Home > The EYE-BALL Herman O'HERMITAGE > EYE-BALL’s Herman on – 2012 Overture: Twiggy – a metaphor for wafer thin margins … RBA further stimulates economy surprising the stock market!

EYE-BALL’s Herman on – 2012 Overture: Twiggy – a metaphor for wafer thin margins … RBA further stimulates economy surprising the stock market!

October 3, 2012
Links to Previous ‘Herman’ Posts:

2nd Oct – The All Ordinaries is a totally misleading index and Australia’s lack of domestic Savings!

18th Sept – A Microcosm of Our Democracy – Auburn City Council elections.

28th Aug – – 2012 Overture – The Northern Fall (Autumn) –

17th Aug:  – A Political Alternative – Australian Community Party –

Aug 6th:   – Shang Yang’s good governance – or is it good faith?

July 21st:   –  Micro Economics – Thoughts and opinions on the Energy Debate!!!

July 18th:   –  A Chronology of Farce – and of a Government who Wonders Why Their Opinion Polls are so low.

July 4th:   –  2012 Overture – The Northern Summer Arrives –

June 16th:   2012 Overture – The Greek Elections

June 2nd:   Creative Destruction …

May 26th:   White Collar Crime – Craig Thomson and Peter Slipper … or just Federal Parliament?

May 17th:   The 2012 Overture Act III

Apr 23rd:   An update on the French Presidential elections and other

Apr 21st:   A Philosophical Appraisal of Social Economic Index… to Capture Wider Social Well Being.

Mar 26th:   The 2012 Overture – A Crappy New Year – Part III.

Feb 14th: Democrazy Part XV – Clinging to Power.

To see more EYE-BALL ‘Herman’ posts:

click here …

2012 Overture: Twiggy –
– a metaphor for wafer thin margins … RBA further stimulates economy surprising the stock market!
| Author: EYE-BALL’s Herman | 3rd Oct 2012 |
The October 2012 RBA official interest rate cut yesterday comes amongst great conjecture.

Some outcomes might include:

  • It will harm those on retirement and savings based incomes. (fiscal drag).
  • It won’t do anything to really help the very high domestic household debt factor (a drop in the ocean).
  • Base metal prices are international factors.
  • The low official rates of the US and Europe, this interest rate differential, or the disconnect between currency and commodity prices is an international measure of Australia’s fiscal success.
  • Australia already has poor housing affordability coupled with high household debt, mean it would be dangerous to prime real estate prices.
  • Conversely there are more rational and less emotional arguments like job prospects are weak, inflation is contained, GDP is likely trending lower by economic modelling, therefore the only real stimulus lever is interest rates.

Now the market predicts further policy easing in November.

There is one more argument not so openly discussed – that being election cycle.

By Federal budget time 2013 Australia will be well into campaign 2013 (expected in the late winter or early spring of 2013).

The RBA believes it needs to be politically neutral, therefore stable interest rate policy, hence the timing of expectation in interest rates implicit in the futures market.

By election day 2013 the post mortems on Australia’s mining boom of the noughties will be in full swing. New research papers and thesis will be complied on what happened, why, could we have done better, what lessons have been learnt. That too will be the environment when the Federal government will be tested as economic managers. Already many sceptics are questioning this year’s budgetary outcomes (the economic assumptions employed).

Predicting the outcome of the next Australian federal election is not clear. An incumbent government that no one listens to or trusts, and an opposition that equally struggles to gain traction (too often reverting to – go back to the Howard policy).

Why do we need to wait another decade or so for the next generation spruiking their acumen and prowess promising solutions based in latest research/technological change? What we really perceive is distortion of the realities while now facing the bust of Australia’s 21st century mining boom. Can we find a messiah? (An adequate leader will do!)

As things stand our export of LNG is still looking OK, and alumina and copper and precious metals will continue to remain relatively strong. The real bust centred on the decrease in demand and therefore price for Australia’s iron ore and coal. Currency being driven down by commodity prices but up by economic credibility and high relative interest rates, and this Quantitative Easing (QE – US and Euro devaluing or managing their currency).

