It's difficult for young investors to see financial booms as the events that sow the seeds of financial busts. But, without wishing to be too much of a grumpy old man at the start of 2006, there are two marvellous examples being played out now which highlight the point that all booms inevitably lead to trouble.
Case study number one is Patersons, the home-grown stockbroking firm which appears to have caught a case of what Briefcase hereby dubs the ‘Napoleon marches on Moscow syndrome’.
Case study number two is the wine industry, which has been in crisis for five years, and which now appears to have reached the ‘beam me up Scotty’ stage of calamity, as salvage attempts reach desperation point and silly things are said and, hopefully, not done.
• Number one
At Patersons, a basketful of woes is being slowly uncovered in the company’s Canberra office where there are allegations, and legal actions, by clients unhappy with the trading strategies of a Patersons’ broker, Eric Hawley.
Briefcase has no inside knowledge as to what Mr Hawley is alleged to have done, or whether he was doing little more than following the letter of an agreement he had with clients – to invest their money as best he could. The courts will sort that out.
But that is about as bad as it gets for Patersons, as the last thing a stockbroking firm wants is its name dragged through the courts – because the only thing a broker has to market is his good name.
For Michael Manford – the man who has done more than anyone to rebuild Patersons to the point where it is regarded as the best Perth broking firm – events in Canberra have become a nightmare.
Rather than celebrate the fact that he saved Patersons from disaster after a mass exodus of staff to Euroz Securities, and captured the high local ground once occupied by Hartley Poynton, Mr Manford is now destined to spend time (too much time) fielding questions from aggrieved clients, and the corporate regulators.
Sadly for Mr Manford he is probably acutely aware of what lies ahead. Hartley Poynton (either under that name, or as Poyntons, HP-JDV, Hartleys, whatever else) serves as a dummy run. Way back in 1998 a broker with Hartleys, Christopher Martin, deeply upset a client, Rahmat Ali, over dud share trades.
Years of legal actions, and associated publicity, did most of the damage to Hartleys, which was, at the time, also trying to morph itself into some sort of leader in the world of electronic, do-it-yourself, share trading.
The Patersons case and that of Hartleys might turn out to be completely different in a legal sense, but an obvious parallel is that both brokers expanded rapidly out of Perth, and both experienced troubles in cities in which they lacked local knowledge – just as Napoleon lacked local experience of Moscow’s winter weather in 1812.
There is also a sad inevitability about how the Patersons/Hawley case is likely to unfold, largely because Patersons is from ‘over here’ and the national media is ‘over there’. This point was made in a sobering story by Canberra journalist, Mungo MacCallum, who says he has lost $400,000 as a result of share trades he did not authorise – adding a personal note of pain that will be repeated.
While some readers may not appreciate the comparison between Patersons’ woes and those of Napoleon, it all comes back to the problems caused by stretching the lines of communications too far. It’s impossible to supervise everyone all the time, so you have to trust the troops to do the right thing when they’re over the horizon.
For decades, Briefcase case has watched examples of Perth companies expanding east and hitting trouble. Hartleys was a glaring example, but it followed in the footsteps of Maurice Walsh, who thought he could teach Melbourne a thing or two about retailing.
And then there was the great one himself, Alan Bond, who thought he could teach the world how to make beer, mine gold, pump oil, float airships, and run a television network, all at the same time.
To be fair to Perth companies, similar examples of the ‘Napoleon syndrome’ can also be found when Sydney and Melbourne companies try to go global. Just ask anyone at National Australia Bank about running a home mortgage business in the US, where $4 billion was lost in the blink of an eye.
• Number two
Most wine drinkers, and every wine maker, understand intimately how good, or bad, things are in the wine game. Depending on where you sit, the industry is terrific right now because booze is so cheap, or a disaster because there is chronic over-production.
It is the excess supply of grapes which has led to the second example of a boom producing a disaster, and the ‘beam me up Scotty’ solution proposed by the Wine Growers Association, which wants a federal government hand-out to “pull” excess vines.
When Briefcase read this suggestion a few days into the New Year it triggered a reflex glance at the calendar to see whether 2006 had moved so quickly that we had already reached April 1.
No, it was still January and the story about pulling vines was still there in black and white. The staggering lack of logic was also still there to be seen, as was the way the wine industry serves as a stark reminder of the central theme of the argument that all booms lead to trouble.
Everyone, even Blind Freddie’s dog, can see that the problem with wine is excess production. The simplest interpretation of this situation is too many producers chasing too few customers.
But there is a subtle (and critically important) variation on this situation. It is too many ‘high cost’ producers chasing too few customers. Purists will dispute this point. They will argue that there is something noble about the wine industry and that the problems really stem from ‘lifestyle’ players in the game and, worse still, bulk grape producers, whose product goes into making cheap bombo.
The argument from the ‘beam me up brigade’ is that these people (translation: people not like us) should be encouraged to quit the industry, with a little bit of taxpayer money, leaving the way clear for the self-anointed experts and leaders to jack their prices higher.
Sorry chaps; this is business, as it should be, and a spectacular example of a boom busting, and continuing to bust. Because at the same time as a there are calls for government assistance there is continued, aggressive, vine planting by tax-driven investment schemes such as those run by Great Southern Plantations.
What a hoot it would be to see the government forking out cash to pull vines while government-encouraged tax schemes plant more – boom and bust at its best.
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“All you need in life is ignorance and confidence and then success is sure.” Mark Twain
