There we were watching Lateline, waiting for the rain to stop at Edgbaston so the cricket could begin, when David Murray, Chairman of Australia’s Future Fund, began making so much sense we could hardly write it down fast enough. And it wasn’t his comments about buying non-government guaranteed corporate debt that got us so excited.
Murray addressed a point we’ve been banging on about here for a month now: when you have to import your capital from the rest of the world, you become dependent on global banks to fund your domestic economy. And if those banks don’t like what you’re doing with your borrowed money-if they think you are using it to bid up house prices rather than build investments that will generate higher returns-they may decide to invest elsewhere.
What does it mean to be capital poor? “We ask them [global banks] for the money to build larger houses…more square metres per house, year-on-year…and we ask for the money to put less and less people per house at the same time,” Murray began.
“Why in Australia is that money not going to fabulous new infrastructure…public goods…why isn’t it fuelling great companies?” he asked. We assume the question is rhetorical. The obvious answer is the country is in the grip of a housing hysteria, or at least the belief that everyone-banks, real estate, agents, government tax collectors, builders, and home buyers-can all get rich on houses.
“We’re now going to have to invent a corporate bond market because this money isn’t flowing right,” Murray added. By ‘flowing right,’ we assume Murray means that instead of funding productive investment and enterprise, Australia’s foreign borrowing addiction could eventually threaten the supply of credit provided by foreign banks.
“I think that our friends around the world who have a habit of saving and helping us with it are entitled to ask, ‘Is this the best return for my precious savings dollar?'”
Lots to think about. For what it’s worth, we think Murray is right on the money. The Chinese are already-and quite rightly-telling American officials to reduce their deficits or jeopardise the flow of credit coming from China.
This is a subject we expect to speak more about tonight. The American fiscal deficit is directly linked to Australia. The more the Chinese are worried about the value of their U.S. dollar assets, the more quickly they will look to diversify those assets or shed them outright.
That probably means increased Chinese investment in Australia’s resource and energy sector. Australia is part of China’s answer to “the resource question.” Also, the Chinese already realise that making a buck of Aussie borrowing is not a bad investment strategy either. Dow Jones news wires reports that, “China’s Bank of Communications will open a Sydney office as its first working branch in Australia.
“The move, announced by the NSW government today, underscores the growing ties in trade and business between Australia and China, a major export customer, and is part of a strategy by authorities to promote Sydney as a regional hub for financial services. The Bank of Communications, China’s fifth-largest bank, is seeking a licence from the Australian Prudential Regulatory Authority to establish a branch delivering a full array of services.”
Selling money can be a good business. China is also branching out with its global investment/expansion strategy, trying to diversify its sources of income. The profit margins in finance are probably a lot higher than the profit margins in making air conditioners (or most assembly and manufacturing industries.) If you want to increase national income, it’s a good strategy (although it’s not as good for full employment, which is also a big objective of the Chinese State).
Also, when you’ve accumulated a huge chunk of capital with a mercantilist trade policy based on keeping your currency artificially cheap so you can run a large trade surplus, you have to put that capital to work eventually and not just buy U.S. Treasury bonds. It will be interesting to see if the long-term strategy works.
But you get the feeling there IS a long-term strategy at work in China. In Australia? Murray says that under his direction the Future Fund will meet the unfunded liability of superannuation for public servants by taking a long-term view. He encourages all of Australia to do the same.
He says he is, “Taking a long-term view about saving, which is a critical problem in the Australian economy…taking a long-term view about our next generation, not just ourselves…taking a long-term view about the stability of employment and skills building…whether it’s at the Future Fund or anywhere else…and a long term view about the pride in our institutions.”
We find those comments quite encouraging actually. One of the big faults in the corporate world in the last twenty years-driven by quarterly earnings analysis and the 24/7 media cycle-is managing long-term institutions for short-term gains. To some extent, this just reflects the compression of time in a globalised world. The business cycle seems to have speeded up.
But shareholders and corporate management alike would both be better served by considering what’s best for the long-term interests of the institution…and how to make sure that particular business continues to serve customers well. This goal might not always be compatible with short-term earnings management strategies that allow executives to meet targets which trigger extra compensation.
Essentially, we think Murray is suggesting that we all need to be better stewards of capital. He’s also implying that for the last twenty years, we-the institutions of modern capitalism-have NOT been good stewards of capital. If you pursue that line of thinking, it might also mean that the expectation that you can make a lot of money very quickly without really doing any work or adding value is-as a cultural frame of mind-not very healthy for our long-term survival.
We’ll have to leave it at that today! Tonight is the big night of the Debt Summit at the State Library of Victoria. We’ll be back with a full report on Monday. Until then!
for The Daily Reckoning Australia