entrails, then reading the tea leaves as reflected through a crystal ball made in China, I reckon the only way is up. Barring unforeseen invasions by time travelling dinosaurs with thermonuclear lasers for eyes, the cash rate will end the year at about 5.5%. ‘Nuff said.

The U.S. now lags China, Japan, India and South Korea as a destination for Aussie exports. Rapid growth in Asia, led by China and India, will continue to drive Aussie growth in 2011. In other words, we no longer catch a cold when the U.S. sneezes.

The banking competition debate will heat up as Wayne tries to construct the 5th pillar. Burned by Kevin’s crash-or-crash-through approach to the mining super profits tax, he’ll proceed slowly, get punters onside and try take the sting out of the Big Four’s inevitable PR counter attack. By the end of the year the banking landscape will be altered, by the people for the people.

The Australian economy will remain the envy of developed nations thanks to farming and mining driven by the deluge of rain and the torrent of demand, respectively. Inflation will be contained by three key factors: a high AUD subduing prices, sluggish domestic demand and the quirks of a multi-speed economy.

The AUD in 2011? The Chinese will probably succeed in slowing their growth to around 8%, which is still very good. This will see us grow about 3%, which is also very good. Add in low unemployment and massive demand for our dirt and rocks, and the AUD will fluctuate between .96c and $1.10. Mind you, this could all unravel if global growth weakens, another sovereign debt crisis unfolds, U.S. interest rates rise, and Australia’s and/or China’s property bubbles burst.

Stay gold people, and keep silly this safe season.

Andrew Pegler – 3 December 2010

How did Ireland suddenly go from the Celtic tiger to the Celtic basket case?

It grew too fast

During the 1990s to early 2000s Ireland went from being the poor man of the EU franchise to one of its richest. Before then it was a bit of a joke. In fact there was an industry around Irish jokes (“Did you hear about the Irish banana business that went broke because they threw out all the bent ones?) But then it embarked on a reform program to attract foreign cashola and lowered company tax to 12.5% and “loosened” industrial policies. And it worked. Microsoft relocated there and a few other big players made sizeable investments. In addition it had joined the EMU in the late 90s giving it access to European capital markets, not just Ireland, and rewarding it with very low mortgage rates. GDP was averaging around 8%, everyone had well-paid, high-tech jobs, and low interest rates fired up an inevitable construction boom. The Guinness was on the “Celtic Tiger” and prosperity was in the Éire.

The familiar story of credit being too easy

The aforementioned low interest rates saw the public borrow and spend beyond their means and the banks lend to people they should not have. Meanwhile the government didn’t do things it should have like raise tax rates or better regulate credit. And with its banks up to their necks in the housing boom, when that went bad they fell over.

Its economy was too specialised

Ireland was precariously dependent on international investment, banking and construction, all of which had already started to take their bats and balls and gone home when the GFC slammed the place, bursting its real estate bubble, busting its banks and sending the economy to the dogs. The unluck of the Irish.

The AUD$114 billion or so bailout package by the (European) Commission and the IMF, in liaison with the ECB (European Central Bank), has been a pragmatic response to the threat of contagion. Ireland’s largest creditors are Germany and the UK and an Irish bank default would have damaged those banking systems at a time when they didn’t need it.

The big take-away for Australia lies in the perils of a specialised economy. Right now we’re knee deep in resources boom mark II but what are we going to do when the music stops? We ought to be ploughing government revenue into subsidising innovation in our manufacturing and tourism sectors which, after years of a high AUD and the flood of investment into mining, will have withered into something unrecognisable. Guinness anyone?

Andrew Pegler – 26 November 2010

Are the banks just gouging scoundrels or is there something to this “funding costs” malarkey?

As we all know the big four banks shared a $22 billion dollars profit this year, which is pretty good work if you can get it. The Super funds were happy and shareholders were grinning, but then they went and wrecked it all by saying something like let’s hike above the RBA. The torrent of abuse from the general public has since steamrolled into a national argy bargy that even went global as it sucked the oxygen out of Gillard’s overseas jaunt. While the punter in me hears the howls of outrage, the contrarian was keen to explore this curious claim that the big four had hiked beyond the RBA because of these mysterious “funding costs”. So what the hell are they?

PricewaterhouseCoopers (PWC) has just finished a door-stopper on the major banks’ results and one of their pointy heads fronted up to Alan Kohler on Inside Business the other week to explain what “funding costs” mean. Here’s the plain English translation.

