Dog-Days-cover-(print)Ross Garnaut - Economic Adviser to the Hawke/Keating Governments and well respected economist has recently published a book that labels Australia as complacent and at the 'cross-road' to its future.

"Here is a brilliant guide to the future of the Australian economy that our prime minister, his cabinet and indeed all members of parliament should study.  We cannot be sure that big problems are ahead for Australia owing to the end of the China boom, but it is highly likely, and our government must be prepared."  Max Corden on the book.

Here is an article extracted from the media recently that outlines some of the aspects of the book that we believe is worth a read.  It's price is $19.99 from bookshops or can be downloaded in electronic version for $9.99.

Australia is enjoying its 22nd year of economic growth without recession – an experience that is unprecedented in any other developed country.

For the first decade of expansion, growth was based on extraordinary increases in productivity, attributable to productivity-raising reforms from 1983. In the early years of this century, reform and productivity growth slowed sharply and then stopped. For a few years, increases in incomes and expansion of output came from a housing and consumption boom, funded by wholesale borrowing overseas by the commercial banks.

Unlike other English-speaking countries and Spain, Australia avoided recession with the end of the housing and consumption boom (earlier in Australia than elsewhere). This was largely the result of a China resources boom. The boom emerged when the exceptional metals and energy intensity of Chinese growth in response to Keynesian expansion through the Asian financial crisis, and again in response to the global financial crisis, took markets by surprise, and lifted prices of iron ore and coal continuously and immensely from 2003 until the Great Crash late in the September quarter of 2008.

China’s fiscal and monetary expansion put iron ore and coal prices back on a strongly rising trajectory in the second half of 2009, and new heights were reached in 2010 and 2011. The high prices for coal and iron ore flowed quickly into state and especially Commonwealth government revenue and was mostly spent as it was received – raising the Australian real exchange rate to unusual, and by 2013, unprecedented levels. The high commodity prices induced unheard-of high levels of resources investment after the recovery of the Chinese economy from the Great Crash of 2008, adding to the expansionary and cost-increasing impacts.

The China resources boom created salad days of economic policy, in which incomes could grow even more rapidly than community expectations. The expansionary effect of the resources boom – taking expenditure induced by high terms of trade, resource investment and resource production together – reached its peak in the September quarter of 2011, when the terms of trade began a decline that continues today. The terms of trade fell partly because Chinese growth fell by about one-quarter within a new model of economic growth.

A bigger influence was the new model of growth, which caused energy and metals and especially thermal coal to be used less intensively. Huge increases in coal and iron ore supplies are also putting downward pressure on prices and will be increasingly important in future.

The dog days of economic policy


The declining impact of the China resources boom ushered in the dog days of economic policy from late 2011, when government revenue and private incomes growth sagged well below expectations and employment grew less rapidly than adult population. The maintenance of high employment and reasonable output growth without external payments problems requires the restoration of investment and output in trade-exposed industries beyond resources. And yet the real exchange rate by early 2013 was at levels that rendered uncompetitive virtually all internationally traded economic activity outside the great mines. A substantial reduction in Australian cost levels relative to other countries is required – a large depreciation of the real exchange rate – to maintain employment and economic growth.

The more that productivity growth can be increased the better. Helpful policy measures include the removal of artificial sources of economic distance between Australia and its rapidly growing Asian neighbours to allow larger gains from trade – removal of remaining protection and industry assistance at the border as the real exchange rate falls, and investment in transport and communications infrastructure.

While China’s new model of economic growth ends the extraordinary growth of export opportunities for iron ore and coal that characterised the first 11 years of this century, new patterns of growth in China and elsewhere in Asia are rapidly expanding opportunities in other industries in which Australia has comparative advantage – education, tourism and other services, high-quality foodstuffs, specialised manufactures based on innovation.

But in contrast to iron ore, coal and natural gas, Australia does not have overwhelming natural advantages over other suppliers of these products. It must compete with the rest of world on price and quality, especially with developed country suppliers with hugely depreciated real exchange rates following the Great Crash.

Even with the return of productivity growth to the world-beating levels of the 1990s, maintenance of output and employment growth would require a large reduction in the nominal value of the dollar, accompanied by income restraint to convert this into a real currency depreciation.

