THERE was an old saying in the markets that when the US sneezed, Australia caught a cold. These days, the US is supine in bed, sweating off a decade’s deathly hangover, while Australia has sauntered off to work.
It’s as much good luck as good management. Lounging about on a big pile of commodities for which China is paying a record price is a fine place to be. And the move by the US government to print more money – via its so-called QE2 – is a fillip to commodity prices.
At least, for now. More US dollars on issue. A falling US dollar. More demand by investors for hard assets. Ergo, greater demand for commodities. Yet nobody has the faintest idea what rock-bottom interest rates and unprecedented money-printing will bring; whether it will fire up the US economy; whether rampant inflation will ensue.
It has become apparent this week, though, that other countries are starting to dread what the tide of ”hot money” gushing out of the US and around the globe might do; what trade and currency wars it might incite. Already, Australia’s budget is down $10 billion, thanks to the rising dollar and its pressure on export income.
Meanwhile, in the US, as equities prices plod blithely higher and bond rates languish at near- 30-year lows, the beginning of the next bubble is surely taking place. In the wake of the tech boom, the Fed slashed cash rates to appease Wall Street and fire up growth. That brought the property boom, then the global financial crisis.
For investors, it might be a game of ”pick the next bubble”. For consumers, particularly the poor, the stakes are higher. It is not just hard commodities on the rise, but also soft commodities such as grains, milk and sugar. Good for the lucky country once again – at the farm gate – but not so good for the others.
WHEN it comes to executive pay, the salient question is not ”what do you have to do to get a bonus?” Rather, it is ”what do you have to do to not get a bonus?”
Executive pay is up about 20 per cent this year, once again well in excess of earnings growth, share price performance, shareholder returns and any other reasonable metric you would care to mention.
On the reckoning of the Australian Council of Superannuation Investors, in 2002 a chief executive of a Top 100 company had a 25 per cent chance of not getting a bonus. Last year, even in the aftermath of the financial crisis, a CEO had an 86 per cent chance of getting a bonus. And the median bonus is three times higher, albeit still below the Macquarie/Babcock-inspired peaks of 2007.
Perhaps the most spectacular feat this year came from the chairman of PaperlinX, David Meiklejohn, who, while enjoying a pay rise himself in a year when the company blew up $225 million, helped his chief executive, Tom Park, to a $926,000 short-term bonus. This little beauty was apparently warranted because Park reduced PaperlinX’s debt.
That debt, however, was reduced in a frantic fire sale of assets, at the insistence of its bankers, to save the company from extinction because PaperlinX had strapped on far too much debt in the first place.
Meanwhile, Downer’s top brass pulled out more in bonuses than they delivered in net profit and the crew from Prime Infrastructure were lavished with a doubling in pay, despite dusting another billion dollars on behalf of their mostly small shareholders.
Thick-skinned as ever, the Asciano boss, Mark Rowsthorn, managed a $900,000 ”retention bonus”. Given the profound destruction of shareholder wealth under his stewardship, it remains a mystery why anyone would possibly pay to retain him.
Although he might be pipped by the indefatigably well-rewarded Wal King, who bows out of Leightons this year (showing his usual flair
for cash with a $5 million ”transition” bonus), BHP’s Marius Kloppers stands to pull out the biggest whack.
Kloppers had 225,000 BHP shares vest. Both he and CSL’s Brian McNamee enjoy big rewards, justifiably won, from the value of their vested equity. This is how the system should work. The BHP stock vested after management beat its peers by 5 per cent a year in total shareholder returns over five years.
Ironically, Kloppers achieved this by failing to make value-destroying acquisitions – such as the takeover of Rio. His is a just reward for failure.
HOW much will the government really make from its mineral resource rent tax? It was to have been $12 billion under the super profits tax. That dropped to $10.5 billion when Julia Gillard struck her triumphant, though still secret, accord with the big three miners.
The latest accident to revenue projections came last week, with another $2.1 billion shaved off thanks to a rising Australian dollar.
It’s a cheeky thought, but not inconceivable, that the government could end up paying the miners. There is currency and profit risk for a start. But ”negotiation risk” is even higher – especially as the miners appear to have skewered the government good and hard so far.
For one, they are asking the Commonwealth to pick up all state government royalties, present and future. Their latest demand is for any carbon costs to be deductible on any operations where the profits tax applies.
Powerful mining lobby versus a backpedalling government … that $7.4 billion already smells like an ambit claim.