Australia’s gas industry, indeed the world’s gas industry will continue to excite for the next 2 decades, driven by excessive demand for dwindling oil reserves. Gold in the era of quantitative easing is driven by being the world’s reserve currency. So are several other base metals. Hard commodities are a better store of wealth than currency or other currency linked paper assets in times of economic uncertainty. However in the downturn the re evaluation of all assets occurs, including processes, valuations and which markets will recover first. Maybe even QE will be correctly named currency devaluation (or intervention) in the floating exchange rate era.

As Australia’s LNG industry goes from development to export stage; construction jobs will be terminated. Therefore we need new construction start ups to absorb those construction jobs or there will be an oversupply of those jobs to be absorbed into other sectors. There are other similar issues regarding jobs in other sectors.

Does it seem trite that one of the first projects of Australia’s massive pipeline of resource developments to be shelved was expansion of BHP Billiton’s Olympic Dam at Roxby Downs in SA? The Olympic Dam mine produces silver, copper, uranium and gold, 4 of the less turbulent base metal prices and therefore insulated markets.

  • It has taken 3 decades to get the Olympic Dam resource development to this stage. It has grown out of virtually nothing, the satellite community of Roxby Downs. Politically in South Australia those outcomes are very sensitive.
  • In the early 80’s Roxby Downs was owned by Western Mining. Could Western Mining have developed it as a stand-alone company, or did it require the balance sheet strength of BHP and their highly developed risk management systems to develop the resource?
  • Until about 2000 and the reverse takeover of BHP by Billiton as an entity BHP was confused as to whether they were a diversified producer or resource exploiter or commodity trader. In fact BHP’s Enterprise Wide Risk Management (EWM) system was started in about 1997 and was not fully rolled out until 2002. At that time BHP was still weakened by the massive write downs of Escondida and Magma Copper. They purchased Magma in 1995 and closed those operations in 2003.

No one for one second has anyone hinted that things are so dire at Olympic Downs that the project will be moth balled or closed. If anything the exact opposite. Olympic Dam is very politically sensitive. Today median house prices in Adelaide according to RP data are the strongest of all capital cities.

There are far too many considerations as always. Generally they are situation specific, like BHP’s low dividend and capital retention over recent times had lead to suggestions of a large return of capital to shareholders in the light of reduced capital expansion plans. I don’t believe so. As part of Billiton’s reverse takeover, BHP will use this downturn in economic cycle to appropriate this investment war chest to further dilute Australian equity in what was once termed “The Big Australian”.

In this coming shake out there will be reduced return on capital (EBITDA), then there will be selective stock buy backs, then there will be selective buying of the best of the failed or cheap competitors. This selective buying includes an array of investment options, including in Africa, Central Asia or South America.

Australia (resource based economies) now face this while the States have their downturn continuing from 2008 and the Mediterranean States of Europe keep lurching to greater crisis.

The USA has been band-aiding their problems all year believing that election cycle will bring fresh policy initiative. Japan has not really recovered from 1991. Now Australia and other resource based economies will join them. Reduced or stagnating growth.

China will shift to domestic demand, like health and education, maybe even environment. That is maturing of industry and will continue to lift China’s productivity, albeit slightly more modestly. A more developed economy, by western standards.

At yesterday’s inaugural John Downer lecture at Adelaide University former PM John Howard said about China, maybe soon the world’s biggest economy, but never the world’s richest economy – (while they still employ such authoritarian (centralist) government).

This is all Darwinian theory under the guise of Capitalism “Survival of the Fittest”. The rise and fall of civilisations continues to evolve.

October 2nd’s High Court appeal over a full Federal Court decision between ASIC and Andrew Forrest over whether Forrest mislead the market will not alter much the course of Fortescue. Andrew Forrest said the legal issues have been distracting. That will always be the truth regarding litigation. Twiggy now has more time to focus on production and sales.