A new economic reform era is required. That requires social cohesion around acceptance that all elements in society must share in restraint as well as commitment to productivity-raising structural change. Achievement of this outcome is blocked by changes in the political culture of Australia since the reform era. Now, uninhibited pursuit of private interests has become much more important in policy discussion and influence.

The new Australian government will succeed in building the political culture that is necessary to deal with the problem only if it is effective in persuading the community of the importance of reform, and in confronting the Australian complacency of the early 21st Century.

This will be hard, as the government will have to change the 21st-century tendency for private interests to outweigh the public interest in policy discussion and choice. Harder still, it will have to disappoint its strongest supporters along the way to leading Australia into a new reform era.

Ross Garnaut is vice-chancellor’s fellow and professorial fellow in economics at the University of Melbourne. This article is based on his book, Dog Days: Australia After the Boom, and is part of a series from East Asia Forum ( in the Crawford School of Public Policy at the Australian National University.


Published in Investment Advice
Monday, 06 January 2014 19:13

Fed Tapering - what it means for investors

Wall St ImageKey points

- After much talk since May, the US Federal Reserve is finally reducing (or tapering) its asset purchase program - by $US10bn a month.

- However, the Fed has enhanced its very dovish forward guidance, highlighting that interest rate hikes are still a long way off and dependent on the economy.

- Fed policy remains market friendly & generally supportive of further gains in shares.

- While, Fed tapering and speculation around it has and will contribute to bouts of market uncertainty, it should be seen as good news as it indicates the US recovery is becoming more sustainable.


In what was perhaps the most anticipated event this year the US Federal Reserve has announced it will reduce the pace of its third quantitative easing (QE3) program by $US10bn a month. The Fed has been foreshadowing a “tapering” since May 22nd so it’s a surprise to no one. This note looks at what it means for US monetary policy and investment markets.

The Fed tapers

The key aspects of the Fed’s decision to taper are:

  • A cutback in QE from $US85bn a month to $US75bn.
  • This to be focussed on both reduced Treasury bond purchases (which drop from $US45bn a month to $US40bn) and reduced purchases of mortgage backed securities (which drop from $40bn a month to $35bn).
  • Tapering is not a “not on a preset course” but dependent on further economic improvement & higher inflation with Chairman Bernanke implying the wind down will be such that QE will likely continue into late next year, implying an ongoing reduction of about $US10bn in bond purchases each meeting, which is slower than many expected,
  • More dovish guidance on the outlook for interest rates with the Fed indicating rates will remain near zero well beyond the time when unemployment falls below 6.5% and 12 of the 17 Fed committee officials not seeing a rate hike until 2015. In other words the clear message is that tapering is not monetary tightening and does not mean that the first rate hike is any closer.

The Fed’s dovish guidance is significant as Fed research suggests it has greater effects on the economy than signals about asset purchases.* Specifically, it’s aimed at pushing back against rising bond yields as it has led to higher mortgage rates.

Our assessment

The first thing to note is that the Fed’s move is positive as it indicates the US economy is getting stronger and the recovery more self-sustaining and so the US can start to be gradually taken off life support. However, the emphasis is on gradual. It’s quite clear the Fed is still committed to easy monetary policy until more spare capacity is used up. While the economy is on the right path, it’s still got a way to go, particularly with inflation running well below the Fed’s 2% target.

In this regard, tapering is not the same as monetary tightening. Pumping cash into the US economy is continuing but at a slightly lower rate. It’s very different to the premature and arbitrary ending of QE1 in March 2010 and QE2 in June 2011 that went from $US95bn & $US75bn respectively in monthly bond purchases to zero overnight at a time when US and global economic data was poor and contributed to 15-20% share market slumps at the time. This time around QE is only being reduced gradually and only because the economic data shows the US economy improving.

More fundamentally, tapering does not signal earlier interest rate hikes. Quite clearly the Fed has gone out of its way to stress this message by indicating that near zero interest rates will likely remain well beyond the time when unemployment falls below its previous target of 6.5%. Our own view of the US economy is very similar to the Fed’s in seeing growth of around 3% next year driven by housing, business investment and consumer spending. However, barring a much faster acceleration in growth, interest rate hikes are still probably 18 months or more away:

  • Growth is still far from booming.
  • Spare capacity is immense as evident by 7% official unemployment, double digit labour market underutilisation and a very wide output gap (ie the difference between actual and potential GDP).

