A Rhyme of the Times

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And just like that at least some of the uncertainty hanging over the Australian market has dissipated. Or has it actually increased?

It seems to us that by agreeing to a 30% Mineral Resource Rent Tax (MRRT) on iron ore and coal and a 40% tax on on-shore oil and gas, the big miners have conceded to this principle: the government is allowed to increase the tax rate on any commodity that goes up in price.

Why do bank robbers rob banks? Because that’s where the money is!

Recently, the mining sectors big earnings drivers have been coal and iron ore. But in the future it will be any commodity – gold, uranium, or rare earths elements – that starts generating revenues that earns the government’s attention.

The revenues should be generated for the companies and shareholders that took the risk to find and extract them in the first place. But the government has burrowed its way into the relationship quite nicely and dug in like an Alabama tick. The miners achieved certainty all right – the certainty that the government can and will change the law whenever it needs revenues to make up for irresponsible spending.

The share market may not see it that way today. But we reckon the long-term consequences for Australia as a desirable place for foreign investment are negative, based on today’s deal. But then, perhaps we are just overly curmudgeonly about the whole idea of spreading the wealth around. Still, it seems like a fraud has been foisted upon the Australian public…that everyone is entitled to benefit from the risk-taking of others without taking any risk at all…because the resources “belong” to all Australians.

The resources would remain stuck and stranded in the ground forever, generating no royalty, tax, employment, or capital gain, or benefit for anyone if it weren’t for private enterprise. But we’ll leave off arguing the point for today. It’s just another lost battle in the long war against the encroaching power of the State. Just another day at the office in the modern world really. The State is King. Long live the State!

The State did, however, make a few concessions, namely that the tax will kick in at 7% above the long-bond rate. And by only taxing the resources that are really making a lot of money for producers, the tax will only apply to about 320 firms, instead of 2,500. In other words, only productive and profitable firms will be punished. And of course, none of it kicks in until July 2012, by which time, if the Mayans are right, we’ll all have just six months to live anyway.

By the way, you can tell that Julia Gillard is a skilful user of language, which makes her extremely dangerous as a politician, and frankly, extremely dangerous to individual liberty. This is not just a criticism of Gillard but of all lawyers and politicians, all of whom are admittedly low hanging fruit if you’re looking to take pot shots at public figures. But let’s not forget what’s been accomplished.

Seven percent above the long bond rate is about 12%. But 12% sounds much bigger than 5%. So the miners win by forcing up the rate at which the super tax kicks in. But referring to “7” instead of “12” sows just a little bit of semantic confusion about the net size of the concession the government has made, making it seem like less of a concession to the public.

Also note the change in name from Resource Super Profits Tax – a name calculated by the Rudd government to portray the miners as greedy profiteers – to the Mineral Resource Rent Tax – a name designed to disguise the inherently predatory and opportunistic nature of the tax by making it sound reasonable, sensible, and inevitable.

The point? Naming things matters. What you call them goes a long way toward defining them in the public mind. An innocuous name can often conceal the true nature of thing. As Dr. Zapatka said in our classical rhetoric class, the first step in characterisation is appellation!

All of that said, the fog-lifting here in Australia may have a muted impact on the upside in local shares. Why? The news from the rest of the developed world still sucks. Specifically, the U.S. housing market continues to be a weeping, festering wound in the side of markets (and specifically U.S. banks with huge exposure to residential housing).

The National Association of Realtors in the US said its pending home sales index fell by 30% in May. To some extent, this was old news, or news you could have anticipated. The tax credit for first home buyers in America expired in April. Once it did, there was a huge drop-off in activity.

Come to think of it, that’s kind of what’s happening in the entire world right now, isn’t it? The various stimulus measures in the U.S., UK, China, Europe and elsewhere have run out of puff. For awhile, they succeeded in boosting lending and demand and creating the illusion of growth and recovery.

But if you’ve ever built a fire, you know why spending money you don’t have isn’t a long-term plan to a healthy economy. A really good fire needs hot coals that have heated up for a good long while (hot coals being sound money, transparent law, capital investment, free trade, and low taxation).

