I will be a panelist at Australia in the Red, a forum on debt organised by The Daily Reckoning & Money Morning, to be held at the State Library of Victoria on Friday July 31st from 7pm-11pm. The evening includes a panel discussion on debt–with Dan Denning, Kris Sayce, Phillip Anderson and Gabriel Andre as well as myself–followed by the screening of “I.O.U.S.A.“.
The following information is taken from their promotion for the event, tickets for which are limited and cost $199–click here for the online booking form. The “I’ll” below is Dan Denning.
| 7:00pm | You’ll register in the auditorium foyer at the State Library of Victoria in central Melbourne (entry via the La Trobe Street entrance). Over complimentary champagne and canapés you’ll get the chance to introduce yourself to fellow delegates and members of our panel of experts |
| 7:40pm | Time to move into the auditorium and take your seat for the evening programme |
| 7:45pm | I’ll formally welcome you to our summit – and you’ll hear a special video welcome to Australian delegates from Daily Reckoning founder Bill Bonner |
| 8:00pm | Panel discussion begins – this is your chance to put your question about Australia’s debt crisis personally to our team of experts |
| 9:30pm | Sit back and enjoy the exclusive first ever Australian public screening ofI.O.U.S.A. We anticipate the event to finish by 11:00pm. |
July 24th, 2009 at 10:35 am
Below is the link to the formal “Invitation” that gives a full overview of the summit/discussion and the dangers of the Australian debt crisis:-
http://www.portphillippublishing.com.au/research/ausinred.html
Steve,
This appears to be a very important and informative event. For those of us that can not go, could you please find out if the event is being recorded and post the link here when it becomes available.
July 24th, 2009 at 10:35 am
Q+A – Is Australia’s central bank intervening in FX market?
http://www.forbes.com/feeds/afx/2009/07/23/afx6689502.html
July 24th, 2009 at 10:39 am
Steve, just wondering whether you or respondents to this blog might consider Willem Buiters’ proposals of equitisation of bank, mortgage, and public debt a (part) solution?
http://blogs.ft.com/maverecon/2009/07/islamic-finance-principles-to-restore-policy-effectiveness
July 24th, 2009 at 11:41 am
Hopefully the event will be recorded in some manner.
The growing public debt in the US can be seen as a problem, and IOUSA largely blames the government’s health care commitments. The creators of IOUSA don’t want to speak about the obvious solution: institute an efficient public health care system.
No one else in other Western countries, especially the social democratic Scandinavian countries, are jumping up and down crying chicken little about how the country is going bankrupt. A rather simple reason: other Western countries can keep a lid on defense spending and have public health care systems.
Unfortunately, what appears to be an interesting documentary devolves into an ideological club that the rich in the US can smash the poor and middle class over the head with by cutting government services without dealing with the underlying causes.
Dean Baker’s CEPR has performed good work on dissecting IOUSA.
http://www.cepr.net/index.php/issues/iousanotok/
July 24th, 2009 at 11:54 am
I expect that I’ll agree with you Phillip, once I see the documentary. I’m going along by invitation as part of a panel discussion, and if I have to take a contrary position to that promulgated by the movie or the other panelists, then of course I will.
July 24th, 2009 at 11:58 am
Hi Jim,
I expect this will be a commercial product, given the nature of the organisers. However last night’s talks to the Whitlam Institute will be available for free as a podcast on the Whitlam Institute website, and will also be broadcast by ABC Radio National.
There are some other upcoming public meetings that I’m involved in; I had hoped to list these on the Calendar Widget in WordPress, but it currently appears to be dysfunctional, so I’ll write a brief post about them instead.
July 24th, 2009 at 7:54 pm
Philip, the UK, NZ and Ireland are all having concerns about debt levels. Only last week NZ was warned that its debt rating was at risk, and with foreign debt 92% of GDP and a current account deficit of about 8%, it isn’t looking good.
As to why this has happened, Joe Average seems not concerned about debt. There may be others who if they thought about it would, but they tend to follow the party line. And doing anything else has some real political risks. So my bet is we wont stop until everything is looking very bad.
If they can fill the place at $199/head, then obviously the recession hasn’t started. Maybe some people are offered tickets at a much lower price.