Image 1
Source: Bloomberg, AMP Capital

  • A fall in labour force participation has exaggerated the fall in the unemployment rate. While much of this is structural some is cyclical and at some point will start to bounce back slowing the fall in unemployment.
  • Inflation is low at just 1.2%.

Comments during her nomination hearings quite clearly indicate that Janet Yellen, the likely next Fed Chairman after Bernanke’s term ends at the end of January, will not be rushing to raise interest rates.

Put simply the Fed may be easing up on the accelerator, but they are a long way from applying the brakes.

Finally, while the US is slowing its monetary stimulus this is not so in other key developed regions with both the ECB and Bank of Japan likely to ease further if anything.

Implications for investors

While the days of expanding US monetary stimulus are probably over, the message from the Fed remains market friendly. The pace of quantitative easing is slowing only gradually, this is contingent on the US economy continuing to strengthen and rate hikes are unlikely until 2015, at least.

For sovereign bonds our medium term view remains one of poor returns. Despite the back up in yields, they remain low relative to long term sustainable levels suggesting the risk of rising yields and capital losses over time as the global economy mends. Even if bond yields stay flat at current levels they offer poor returns, eg just 2.9% for US 10 year bonds and just 4.3% for Australian ten year bonds. However, a 1994 style bond crash which saw extreme long bond positions unwound triggered by a sharp 300 basis point rise in the US Fed Funds rate looks unlikely.

For shares, the period of dirt cheap share markets and support from ever expanding monetary stimulus seems over. More significantly, taper talk since late May has clearly made some nervous given the positive relationship between rounds of quantitative easing in the US and share markets, with many fearing that a move to end it will be followed by slumps as occurred after QE1 and QE2 ended. See the next chart.

Image 2

Source: Bloomberg, AMP Capital

Slowing QE suggests share market returns are likely to slow from the 20% or so pace of the last 18 months. Bouts of uncertainty regarding the Fed’s intentions are also likely, as we saw in May-June and more recently. However, the overall picture remains favourable for shares:

First, the tapering of QE3 is very different to the abrupt and arbitrary ending of QE1 and QE2. This time around US data is stronger and the wind down in QE3 is dependent on further improvement in US economy.

Second, although the Fed isn’t undertaking monetary tightening many tend to see it as such so past monetary tightening moves, which have been via rate hikes, are instructive. The next table shows US shares around the first rate hikes in the past 8 Fed tightening cycles. The initial reaction after 3 months is mixed with shares up half the time and down half the time. But after 12 and 24 months a positive response tends to dominate. So even if this were the start of a monetary tightening cycle it’s not necessarily bad for shares.

The reason for this lies in the improvement in growth and profits that normally accompanies an initial monetary tightening. It’s only later in the cycle when rates are going up to onerous levels to quell inflation that it’s a worry. Right now we are seeing improving growth and profits, but with the start of rate hikes (let alone rises to onerous levels) looking a long way off given very low inflation.

US shares after first Fed monetary tightening moves

First rate hike -3 mths +3 mths +6 mths +12 mths + 24 mths
Oct 80 4.8 1.6 4.2 -4.4 2.4
Mar 84 -3.5 -3.8 4.3 13.5 22.5
Nov 86 -1.5 14.0 16.4 -7.6 4.8
Mar 88 4.8 5.6 5.0 13.9 14.6
Feb 94 2.9 -6.4 -4.9 -2.3 14.9
Mar 97 2.2 16.9 25.1 45.5 30.3
Jun 99 6.7 -6.6 7.0 6.0 -5.6
Jun 04 1.3 -2.3 6.2 4.4 5.5
Average 2.2 2.4 7.9 8.6 11.2

Source: Thomson Reuters, AMP Capital

Thirdly, the rally in US shares recently has been underpinned by record profit levels. It’s not just due to easy money.

Finally, shares are likely to benefit from long term cash flows as the mountain of money that has gone into bond funds since 2008 is gradually reversed with some going to shares.

Image 3

Source: ICI, AMP Capital

While next year will no doubt see a few corrections in shares along the way, the key point is that the broader picture – of reasonable share market valuations, improving global growth and still very easy monetary conditions - suggests the bull market in shares has further to run.