Those coals can burn logs and generate a lot of warmth and light. On the other hand, if you just keep chucking on balled up newspaper to a fire (fiat money), it goes up in a nice pretty explosion of flame, but flares out quickly and you’re back to where you began – shivering in the cold, starving, and destitute.

What about China, though? In the great scheme of global imbalances (pointed out yesterday by Bill Gross) everyone is hoping the growth of domestic demand in the developed world (higher spending rates and lower savings rates) will keep the world turning. But will it become the great engine of global warmth?

Hold that thought! One side note to this theory is that if high-saving developing nations spend more domestically, they will have less money to invest in government bonds in places like the United States. In other words, higher consumption rates in the developing world could mean higher interest rates in the developed world, which would not be good for heavily indebted borrowers.

The bigger issue, though, is whether the very same forces that led to a credit boom and asset bubbles in the Western world have already hit China. We believe they have. And if you want anecdotal evidence, please note the success of the IOP of the Agricultural Bank of China – China’s third-largest bank by assets. It met strong demand by institutional investors in China, according to Bloomberg.

As we noted last week in an e-mail update to subscribers of Australian Wealth Gameplan, investment banks have a way of supplying the market with exactly what it demands. One example is securitisation of debt via mortgage bonds that yield more than government bonds thanks to a synthetic structure.

Another example is the IPO of the Blackstone Group in late June of 2007. Blackstone was one of the largest private equity players in the huge private equity boom of 2006 and 2007. Loading up balance sheets with heaps of debt to make big takeovers was all the rage at the time. And you should have known that when Blackstone’s insiders were ready to sell a piece of their very profitable business to the public, the big profits were already made.

Since its IPO, Blackstone is down 74%. It closed at $9.40 after Thursday’s New York trading, having IPO’d at $36.45 in 2007. Its performance is twice as bad as the S&P 500 in that same time. The S&P 500 is down about 30% from the June 2007 level – although now that it’s breached the 1040 level, our trader friends tell us to “look out below.”

After Chinese lenders went on a US$1.5 trillion lending boom in 2009, it’s hard to say just what the quality of the assets are of China’s third largest bank. But the fact that the bank is being sold to the public now has at least a nice symmetry with Blackstone’s IPO. History doesn’t repeat, but it often rhymes. If the assets are trash, and history rhymes, what rhymes with trash?

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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14 Comments on "A Rhyme of the Times"

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Jimbo
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This is a particularly ill-informed article. The government grants the miners special rights to go onto other people’s land and dig out valuable minerals. There is a degree of risk involved in doing this, but why should the government grant this right for nothing? That represents a windfall gain for the miners. Who owns the minerals if not the government? Perhaps the owners of the land – but in a lot of cases the ground is owned by the state anyway and has been since settlement, with only pastoral leases having been granted.

Justin
Guest

What if the long bond rate keeps falling?

Might not be a good deal for the miners after all.

GaryB
Guest

Get over it Dan Denning, our non-renewable mineral resources DO belong to the people of Australia. And what the Fed Govt is doing is just being a player in the free market food chain that you so earnestly admire. The mining companies exploit the China bubble to gouge out massively increased contracted prices, mining workers from top to bottom are able to enjoy fat salaries, and landlords and property speculators in mining towns screw miners for the cost of their accommodation. Why shouldn’t the people of Australia feed off this food chain? We own the makings.

Lachlan
Guest

All ideological talk of who owns what is blinding. Of course the miners will be taxed. We dont live in a perfect world with a free market. The problem is that if they are over taxed our structurally flawed economy will fail quicker than otherwise…since they all flop eventually due to over taxing. Refer to Rome.

Excellence
Guest

Commenters should do their homework about an industry prior to demanding legal plunder from others operations.

The State and Federal government protects private property.

The State and Federal government recognise that mining is an activity that generates wealth via employment of it’s individual citizens and ownership of a citizen action discovered and proven RESOURCE. A private resource. A PRIVATE resource that generates intense capital investment.