July 25th, 2009 at 9:31 am
The levels of debt that many Govt’s are dragging their countries into is perverse. It is rammed down people’s throats as a saviour, a panacea for all our ills. Yes, let’s solve our massive debt problems with…………. more debt??
And while there, let’s promote and fund (with taxpayers money of course)policies and incentives for yet more private debt spending.
Those who believe Govts can afford/enable the solutions to our economic problems will, while very well meaning,will find Govt’s entirely unresponsive. Economic theory still is what is has always been. Groupings of many cohort theories that are formed from and are aligned with their various political idealogies. Economics IS politics and vv, in our capitalist society. And who is in power get’s to choose what is “right”.
So while I certainly do admire and value any efforts and discussions at economic “change”, I still believe it is the political changes that will drive any real secular economic overhauls. Until that hapens, we will see more of what we have now and what the Govts in power must have- STATUS QUO …. with some fiddling at the edges trying to put lipstick on the pig.Ruling politicians desire one thing above all else- another term in office. All else, all other priorities pale in the significance of Priority ONE.
Which is why I have very little hope that any change of significance will happen regarding our economic plight. There has been a sea change in Anglo country politics. And to me it’s clear- Debt does not matter. Staying functional does. The course for us has been set. We have entered a time when Govt’s have given themselves open licence to produce truly absurd levels of debt rather than face the hard choices offerred by sound economic management. That situation won’t end anytime soon.
Australian’s will soon enough realize that “recovery” will mean a constant rolling recession- at best. But it will be crammed down our necks that this IS recovery- because “we are fairing better than everyone else”. Avoiding economic collapse and social chaos will constitute recovery- all the while it’s the DEBT (national and private) that we cannot bring purselves to face.That is the core driver of our new normal.
Surviving in the new normal of very little entreprenuership, innovation and opportunity won’t be easy for most. Our Govts will see to it that taxes, fees, tarriffs and a plethora of other official interventions and impositions (all for our own good btw)keep real economic growth dead and buried. Forcing more and more people to rely on the teat of state. FEAR (of foreclosure and destitution, of being ill in a no healthcare society, of “terrorism” , of rogue states , of over INDEBTEDNESS etc) has truly become the thriving currency of politicians and it will be managed by growing more and more debt- all of it at your/our expense.
July 25th, 2009 at 1:16 pm
http://www.chartoftheday.com/20090724.htm?T
I think this says it all about “green shoots” and other brainwashing tactics.
That is quite a long chart chart. But then again, I’m sure the market has taken account of those wonderful earnings…..??
July 25th, 2009 at 3:04 pm
I.O.U.S.A byte size 30 min version.
http://www.iousathemovie.com/
July 25th, 2009 at 7:33 pm
Port Philip Publishing operate, as I understand it, Money Morning, The Daily Reckoning & possibly other commercial publications and currently sell a stock tipping service & also sell (or certainly have sold) a course on how to make a zillion in copy-writing, yes, anyone can do it by taking our course …for only $XXXX.
And nothing wrong with flogging stuff; I’m a capitalist from way back. Good luck to them – they’re mostly Americans, I think, who’ve come here seeing us Aussie chums as a revenue source and why not?
But Steve – who I’m sure is attending this forum in a not-for-profit capacity in order to ‘get the word out to the masses’- should perhaps be a little wary lest his reputation is muddied by crass commercialism.
I assume he’s already being paid (reaonably well?) for his current academic activities; tax payer funded & everything? So it’s gratifying that he’s prepared to put in his time to help PPP to make a few bucks – I’m sure they deserve it & I hope he gets at least a nice dinner out of it.
I suppose, if the yearning for $$ DID ever become too strong, Steve could always quit academe and join a merchant bank, or become a stock market trader or… a politician.
Just a thought (until deleted)
PS I won’t be attending Steve but thanks for thinking of me
July 25th, 2009 at 7:57 pm
No worries about deleting gi!
I signed up for a huge number of talks initially, and then got jack of speaking for free to commercial operations which in some cases were charging attendees $800 a day to hear the likes of me, but paying their speakers zip. So I started putting a $5,000 price tag on me giving a talk with the deliberate (and successful) intention of ending such demands on my time.