The Australian share market is also likely to benefit from the rising trend in global shares, but is likely to remain a relative underperformer reflecting better valuations globally and a bit more uncertainty over the Australian economy. Sector wise, mining stocks look cheap and best placed to benefit from the global recovery.

In terms of the Australian dollar, Fed tapering may make life a bit easier for the RBA in getting the $A down. While I wouldn’t get too excited as near zero interest rates in the US look like remaining in place for some time, the broad trend in the $A is likely to remain down.

Finally, in the very short term getting the Fed’s taper decision out of the way likely clears the way for the seasonal Santa rally in shares that normally gets underway around this week and runs into early January.

Dr Shane Oliver
Head of Investment Strategy and Chief Economist
AMP Capital


Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.


Published in Investment Advice
Thursday, 31 October 2013 01:51

Australian Share Market Outlook - October 2013

John Grace (Deputy CEO, Ausbil Funds Management) and one of Australia's most respect Australian Share investors talks about the most recent company reporting season.

John also talks about his outlook for the share market, and his optimism despite a solid rally over the past 12 months.

More importantly he discusses how he has positioned his fund to take advantage of what has been very much a two tier market.



DISCLAIMER: The above information is commentary only (i.e. our general thoughts).  It is not intended to be, nor should it be construed as, investment advice.  To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.  Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and circumstances.

Published in Investment Advice
Friday, 18 October 2013 20:00

Global Investment Update - October 2013

Hamish Douglass (CEO Magellan Financial Group) talks with Mark Draper (Adviser, GEM Capital) about his views on the current state of global financial markets.

In particular Hamish discusses:

1. How he does not believe that the US will default on their debt

2. Withdrawal of US stimulus in the form of Quant Easing and what investors should be watching in this process

3. How the Magellan Global Fund is positioned to generate returns for investors over the next 3 years


For more information on our views

Published in Investment Advice

DohInsideThe Tax Office has published a list of the top 10 compliance mistakes that SMSF trustees make when running their funds. The list is based on the type of contraventions reported by approved SMSF auditors between 2005 (when contravention reporting started) and up to June 30, 2012.

The top 10 contravention types (although admittedly one of them is “other”) in percentage terms are as follows:

SMSF Contraventions

An interesting observation is that of the top 10, three types of contravention represent more than two-thirds of the proportion of asset values (67.8%) involved in the most frequent contraventions. These are:

  • in-house assets
  • separation of assets
  • loans to members/financial assistance.

When looking at the number of contraventions, a little under two-thirds (64%) involve four of the top 10. These are:

  • loans to members/financial assistance
  • in-house assets
  • administrative-type contraventions
  • separation of assets.

The Tax Office has the following options when dealing with an SMSF contravention issue:

  • making an SMSF non-complying for taxation purposes
  • applying to a court for civil penalties to be imposed — a person may also face criminal penalties for more serious breaches of the law
  • accepting an enforceable undertaking in relation to a contravention, and
  • disqualifying a trustee of an SMSF.

As well, the Tax Office can issue the following:

  • rectification and education directions for contraventions, and
  • an administrative penalty regime for SMSF trustees for certain contraventions.

A rectification direction will require a person to undertake specified action to rectify the contravention within a specified time and provide the Tax Office with evidence of the person’s compliance with the direction.

An education direction will require a person to undertake a specified course of education within a specified time frame and also provide the Tax Office with evidence of completion of the course.

Where an administrative penalty is imposed it must be paid personally by the trustee or the director of the trustee company and cannot be paid or reimbursed by the SMSF. A table of some of the provisions that will attract the administrative penalty follows:

SMSF Penalties

Wednesday, 25 September 2013 08:36

Self Managed Super Fund - Essential Checklist

Draper_05For those who are considering whether to establish a Self Managed Super Fund we have devised a checklist of aspects to think about before proceeding.