The cost of borrowing has gone up

Banks get some of the money they lend to us from big banks overseas. This source of green has become more expensive since the GFC forced a re-assessment of global risk. In other words, the fear that it may all go pear-shaped again has forced bankers to up the interest they charge other banks to cover their behinds. The big four are just passing this on.

A war for deposits

Another large part of the funding puzzle is deposits. The GFC has driven up overseas funding sources, forcing banks to rely more on our humble deposits. These longer-term sources of funds, like term deposits that can go out to five years and are highly likely to be rolled over upon maturity, are making up this shortfall. This has fuelled a price war that’s forced banks to pay more for our deposits.

Bank expenses are rising

According to the PWC report, bank expenses in general rose by 7.5% in the last two years and they gotta find ways to pay for these.

People aren’t borrowing much

Home lending hasn’t been so slow since the early eighties and business credit has gone backwards for the last two years. Over the past 25 years, credit has grown 12% a year but next year it’ll only be about 5-7%. Credit (lending money) is basically how banks make money.

Hopefully that gives the contrarians out there something to mull over.

Andrew Pegler – 12 November 2010

James Wolfensohn – not the 1950s Chicago blues legend – reckons Australia is missing the Asian boat and that the US will be stuffed for years.

James Wolfensohn is an Australian-born investment banker who became president of the World Bank in 1995. He reckons Australia hasn’t really woken up to the global shift east yet. The “Wolf” reads a lot. He gets out heaps. And he’s just written his autobiography called A Global Life. According to the Wolf our failing is to do with education. “The interest of young Australians to study in Asia is less than it should be given the huge economic dependence of Australia on Asia as a buyer of natural resources. We should be putting a tremendous effort into making sure that our young people understand those cultures better.” He has a point. So go east young men and women!

He’s also pretty downbeat on the US economy. “For the next two or three years growth will be two or three per cent, which won’t get them out of this problem”. That problem, according to the Wolf, is 10% unemployment and a further 7% have either fallen off the radar or can only get a few hours’ work a week. That makes near 17% unemployment. The Wolf also estimates that by 2050 over 60% of global GDP will be in Asia and points out this last happened in 1815. FYI in 2000 80% of the world’s GDP came from the US, Europe and Japan.

For what it’s worth here’s an idea for Barack. In an effort to kick start your ailing economy, shift that stubborn 10% unemployment, offset your crippling national debt and postpone the looming national identity crisis that will come as global power moves inexorably from west to east, the US should consider obtaining an Avon distributorship. I’m sure Hilary will be busting to hit the road and sell high-quality cosmetics and perfumes, particularly the bath and body care ranges. Vice President Joe Biden could run the online shop and Ben Bernanke could manage the customer relationships with China and India.

I will be in my caravan.

And in other news… the aforementioned US economy grew 2% over the last quarter up from 1.7% in the quarter before that. The biggest driver of demand there, consumer spending, i.e. people buying stuff, rose a tad but continues its sluggish form compared to past deep recessions.

Should Glen Stevens and the RBA board be stamping our interest rates “Made in China”? Me thinks so.

China just overtook Japan as the world’s second-largest economy and this export-driven inexorable rise of the dragon continues to laden this lucky country with a largesse of fortune cookies. Dirt? We got heaps of the stuff! Coking coal, iron ore. Natural gas? More than you poke a Bunsen burner at! And then there’s our meat, wheat and the odd treat. China’s demand-driven growth will continue to underpin demand for all this stuff and barring a global catastrophe (rogue asteroid, volcanic explosion bringing on a new ice age or Lady Ga Ga coming out as an alien) the outlook for the little economy that could is pretty damn good. And then there’s India coming online – no need to curry that favour. But if there’s a dark side to this moon it’s that rates could stay up for ages.

Why? Economists are a nervous bunch, especially when the economy grows too fast. When this happens demand for goods and services grows faster than supply. FYI goods are those results of economic activity you can drop on your foot, services are things you can’t. When goods and services grows faster than supply there is a scarcity – the laws of supply and demand kick in and prices go up, which is what inflation is.

So how do you control inflation? That’s right folks, good old interest rates. Higher rates mean less people want to borrow and that means less economic activity and therefore less inflation. Capice?

In this post-GFC resources boom mark II the world is throwing money at us for our dirt and other goodies. This in turn is boosting our incomes, and also encouraging the big mining companies to make massive, long term infrastructure investments. And all this action means spending is likely to grow faster than production, which could very easily unleash the inflation genie.