This one (done for free) is letting me drop in on a couple of old friends that I haven’t seen for a couple of years in countryside Victoria. Most of the talks I give these days are to genuine non-profits (such as the Australian Museum, where I’m giving a talk on August 25, or the Whitlam Institute, at which I spoke last week). Apart from that, it’s cash up front or I stay home–the final straw on that was where one mob gave me a bloody certificate for speaking (not even the usual obligatory bottle of wine!) which promptly ended up in pieces in my recycling bin on my return home.
The academic pay thing is an interesting side issue. Back when I was an undergraduate student in the 1970s, a Professor was someone who earned a bucketload and lived in Vaucluse (as quite a few of them did). Now they are paid about $150,000–similar to what middle managers in telecommunications companies earn (I speak from experience), and well below what is expected in middle management in finance. Academic pay relativities fell about 25% between 1973 and 1996, which was when I finally entered the academic workforce.
Of course, we’re not there for the money–most academics I know (the good ones) are there for the sheer pleasure of developing ideas in their areas of interest. It’s therefore galling that the management-obsession with “performance indicators” now has us being treated like industrial workers or bureaucrats who need management in order to get us to perform.
One delightful side-effect of going as public as I have on the debt issue is that my university has very sensibly decided to let me do what I want to do, and treat all that management monitoring as a “tick the box” exercise. Though I begrudge the creeping managerialism that has taken over Australian universities, especially since the Dorkins reforms (yes I know I’ve mis-spelled that!), I am grateful to my own uni management for giving me my head on all this.
What I lack isn’t money but time–and on that front I’d gladly get funding from this blog (were it forthcoming) to buy out my teaching and be able to work exclusively on the research I need to do to write Finance and Economic Breakdown. Now that the blog is approaching 2,000 members, it’s approaching the time to test the waters on that and see what is feasible.
July 25th, 2009 at 8:00 pm
The Melb venue holds, I think, 200. So 200X $199 = $39,800 gross.
Most of the speakers look like they’re employed by PPP, so let’s assume no cost there (not sure about bonuses). The movie is a Daily Reckoning production, I think; maybe there’s a royalty of some sort involved..
Cost of the venue for a night, what, $1,500? Let’s say $2,000. Drinks & finger food @ $20 pp = $4,000. Waiters, what 4 through an agency? Say $1,500.
Steve’s doing it for free. So net profit somewhere north of $30,000 for the night with another mooted for Sydney?
As a former go-getter myself, I like it! Great little earner. Who cares what happens in economics as we’re earning a dollar!
July 25th, 2009 at 8:10 pm
I didn’t see you response before I re-posted, Steve.
Mate, I came to Oz with $300, zilch education & retired before 40 so I admire & respect people who have get up & go (as long as it’s ethical).
BUT I do have a problem with anyone who is taxpayer funded and who, by dint of their profession, is able to increase their knowledge & skills whilst so employed, to make yet more money in free enterprise. I say, resign, get off the taxpayer teat and go it alone!
It’s a bit like pollies & public serpents gaining the benefits of tax-payer funded travel & frequent flyer points. To me, it just ‘aint right and indeed is a sympton of a much deeper malaise in a basically corrupt system. Just my opinion. Cheers!
PS Glad you really are doing it for free. Surprised, too.
July 25th, 2009 at 8:11 pm
just following up on something you said earlier steve,
while i take your point about the US not going down the path of a 20 fold increase in fiat money, we are swimming in uncharted historical waters.
if you are right and the current stimulus fails, then i cant see what choice they will have, but to wind up the real and electronic printing press to unheard of levels.
there arent enough savings globally to finance the kind of intervention required, so they will have roll their own. or am i wrong about this.
and they seem idealogically oppossed to bankrupting their banking buddies by either allowing them to fail or restructuring the debts and the banking system.
so there is every likelyhood they will take the path of least political resistance.
and what path is that.
well they cant upset their banking buddies, so nationalisation or debt restructure is out of the question.
no, firstly they will find someone to blame when plan A fails. if i was mr benanke i would be dusting off my cv and looking into other job opportunities.
