04/02/2010 - 00:00

Are Australians living in a fool’s paradise?

04/02/2010 - 00:00

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The after-shocks of the GFC could be extremely painful.

JAPAN, which remains one of Australia’s most important customers, was described last week as “a bug in search of a windscreen”, a delightfully graphic description of a country neck-deep in debt, and in danger of drowning.

The author of the bug comparison was John Mauldin, an American, but a widely read and very talented American, who carries the burden of living close to the epicentre of the global financial crisis.

For Bystander the author, his location, and his criticism of Japan, and other countries in the Northern Hemisphere, are a problem.

If Mr Mauldin is correct, then the after-shocks of the GFC might prove to be more painful than we are being led to believe, especially as he tagged his latest letter to investors ‘Thoughts on the end game’, a discussion on how the world will struggle to repay the $2 trillion in debts incurred to avoid (or should that be delay?) a prolonged slowdown.

Some countries, Mr Mauldin says, are closer than others to a crisis point, “but the entire developed world is lurching, in almost drunken fashion, towards our economic denouement (finale).”

It is gloomy stuff, which sits oddly alongside how people in Australia, particularly Perth, see the future. Here, it is boom-time, again.

The problem that keeps Bystander alert is whether both points of view, gloom versus boom, can be correct at the same time – or are we looking at a north versus south (old world versus new world) divide?

There are two plausible explanations of what’s happening.

Either Mr Mauldin is too close to the financial disaster zones of New York and London and cannot see that regions such as Asia and South America are cruising ahead without the traditional economic leadership of the US and Europe; or, we’re living in fool’s paradise and the GFC was such a big event that it will eventually claim even the extreme optimists in our part of the world, including China.

The downside of this discussion, which incorporates the problems of unwinding government stimulus packages, rising interest rates, and repaying debts through higher taxes, explains why the stock market has fallen sharply in the first weeks of the New Year.

But there is another possible explanation for the extreme gloom, and one that Bystander first explored in the early days of the GFC. It is the location of most English-speaking financial commentators, and most of the world’s news media – they work in the same cities where maximum damage has been incurred.

In other words, if you live in London or New York, the view is awful. Business continues to struggle. Jobs are not returning, and it’s a freezing cold winter with short days and grey skies. Little wonder you can only see a glass almost empty.

The problem for Australia, especially for investors trying to guess which way markets are going to move, is that while we are an island it is hard to imagine that we can remain an economic island, immune from the problems of the Northern Hemisphere.

It was in seeking some sort of balance that Bystander came to the view that the crisis, like a fever in a hospital patient, has passed, but the recovery process will be long and painful – especially if the Japanese bug hits that windscreen.

Men overboard

IF knowing what lies ahead is tricky for investors, and ageing scribblers, spare a thought for those one-time “masters of the universe”, company chief executives who have suddenly discovered that they are an endangered species.

Three examples of ‘men overboard’ illustrate the point that life in the executive suite is no longer quite as sweet.

John Parker, managing director of Kalgoorlie-focused Norton Gold Fields, left suddenly on January 14. On the same day, Kevin Tomlinson, announced his resignation as chairman of Medusa Gold, and on January 18, Arthur Hood, quit his job as chief executive of Lihir Gold.

There’s a pattern there. In fact there are several patterns.

Firstly, all three men were helping run gold mining companies. Two of those companies, Norton and Lihir, have had problems in their pits; Norton at the Paddington mine, Lihir at Ballarat. Medusa, however, is performing strongly.

The mid-January departure points are also significant. The start of a New Year is a traditional time to plan for the future.

But another common point is that the departures have occurred at what might be called a safe time. Directors and senior managers departing during the great uncertainties of 2008, or 2009, would have sent a signal begging to be misinterpreted by the market.

Bystander’s motto is: if you see three similar events, expect more.

Management in 2010 will be a challenge as impatient (and greedy) investors conveniently forget the troubles of the past two years and demand super-human performances and fat profits to make up for lost ground.

Chief executives might get paid a lot but their career expectancy has just been shortened.

Warning on lithium

FOR every resource stock investor getting excited about lithium – a metal said to have a brilliant future in the batteries of electric powered cars – comes a second warning flag from someone who knows what he is talking about, Toyota Motor’s top battery man.

Koei Saga told the media pack at a Detroit car show in mid-January that lithium-ion batteries were important for the future of electric cars. But then he added that, while they were a step forward in battery technology: “we need batteries that offer far superior performance”.

In other words, lithium is the hot battery-metal today, but companies such as Toyota are looking beyond lithium.

That warning from the demand side of the lithium equation comes on the heels of rising South American production of a metal that is easy to mine (scrape the top of a dry lake bed in the Andes).

When there are issues on both the supply and demand side of a commodity it’s best to see any investment as a trading opportunity, because it will be a long time before the dividend cheques flow.

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David Ogilvy

 

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