Who is master of the markets this fine Australia day afternoon? Is it Mammon, Mother Nature, or Man?
The Dow fell 119 points in New York over night for the largest loss of the year, so far. It is the first sign from markets that maybe not all is well in the economy after all. Markets, after all, have been singing quite a different tune about the future than the news and the pundits. When markets make higher highs, it ‘forecasts’ better times ahead of the economy…usually.
You have probably heard the old expression, ‘garbage in, garbage out.’ In more wonkish terms, a system’s output is a function of its inputs. Markets have millions of inputs, including information about the world constantly updated in the hard-working, slightly fevered minds of millions of traders and investors. But the biggest-and at this stage, most overwhelming input-is money.
Money in, markets up, is probably the best way to describe what we’re seeing all across the globe. That’s why today’s markets probably tell us less about the economy than a market less dominated by liquidity. True, right here in Australia there is a lot of good news that can account for the market’s nearly two percent gain for the month. But here’s the real question: have things been so good in Australia for the last three years that the stock market can go up by 75% and not be over valued?
You let me know what you think about that. Of course the market hasn’t gone up that much, yet. But if it continues to climb at his pace all year, that’s what we’d be looking at, a 75% gain in 36 months. And as good as times are, we wonder if they can really, possibly, be that good. Then again, today is a lovely day out, which reminds us… happy Australia Day Australia.
We want to thank you again for being such great hosts. We’re loving it here. And by the way, Steve Irwin seems to be pulling away from the firefighters and the guy who punched the shark in our very unscientific poll of who you think should be Australian of the year. We’re going to keep it running for awhile, just because we can.
Today’s big news-aside from Ford motor company losing $16 billion last year-is water. The Howard government has pledged $10 billion over 10 years for Commonwealth control over the Murray-Darling Basin and river system. The big feature seems to be the $3 billion pledged to pay farmers and irrigators to sell their water rights back to the government.
South Australia’s Mike Rann is agin’ it. Peter Beattie in Queensland is hemming, with hawing scheduled for later today. And pols in New South Wales and Victoria seem to be all for ceding control over the river system to the Feds. And who knows, maybe it’s a good idea.
“The core problem,” John Howard said yesterday, “is that the different states have competing interests…The South Australians resent, as they have for more than 150 years, the level of diversions by Victoria and NSW. The Queenslanders feel they were late to the party in developing irrigated agriculture and want to catch up. The New South Welshmen downstream complain that their overland flows have been diverted to cotton farms.”
Here we admit our general ignorance about the issue. Let us multiply that ignorance by our habitual distrust to introduce another question. Perhaps there really are some problems that always require a national solution, putting national interests above local interests. Maybe this is one of them. But is a Federal solution to the water problem, one involving more irrigation and pipelines really the best solution? Is it a solution at all, (leaving aside the issue of giving any government more power than it already has)?
From an investment perspective, infrastructure companies already have pretty full order books and pretty healthy stock valuations. We don’t see an obvious profit angle. There is, however, a much larger angle, namely the future development of Australian cities.
Again, we have no idea if the Federal solution to the water problem is an effective one that will really solve the problem. But let’s try to put the problem-lack of water–it in the context of urban geography and development. Major cities tend to appear where they appear for a reason. You find the great commercial cities of the world at the mouths of rivers, on major lakes, on natural harbours, or at the intersection of over-land trade routes. Goods and services are trafficked in these places, which is why they become big, smelly, fascinating, and sweaty.
Are Melbourne and Sydney naturally-placed, naturally evolved cities? They seem to have been rather arbitrarily placed by the British, or at least placed without a full knowledge of the ability of the climate to support settled agriculture and an urban population.
Certainly Sydney harbour is a deep water port, able to accommodate many, many commercial ships. But those ships need to be exporting things from Australia to other places. As far as our paper-thin knowledge carries us, it seems the bulk of Australia’s export volumes (mostly natural resources like coal and iron ore) are shipped to Asia and the rest of the world further up the Eastern Coast, or on the other side of the country entirely, in the Pilbara and the Kimberley Plateau.
What about Melbourne? The Yarra is hardly a commercial river, unless you’re placing bets on the skulls racing up and down in front of the MCG. Scenic, yes. Vital commercial artery, no. A great port is certainly needed to import goods and services into such a large city. But what is flowing out of Melbourne? Again, we admit to what we don’t know.
But here on Australia Day we’re just thinking out loud that this is a young country (let us rejoice, for we are young and free). It was settled in a non- traditional way. Maybe the best places for human settlement on a large scale- places with farmland that can support large urban populations and enough rainfall to support industry as well-maybe those places are up north and west and not here south and east, and least not in these days of growing populations and shrinking water tables and rainfalls. Maybe the future holds a migration north and west.
Great internal migrations are nothing new. Blacks from the American South headed North after the collapse of the southern economy at the end of the American civil war. The demographic challenges are still showing up in American culture. But millions moved and the country’s course altered slightly, while still going forward. China, of course, is in the middle of its great migration from the interior to the coast, from the farm to the high-rise.
Australia, by comparison, is a young country with lots of space. But not all that space can support growth. Fifty years from now, will there be new cities in the north where none exist today? Fifty years from now, will there be enough water to support Melbourne and Sydney? Coming from the American west ourselves, we realize that its only through massive dam and irrigation projects that cities like Phoenix, Las Vegas, and Los Angeles can exist in places where large numbers of human beings would ordinarily have a hard time supporting themselves, and keeping their whistles wet and their lights on. Without the Hoover Dam, Los Vegas would be what it was 100 years ago, a giant rail yard with no sprawling hotels and bright lights. The dam brings climate control and water to an otherwise barren, mostly uninhabitable desert.
Throw a case of climate change in the mix to water-starved, energy-hungry cities and you have a recipe for the collapse of a complex society. It wouldn’t be the first time such a thing has happened in human history. And it wouldn’t be the first time lack of water played a decisive role. More on that next week.
Congratulations to Dr. Tim Flannery for winning Australian of the Year. The Age reports that, “Dr Flannery is a somewhat controversial choice. He has criticised the Howard Government for its lack of action on climate change, proposed nuclear power as one of a number of solutions to global warming, called for a carbon tax, and is loved and hated by other academics and environmental advocates. ”
Good on him, we say. Nobody loves a gadfly, which is what makes them so valuable. “What distinguishes Tim is his ability to see through time, says Peter Cosier, fellow member of the Wentworth Group of Concerned Scientists. “He is able to see across generations and future generations will be thankful that Tim is on their side.” Seeing across time would be handy these days, especially for investors. But the best you can do is look a few years ahead at trends that seem to be just getting started or picking up speed.
“India,” we read in today’s Australian, “will grow at about 8 per cent until 2020, according to a new report by Goldman Sachs that sharply lifts the investment bank’s forecast of the country’s long-term growth rate. In a 2003 report on the so-called Bricc economies of Brazil, Russia, India and China, the bank had predicted a 5 per cent long-term Indian growth rate. But its new forecast says India will overtake the US to become the largest economy in the world after China by 2042. Goldman now predicts India’s economy will overtake those of Italy, France and Britain by 2017, Germany’s in 12 years and Japan’s in 18.”
As far as we can tell, the resource-intensive phase of Indian growth has not yet been factored long-term into Australian share prices, or even capacity targets for basic Aussie exports like coal, iron ore, and other metals. But thinking on the fly, this means that in addition to New South Shanghai we’d better start planning an Indian city up north too. We’ll work on a name this weekend.