secondly they need a distraction or two. nothing like a few small skermishes with a few people they dont like to keep people occupied.
and finally open up the electronic printing presses, but hopefully this time they will try and shore up the balance sheets of the debtors.
so stay tuned for welfare state mark II.
the alternative in pursuing a failed policy to the bitter end would be chaos on a scale not seen before, and threaten the very viability of the federal union.
obama seems a practical man, and when he finds out that the people who presided over the problem cant fix the problem, he will change course, and heads will roll.
atleast i hope so, or may be he is in a staring contest with an elephant that refuses to move.
in some ways im wondering if this period of US history has similarities with the first half of the 19th century.
in the period leading up to the US civil war. there were financial panics in 1837 and again in 1857. the first had to do with failures in the agricultural sector and land speculation, and the latter a large series of financial instutions failing.
combine this with an expansionist, and some would say incompetant US foreign policy at the time, with the likes of william walker running around the latin american countryside wanting to take over everything in sight. william walker was pretty much the closest thing to being the donald rumsfeld of his time, and the foreign policy disasters ensued.
those interested should read about him. US foreign policy has never been funnier if it wasnt so tragic. americans have been stuffing up foreign policy ever since their boots were big enough to have one.
at the end of it all we had the US civil war. chances are we wont have another, but what odds the disintergration of the federal constitutional structure of the US, if they dont start listening to people who saw this coming in a timely manner.
July 25th, 2009 at 9:26 pm
steve,
are you suggesting we are a miserly bunch
in my case its my sri lankan and scottish heritage steve, its genetic. thats my flimsy excuse and im sticking to it
but i think i can help you out of your predicament.
can i be rude enough to make a suggestion re the title of your forthcoming book.
if you want to get it on oprah, and lets face it , if you get it on oprah you WILL get your wish of hanging up your day job.
you need to change the title at least,
forget about “finance and economic breakdown”
we need something catchy,
how about,
“what the heck happened”
or
“financial collpase, and how we learned to love debt”
or
“honey i shrank the economy” with a forward by ben benanke
or if you think thats too light on, perhaps go the stephen king route, and call it,
“the debt”
or
“the debt delusion”
i’m sure the possibilities are endless. make it catchy and readable by oprah and your fame and fortune is assured.
she is the most powerfull women on the planet, barack obama can testify to that, and i think she likes aussies and their no nonsense demener.
allthough i’m joking there may be a grain of truth to what i say,
all in jest
July 26th, 2009 at 1:18 am
gi
I think maybe you are being a little too tough on Steve. For starters it matters not too much who sponsors the program as to the exposure and the quality and the content. In reality “money morning” etc have opinions, sure they are financialy motivated that’s one aspect another that have opions – Govt. for example are politically or power -ego motivated. With respect Steve is given the opportunity to express his views, views that are broader based than just”commercial” views that will get across to others. This educational program has, if I read it correctly, been, is Steves life. It is the life of someone who has a passion for what he believes is RIGHT It’s a little bit like Justice the price is to correct the wrong – it’s not about money, however, yes there always is an however, one needs a certain amount of money to obtain a goal. In this case Steve I believe is doing the “gig” for free. So not a problem should be raised. Even so for my money I would be only to pleased to contribute (financially) to further development of his work when I understand more about how it works.I supported 9financially through voluntary donation) for a short period of time, in the seventies the foundation of The Centre of Indepent Studies because I had met and was/still am impressed with the ideals and intellect of its founder Greg Lindsay. Steve is in my mind doing that in a much more relevant to “everyone” field. I am not intellectually capable of understanding how his work can be implemented to change such a imbedded financial boom – bust system of percieved wealth based of housing consumption and not on productivity, without an incredible amount of pain. The transistion from one system to another will take an enormous amount of courage none of which I can see is present within any current World politician. Where today, are the Thomas Jeffersons and Abe Lincolns of yesteryear?
gi being self made and being capitalistic by thought and nature is something I share with you however with a system that constantly derides individual thrift and production.
What alterantives would the people that are have free thoughts and ideas, the people like Greg Lindsay and Steve Keen the people that provide the drive and energy and intellect, have to develop their thoughts and ideas on a larger scale without capital?