  1. Ask yourself one more time if this is the right decision for you. It might be time to take a deep breath and just check that you are sure. Don't do it just because SMSF is a buzzword and everyone else you know is doing it. It has to work for you and your family. So maybe sit down and do the age old thing, draw up two columns, one pro and one con, and go through it all again
  2. Part of the shift is being confident, not only that the SMSF structure will work for you, but that it will perform better than what you have already. So go through your existing statements on your retail or industry fund or whatever it is you have, and check its performance over time. Do you have a consistent and coherent investment strategy to fulfil your goals for retirement savings
  3. Make sure you have a good idea of how you will deploy your money when you set up your fund, either acting by yourself or with the help of an investment adviser you trust. Part of this is to understand how you can roll over existing super accounts, but also how you might put other assets currently outside your super into your new fund. Think about what assets you want to put into your fund and understand how much tax you might have to pay on getting them into your SMSF.
  4. You're going to become a trustee of your fund, so you need to make sure you understand your responsibilities and legal obligations. Work out if you want to get some professional help, or if you want to be completely DIY. You should understand how much work is required to administer the fund and work out if you have the time and expertise to do it yourself. If not, you should know what sort of skills you need to access, have some particular advisers in mind and have an understanding of their fees.
  5. Decide on your structure - individual trustees or a corporate trustee. The corporate route has gained in popularity in recent times but there are advantages and disadvantages for each. Professional advice will be useful here.
  6. Make sure all your tax affairs are in order. The ATO is the regulator of the SMSF sector and will approve the creation of your fund. It will definitely have issues with your application if you've been convicted of dishonesty offences, but they will also be cautious if you have a large outstanding tax bill, a history of not lodging your returns, if you have a private company with a poor reporting record or taxes outstanding.  If there are other trustees in your fund, they also need to be eligible, so check that they are.
  7. Apply the residency test. If you live outside of Australia for long periods, an SMSF might not work for you because that will impact on the tax situation. The fund needs to meet the ATO's definition of an "Australian superannuation fund” to be eligible for tax concessions.
  8. Get your trust deed together with the help of a legal practitioner. Sign and date it and make sure that is properly executed. Make sure all trustees sign it. At the same time, or within 21 days of becoming a trustee or director, all trustees need to sign a declaration saying they understand their duties and responsibilities. Keep this safe because you could be asked to produce it later.
  9. Access the tax file numbers of everyone in the fund, because these will be quoted when the fund is registered with the AT0.
  10. Set up your fund's bank account. You'll quote this account if and when you close down your existing super funds to kick off your SMSF.
  11. You need your trust deeds and bank account number when you register your fund with the AT0. If you've gone with a company structure, you'll also need an Australian Business Number (ABN).
  12. Write out your fund's investment strategy. This is not only a good exercise to go through, but you'll need it to show that your investment decisions comply with the strategy you have already outlined, and even more importantly, comply with super laws.
  13. Finally, refer to the ATO’s website for its SMSF series of booklets and information at   And don't be shy about reaching out to the professionals for advice - that's what we're here for.


Note: Advice contained in this flyer is general in nature and does not consider your particular situation or needs. If information contained is not appropriate to you at this stage please pass on to family and friends who may benefit. Please do not act on this advice until its appropriateness has been determined by a qualified adviser.

For more information on SMSF’s or to arrange a no-cost, no-obligation first consultation, please contact us at GEM Capital on Ph (08) 8273 3222


Published in Superannuation


The ban on off-market transfers for self-managed superannuation funds (SMSFs) will not go ahead as planned from 1 July 2012, and is likely to be delayed for one year, according to Self-Managed Super Fund Professionals' Association (SPAA) technical directorPeter Burgess.

SPAA understands that the Minister for Financial Services and Superannuation, Bill Shorten, will announce the delay of the measure to 1 July 2013 before the end of the month.

Treasury is currently experiencing some "drafting issues" with the proposed ban on off-market transfers, which is "causing it a few headaches", Burgess said.

"In addition to the brokerage costs that SMSF trustees are going to have to incur because they have to go on market, they also run the risk of the market moving against them," he said.

"Since they can't be the other side to the trade, they have to wait until there's been a market price that determines the asset value. Then they can get into the market and buy it back," Burgess said.

"We continue to advocate for the removal of this proposal and for the introduction of an operating standard," he added.

SPAA director of education Graeme Colley said the ban on off-market transfers would have implications for employee share issue arrangements.

"If a public company wants to issue shares under employee share issue arrangements they can be transferred directly to the superannuation fund," he said.

But things would get complicated if the employee has an SMSF, Colley said.

"The question then becomes: does that company have to put the shares on the market before they can be transferred to the superannuation fund?" he said.

Published in Superannuation