Much more importantly for Fortescue is the recent news that their break even level on iron ore production costs is at $110 per tonne of ore. They were forced to refinance short term facilities into longer term financing lead managed by J P Morgan and Credit Suisse. In this process J P Morgan and Credit Suisse have bought themselves a seat at the ultimate carve up or restructuring of Fortescue. Is Fortescue attractive to BHP. I believe for BHP there will be richer pickings. The presence of Credit Suisse might suggest interest more akin to Xtrata, but J P Morgan has much deeper considerations. Of course State owned Chinese corporations would like to secure longer term sources of raw material on favourable terms.

One stock market analyst expressed in exasperation how does lengthening debt maturity profile create value? He was highlighting that the rally in Fortescue’s share price was basically a dead cat rally. Can they substantially reduce production cost to sustain debt maintenance in this era of lower spot prices?

In the demise of Fortescue will the question of how they allowed their production cost to become so excessive compared to longer term trend iron ore spot prices. Only industry insiders still talk of the folly of Meekathara Minerals and how production shortfalls saw them default on gold forward financings. Who is old enough to remember Poseidon or Tasminex? Who has ever heard of Aurora or Argyle Silver Mines of Broken Hill in the 19th century? When the tales of the 80’s names are told they are simply rogues or similarly dismissive names. John Spalvins, Alan Bond, Robert Holmes a Court, Chris Skase, Russell Goward  et al.

What is now a pattern in all economic cycle’s boom and bust is the tacit put that equity holders have over debt holders. Equity holders take excessively out of the economy during boom time, and leave the bond holders to pick up the pieces in the bust. In this process the strong getting stronger, and the weak getting crushed falsely believing they will become the victor. Maybe it is greed, but it has a kaleidoscope of permutations. A game of pass the parcel or musical chairs where you don’t want to get caught out, but invariably do simply by being in the game.

The banks and shylockers tend to get their pound of flesh. In GFC when investment banks were failing there was a tacit put upon government.

Last weekend the latest opinion polls in the USA are predicting Obama will hold the State of Ohio in the presidential race, therefore win a second term in the oval office. That makes my presidential call 5 weeks ago premature. Much more important than tonight’s presidential debate in Friday night’s non-farm payroll stat and the other one due 4 days prior to election day. Positive PMI will also help.

Voter turnout is the crux. It will also be the only news post election. See U-Tube video below:

Linked on Line here.

there are others on: Linked on-line here.

From my first 2012 post in September 2011 there is much more clarity in international thinking. Today the best I can come up with is;

Would you like to be the Australian government seeking re election mid next year in the likely economic environment?

Believing in Sanity is indeed Insanity.

EYE-BALL’s ‘Herman’ …

  1. david the pragmatist
    October 3, 2012 at 1:18 pm

    Yes, I decided to read this one in deference to the assault I made on Hermans’ last blog on the ASX Index.
    Well it is a much better article and one that impresses me in its intellectual output.
    Fundamentally I do not agree with it as it reimposes the same old problems of “being human”.
    Herman takes us back to the eighties and the shysters of those times and nearly winces as he remembers them. Most of those guys were entrenpenears when a society of those times needed them. We probably don’t want them anymore we are much too caught up in ” naval gazing” and make sure the compliant managers are capable of keeping with the “faceless” of today.This said the idealogy of Herman is hard to accept. Maybe his theory of good and the weak overpowering the strong and indefensable has some cultural merits.

    Once this is analysed you will note that todays society is not ready for egalatarian issues anymore than we are capable of “multi cultural” theory interpreted as everyone being equal!

    I am not a racist but i am a culturalist and what we are reflecting on in terms of equality cannot happen in any economy that is so lopsided to demand political correctness in one hand and accept half the world starving and killing each other on the other.

    Eye Ball talks about people power and its ability to save the world. Again his naive is paramount in such a tantalizing way ie Egypt, Syria, Bosnia, Greece,ect ect. Lets be realistic we are just shuffling the deck chairs on the Titanic once again.

    I am sorry Herman, I appreciate the intent of your sentiment but the world will swallow you up if you cannot be practical in your diagnosi. ie there’s not much point in diagnosing the illness if you haven’t got a cure. Herman, maybe you are part of the evolutionary chain that will eventually take us to that magic place you crave!

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