Their only capital development is time and time is money. therefore money buys the time.
What a great investment for the truth.
July 26th, 2009 at 7:33 am
Well, well, well here come the purists!! Cast the first stone……… presume guilty before innnocence. Get real FOLKS!! Steve lives, eats and shits like everyone else on this blog.
Just because he SEEMS to have join rank with the so called ‘crass commercialism’ doesn’t means that he’s not out there doing what he honestly feels is ‘right and proper’ to address the issue of toxic debts in our debt laden world. And if that platform(whatever that maybe) is available, go for it, I’ll say.
The world is a dangerous place(certainly at the moment) and even one voice out of the ocean doubters that screams ‘U-turn, U-turn’ is welcome. Try not to think that just because you have a dig at ol’ Steveo, he’s gonna delete you!! I trust he can handle this. In time to come, I might even have a go at him myself in the name of free speech.
July 26th, 2009 at 8:19 am
The IOUSA movie is right about the scale and severity of the problem and wrong about the solution.
While deficit spending may be an act of irresponsibility in both the private and public spheres, if it is invested in future economic capacity then it may well be justified in terms of bringing forward capacity.
Debt becomes a problem when its proceeds are misdirected and its ratio to income becomes unsustainable. That point may be close with both U.S. and Australian debt, although predicting the precise timing of economic events is very difficult.
The issue in Australia is not a propensity to save. Australians save assiduously, mostly through their housing and superannuation. That is one reason they have been prepared to take on so much debt to buy overvalued housing stock.
The real problem is that both these financial sinks have been hijacked by the banks and financial sector to fund their giant ponzi schemes. If under the current circumstances Australians were to save more, it would only encourage the looters.
And the looters are the deal makers, the deck stackers, the rent seekers and the exorbitant commission grafters; the likes of Macquarie Bank spring to mind.
This is a failure of government, not in fiscal or budgetary management, but in policy and equity. A failure of policy to ensure the wealth of Australia is not squandered and a failure of equity to ensure that the common wealth remains just that.
However, the government in this case is not the institution that is distinct from us, but the institution expressing the will of the people. So in this case it would be fair to say that this really a national moral failing.
This issue is not fixed by slashing programs, and certainly not by slashing programs for the most marginal and vulnerable in our society.
On the other hand, changing the national culture is impossible while a majority of citizens still defend the underlying basis for the regulatory and financial infrastructure that brought us to this place.
Living in Queensland in a society almost absurdly welded to unsustainable growth and consumption, both economically and environmentally, does not give me much hope in the short term. Would a short sharp shock help? I doubt it, and any government that ‘encouraged’ a correction (as in falling house prices) would be very short lived, which means the longer term, more unpredictable but more catastrophic decline will over time become the most likely scenario.
Sad, really.
July 26th, 2009 at 12:47 pm
MACCA, 9.31am 25/7/09. I totally agree with your entry. Next. First. Australia ceased operating businesses along strictly business principles sometime back in the sixties.It was probably when the automobile industry created planned obsolescence. It had something to do with Godless Communism, the Cold War, the Arms Race, the Military Industrial Complex,the Media Political marriage and the resurgence of Japan and Asia. Second. We seem to be having an attack of the nasties today. I can’t see any justification for it. Steve covers it pretty well in his entry. When I hear people comlpain abut the high price of petrol, I say “start your own petrol company and do it cheaper or better”. Remember ACTU and Solo? Everything looks easier from the passenger seat. In my musings I always try to reduce the argument to the bare bones, and then put a practical slant on the proposed solution. I am constantly amazed at the way people think the Government can fix any problem that appears. Third. Steve, if you need a catchy book title you can kick aound the old Harry Browne “You can profit from a monetary Crisis”. It would need updating etc but it was true, even if hard work. Any respondent here could do it on their own account,and retire from daily exertion on the residuals. Getting the residuals is the hard part, that’s why profit, rent, copyright and superannuation were invented.
July 26th, 2009 at 1:56 pm
Philip
In a previous thread, I compared the scientific achievement of the moon landing with the global financial crisis 40 years later. You commented correctly: “a gradual flight from the arts and sciences into business and finance over the last couple of decades”.