Only a quasi-religious governance structure seeks to own the resource.

This concept of public ownership of property is a travesty of brobdingnagian proportions.

JimBob
Guest
A resource rent tax, justified by the chant, “The people of this nation own the resources of this country,” is a Mugabe/Zimbabwe type declaration. It is a Marxist slogan. Repeated innumerable times many of the population come to believe it. This attitude does not augur well for our future. Once Marxist principles are implemented a nation becomes subject to Bureaucratic control; the profit and loss system which maximises efficient resource use is destroyed. Interested Australians who believe in consumer sovereignty and personal liberty, and who want to defend Classical Liberal principles, should closely study Ludwig von Mises’ essay titled “Profit… Read more »
Statesman
Guest

The Australian Constitution has already given provision for the states to tax resources via mining royalities. People should wisen up when it comes to giving more power (and money) to a centralized government. Totalitarians love that form of government.

albert
Guest

Just a short while ago idiot resource company ‘A’ was throwing off so much cash they didn’t know what to do with… so they decided to buy idiot resource company ‘B’. Company b wanted to keep playing in the sand pit so they foolishly loaded themselves up with so much debt they nearly collapsed……what a joke….so your claims of ‘risk of finding and extracting resources’ etc rings hollow on so many fronts.

Hank
Guest

Regarding Kevin
I do not like a person going to Church and using Warfies Talk!!Did he wanted to schow he is maybe an Okker?
I do not want a person like this to be Prime Minister

Hey I do admit to this but only if I hid my thumb with a hammer by mistake or like…………. but not in normal conversation!!
Pew!!!!
The replacement is all at once getting off her Bum and backflipping like a Prawn!!
She IS A PRAWN!!!
Poor Australia if we get this Labour Bunch get back in!!

Lets run this Country like Buissines!!!!
Shure lets make profit for the Shareholders.. (WE)

michael
Guest

Australian minerals, owned by Australians. If overseas billionaires want a slice, they can’t complain about paying a fair price. The big mining companies have been laughing up their sleeves for decades in relation to tax rates and royalies relative to contract prices with China and India. It’s well beyond the time when sovereign returns from mining resource should have been brought up to date.

Ned S
Guest
“Australian minerals, owned by Australians” – Who owns what and what rights others who don’t own any reckon they should have to purchase it for what they reckon represents a fair price can be contentious issues. Reading the American blogs, there are more than a few sons of Uncle Sam who figure if Ahab the Arab won’t give them oil for the perfectly reasonable price of 30 bucks a barrel then sending in their good and god fearing young boys to give the greedy Mussies a lesson in Christian charity is the way to go. ‘Course that ignores the fact… Read more »
Biker
Guest
“I wonder how long before Canukland gets its invite to become the 51st state?” There were numerous failed attempts along the eastern Canadian / US borders, Ned. We visited half a dozen battle sites in eastern Canadian provinces last year, several of them forts and citadels where some bloody battles occurred 1812 – 1814. One of these sieges at Old Fort Erie, near Niagara Falls, ended in 1814 when the Yanks blew up the fort’s powder room, obliterating the fort and blowing cannon up to a kilometre away. For some, it was undoubtedly the equivalent of the Twin Towers massacre… Read more »
Ned S
Guest

Whenever I hear Hillary Clinton say “America has hydorcarbon interests in the region!”, I think “poor baskets” [as in the citizens of the region being referred to] – And am kind of glad that Oz isn’t overly endowed with oil.

Ross
Guest
Ken Henry changed his future commodity price figures to take only $1.5b out after the RSPT got killed. He did this even as the Chinese had shortened up pricing to quarterly negotiation that added unmitigated risk to any projection. Per BDI reports below Henry and Labor already knew commodity prices were at the top of the market on the rebound. Say goodbye to the trade surplus. Labor has a great big hole in its budget. The Dry market is facing the 6th consecutive week of daily downfalls. “This week all the Baltic Dry indices are for once more in the… Read more »
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