Just how high rates will need to go to put a cork on all this fun remains to be seen. At least one ex RBA bigwig reckons there’ll be four increases between now and the end of next year.

Mmm � perhaps we should get our trade figures made in China too. I hear 8 is highly sought after.

In other news … sex sells! SEX.COM could be worth up to $13m when it goes under the hammer. It last sold in 2006 for a steamy $14m, but resurfaced in July after its owner went belly up. FYI Insure.com went for $16m in 2009.The question “what’s in a name?” never seemed so relevant eh?

Andrew Pegler – 15 October 2010

With so much talk about interest rates I thought it apt to take a look at some of the basics of the whole shebang.

What’s a central bank?

This is a country’s primary monetary authority. Ours is called the Reserve Bank of Australia, known as the RBA. Other examples include the European Central Bank, the Bank of England and the Federal Reserve in the US. Central banks are busy bees. They issue currency, hold banks’ compulsory deposits and, most importantly for our purposes, set interest rates. Like most rich countries ours is independent of politics so it can’t be dictated to by the PM or anyone else. That way we usually get what is best for the economy, not short-term political objectives like lowering rates during an election campaign.

Who are these people?!

The nine members of the RBA board come from business and academia the board’s only women is Jillian Broadbent AO. They meet on the first Tuesday of every month to work though a few cups of tea and decide to cut, raise or leave rates as is. They do this after taking a good look at the latest inflation figures, economic growth, employment, home loans, building activity and how much people are spending on consumer goods. They also look at what’s going on overseas and how that will affect us. The board members are very smart, they get out a lot.

This is in your interest

As I said, the RBA is our central bank and it – not the government – sets interest rates. There are a few different kinds of interest rates but the one we’re dealing with is called the cash-rate, which is the one that influences mortgage, loan and deposit rates. The RBA uses interest rates to control economic activity. It raises them to keep the inflation genie square in its bottle and drops them to stimulate demand and investment. The principle is that if rates are higher then less people will want to borrow money and therefore economic activity will slow and that means prices slow and that means inflation slows. And vice versa. When they’ve done deciding our fate the RBA sends out a press release outlining the new rate, and why. A few weeks later they release the minutes of the meeting, which are often very revealing about what individual members of the RBA board thought and why.

Hopefully that clears that up.

Andrew Pegler – 24 September 2010

It seems like just a few weeks ago that the dollar was sub USD 90c…hang on that WAS just a few weeks ago!!

Yes folks, the little-dollar-that-could recently surged past .96c in a 26-month high. But, as we have discussed, this comes with benefits and pitfalls. Ahh, such is life.

The AUD has risen more than 17% since May against the US dollar, thanks to a strong domestic economy, a weaker US economy and relatively higher local interest rates in comparison to those in the rest of the world. This creates demand for the AUD, further pushing up its value. The laws of supply and demand again, eh?

The good bits

Get on a plane. Overseas travel is cheaper because a higher dollar means you literally get more bang for your buck. So right now your massage on that idyllic Bali beach just went from not much to hardly anything and it’s time to book in that Easter Island lunar eclipse festival (but avoid the brown mushrooms). Meanwhile imports from iPods to Belgian chocolates and from nuclear submarines to BBQ’s big enough to see from space are also cheaper as the dollar climbs in value compared to other currencies. And, while the RBA doesn’t target a particular exchange rate, cheaper imports tend to keep inflation lower. So that’s a nice win� or is it? According to Glen it ain’t and he’s gone and spoilt the party again with a warning that interest rates are heading up. That cheaper Plasma means nought if you have no home to watch it in because you defaulted on the mortgage.

Piggy in the middle

In the middle are the farmers and the diggers and drillers who get a mixed bag. On the one hand, what farmers produce is less competitive against overseas buyers but on the other hand that American-made tractor has never been cheaper. Meanwhile, BHP and Rio Tinto are more insulated because they sell our dirt in US dollars. But they take a hit when they repatriate their earnings.

The badder bits

The regular currency whipping boys of manufacturing and tourism cop another hammering with the rise of the AUD. Manufacturers who export or compete locally with cheaper imports are squeezed as their product becomes more and more expensive. And the same goes for tourism.

The future?

The other week Bloomberg claimed the Aussie Dollar was the most overvalued currency in the world and with China taking new steps to reign in its property bubble and the bond market starting to waver there is fear in the air, folks, and the herd is getting skittish. That means a potential flight to the USD which will see the Aussie go down and rates to go up – a spiral that could get very ugly, very quickly.