You also suggested correctly that was because “students seeing education not as an end in itself but rather a means to get richer”. When I left rocket science for economics and financial engineering more than two decades ago, it was not so much “to get richer”, though it did happen, it was due to a lack of job opportunities from: winding down of NASA, relentless funding cuts by governments in research everywhere etc. I swapped scientific research for unscientific research, with increased pay. I moved from one financial sector to another witnessing greed and incompetence, but I was gagged by money. Eventually, I decided something must be done, even before the global financial crisis, which was no surprise to me and hence had no impact on my wealth (so far).
But change is not easy, because there is so much nonsense inside the heads of academics, government officials and regulators that they have great difficulties in understanding what really happens inside commercial financial institutions. They had fallen asleep, assuming efficient markets and have deregulated for too long to have any idea of the growth and consequences of “financial innovations”. Government policies have allowed the real economy to be cannibalized by the financial economy, which steals a disproportionate share of earnings from honest labor and savings. Some people have been saying this for a long time and may only be beginning to be heard. Here is one example:
http://johncbogle.com/wordpress/wp-content/uploads/2007/05/Georgetown_2007.pdf
It would be bad taste (and illegal) for me to give Steve financial advice, as only he really knows what’s “enough” for him. One thing seems obvious to me: none of us is participating in this blog for the money. Sometimes, the satisfaction of making a contribution for the improvement of society is “enough”. Philip, I guess we are of a like-mind on this.
July 26th, 2009 at 2:54 pm
Lyonwiss,
Probably a half of job offers for “senior” software engineers in Sydney come from the financial industry:
http://mycareer.com.au/jobseeker/search/results.aspx?s=102&q=senior&d=7&l=1&c=3.174
There is also one offer looking like from a patent trolling company.
So what do you expect me to do? I have very limited assets as a migrant from Eastern Europe, I just need to feed my family (my wife also has to work full time). Should I go to a company which offers me 20% less and may not survive the next year?
What should Steve do? Teach for free future bank executives who are going to earn 20 million a year?
The sad truth is that the “broad” financial industry will always survive and these people who really do something productive for the society are first to go broke.
This article is interesting in the context of job offers mentioned above:
http://opinionator.blogs.nytimes.com/2009/07/24/weekend-opinionator-is-wall-street-picking-our-pockets/
Yes I know there might be some minor inaccuracies in the article but…
July 26th, 2009 at 4:12 pm
Lyonwiss,
Spot on. Interesting story, and I suspect very few people who are advantaged by financial & industrial capitalism really see how flawed the system really is. After all, such people don’t want to understand when their incomes depend on them not understanding.
Business as an institutional system of power requires constant delusions and self-deception to continually perpetuate itself – otherwise people may begin to look outside the cocoon and realize that there may be better ways to run the institutions in our society.
The task of the ideological managers within economic university departments and government is to recite the gospels and sing praises of the wonders of state capitalism. It is essentially no different in the Soviet and Easter Bloc communist countries. Over there, they had Marxism as the religion and communism as the economic form of organization. Over here, we have neoclassicism as the religion and capitalism as the form of economic organization.
There is one amusing difference, though. If an intellectual under the communist system was to denounce it, they could be sent to the gulag. When intellectuals in our free society regurgitate the required incantations and engage in state and corporate worship, it is cowardice and/or indoctrination.
Regarding what you said about the nonsense that resides in the heads of intellectuals, one of the best quotes I’ve come across is this:
“The dominant economic discourse has, since the early 1980s, reinforced its hold in academic and research institutions throughout the world: critical analysis is strongly discouraged, social and economic reality is to be seen through a single set of fictitious economic relations which serve the purpose of concealing the workings of the global economic system. Mainstream economic scholarship produces theory without facts (“pure theory”) and facts without theory (“applied economics”). The dominant economic dogma admits neither dissent from nor discussion of its main theoretical paradigm: the universities’ main function is to product a generation of loyal and dependable economists who are incapable of unveiling the social foundations of the global market economy. Similarly, Third World intellectuals are increasingly enlisted in support of the neoliberal paradigm; the internationalisation of economic “science” unreservedly supports the process of global economic restructuring.” (p. 42)
Chossudovsky, Michel. 1998. The Globalisation of Poverty: Impacts of IMF and World Bank Reforms (Sydney, Australia: Pluto Press)
On your comment about making a contribution to society, I think that many people have lots of interesting suggestions for improvement – if they could be encouraged to come forth and speak about them. Some do, some don’t. I hope to make mine when I do my PhD later on (researching a new model to eliminate IPR for pharmaceutical drugs).
July 26th, 2009 at 7:42 pm
sorry philip i couldnt resist,
our neo classical interlectuals get sent to or seconded to our version of siberia,
canberra, to walk the hallowed halls of the treasury building
July 26th, 2009 at 7:46 pm
do we have a solzhenitsyn in our midst,
to expose the delusion of the
“canberra treasury archipeligo”
July 26th, 2009 at 10:04 pm
MACCA,
I forwarded the chart to my father who replied thus:
“You guys [my brother and I] are the ones with the finance and commercial degrees so I am interested in your take on this. – Here is my layman’s view:-
Until 2 yeas ago, if an enterprise was yielding, say, 15% on its capital (assume capital of $100 Mill.), it had earnings of $15Mill. If it then borrowed $200Mill. @10%, this could then boost earnings to $25Mill. (5% profit on 200M) This was good business. (Bear with me … read on please)
Now… last year this enterprise decided to deleverage as fast as it could. (assume it’s bank was in trouble and it indicated an unpreparedness to renew the $200Mill loan). The enterprise repaid $100Mill (which it had liquid but the other $100Mill was tied up (stock, plant and machinery etc…)
Now it takes all its earnings at the end of this financial year (say this is back to $15Mill) and repays that off of the 100Mill. outstanding, this leaves it $85Mill in debt.
It pays it’s shareholders no dividend this year,…. but…..it is still in a very strong position. If it can reliably roll over its debt of $85 Mill. (banks are now more robust that last year), it is in fact bigger and stronger than 2 years ago when it had Capital of $100Mill. ….However…. its share price will take a bath because it will pay no dividend this year as all earnings have gone to debt redemption.
However, the market will look beyond this event and will price into the share, responsible management (because it chose to recover debt so promptly at this time) and the share price will find a floor of, maybe, 20 – 50% of its previous highs. We have seen the market do just this over the last year. As soon as the capital squeeze is over, responsible management will allow some earnings to flow through and consequently a return to (but diminished) dividend and the share price will start to climb. (as we are seeing at the moment)
This, of course, is the situation in the American market. Our local market is much healthier.
So…. low or even negative earnings do not necessarily spell zero value.
Publication of this kind of chart in isolation has, to my mind, limited use as it provides a limited and narrow focus on one aspect only.
Now, I could be way off beam. What do you two think?
Dad”
July 26th, 2009 at 10:05 pm
For others, the chart in question is this one:
http://www.chartoftheday.com/20090724.htm?T
July 27th, 2009 at 12:18 am
Hi DrBob127,
Lets assume your fictitious business would be in some sort of essentials. In that case your assumptions may be correct. However many of the businesses in the US have a business model based on ridiculous levels of consumer spending. They (the US) are not the industrial powerhouse they were years ago. Some of these models built around this last 30 years of unsustainable consumption may never prove viable or profitable again. I think the market at present thinks it’s back to business as usual. Some casualties may have to reinvent themselves some may not be able too. I’m just not that sure that the old model will survive. If it does then I’d say we have just postponed the collapse,not fixed it. What do think?
July 27th, 2009 at 1:33 am
DrBob127
Your father has confused leverage with how the market works. There is no reason for banks to call in debt, if the businesses are profitable. De-leveraging is only forced on businesses making losses. Leverage increases the volatility of the return on equity and its value is discounted by the market in poor economic environments. Dividends are largely irrelevant.
Markets have recently rallied because they believe dreadful earnings have already been priced in (as in the chart), but actual results have not been as bad as feared. This is a favorite Wall Street game: lower expectations to engineer short-term rallies. When the reporting season is all over, they sudden realize PE is at unsustainable levels…