george street review - 132 issue 3

AUSTRALIA’S FINANCIAL STRATEGY IN AN UNCERTAIN

GLOBAL ECONOMY

ISSUE 3SEM 132

2 GEORGE STREET REVIEW | ISSUE 3

GEORGE STREET REVIEW

EDITORS:Bianca GorgoglioneAnnabel Yee

CONTRIBUTORS:Jenna WongArchibald MarrBrent LoeskowAnnabel YeeHelena Michael

Reinhold SchmidtChawis ChamnarkitKingsley AdvaniJonathan ColakAndrew McNaught

CONTENTSCHAIR’S REPORT Jenna Wong

AUSTRALIA’S MINING FUTURE Reinhold Schmidt

GST IMPORT REFORMSJonathan Colak

TITANS OF INDUSTRY FORUM

BITCOIN 101Chawis Chamnarkit

THE AFRICAN CENTURY Archibald Marr

DARK POOLSKingsley Advani

UNLEASHING THE FEMALE WORKFORCE Andrew McNaught

RESOURCES: A BLESSING OR A CURSE Andrew Kiggundu

GOODBYE MR. FEDHelena Michael

ABBOTT VS. RUDDBrent Loeskow

WHAT THE FINANCE?+ THINK BIG

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RBA: WHICH WAY? Annabel Yee

GEORGE STREET REVIEW | ISSUE 3 3

Australian business community about some of the critical issues facing the business leaders of today and tomorrow. We hope to see you all there!

OPPORTUNITIES

Bond Investment Group strives to deliver quality opportunities and experiences in order for students to excel and gain a competitive edge before launching into a career. This semester, we have run another Bloomberg Aptitude Test, allowing students the opportunity to identify their strengths and weaknesses in various areas. The test allows employers to contact test-takers for an internship or full-time position and is a fantastic opportunity to get a head start in your career! We wish our test-takers good luck with their results and for those who could not make it this time, make sure to look out for more opportunities next semester.

The group recently ran an Investment Banking application and interview seminar, helping students to prepare for the some-what daunting process. We hope those of you who attended found it a useful experience and wish those of you who applied the best of luck. Thanks must go to Lewis Bourne for running the session.

Best of luck with the rest of the semester and we hope to see you all on 9 July!

As always, remember to think BIG!

Jenna WongChair Bond Investment Group

This has certainly been a very busy semester for everyone at Bond Investment Group and we have dedicated this edition

to our upcoming Titans of Industry Forum. Inside you will find articles stemming from our overarching theme for the panel: “The Silver Lining: Australia’s financial strategy in an uncertain global economy”.

Firstly, a big thank you to everyone who entered our article writing competition. We are happy to announce that the winner is Andrew Kiggundu, and his article is featured on page 16.

TITANS OF INDUSTRY FORUM 2013

Our annual Titans of Industry Forum has crept upon us and we are very excited to have secured a talented and diverse range of guest speakers for this year’s Forum on Tuesday 9 July:

» Mr Richard Gibbs – Chief Economist, Macquarie

Group Limited;

» Ms Nell Hutton – Managing Director, Goldman

Sachs;

» Mr Garry Weaven – Chair, Industry Funds

Management; and

» Mr Samuel Cochrane (moderator) – UBS Anzac

Macro Sales and Bond Alumnus.

Please turn to page 4 for more information on the Forum, our guest speakers and the topics that will be discussed. As always, it is an event not to be missed and to learn from some of the sharpest minds in the

CHAIR’S REPORT

THE BIG COMMITTEE FOR SEMESTER 132

Welcome to our Semester 132 edition of the George Street Review.


It’s back and as BIG as ever – our annual Titans of Industry Forum. This year’s panel again features some of Australia’s sharpest minds in the business community. The Forum will be in the form of a luncheon, followed by a panel discussion and an opportunity for Q&A.

The panel is comprised of some of Australia’s true titans of industry:

» Richard Gibbs, Macquarie Group Ltd.

» Nell Hutton, Goldman Sachs

» Garry Weaven, Industry Funds

Management

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The Silver Lining: Australia’s financial strategy in an uncertain global economy.

SUB-TOPICS1) Chinese Slowdown: How will Australia cope considering our dependence on the Chinese economy?

2) Resource Curse: Economic and industry analysts have reported a heavy decline in mining investment. Does Australia exhibit an over-dependence on its mining sector?

3) Sovereign Debt Crisis: To what degree will Europe’s sovereign debt crisis impact Australia and how can we protect ourselves from the crosswind?

4) Currency Wars: Where do we see Australia’s currency in the near future and what effect will the development of foreign currencies have on the Australian economy?

5) Political Climate: Looking into the future, what effect will Australia’s politics have on its position in the global economy?


GARRY WEAVENChair

Industry Funds Management & Pacific Hydro

Garry Weaven is Chair of Industry Funds Management (IFM), a global fund manager owned by a number of Australian superannuation (pension) funds, and of Pacific Hydro, a leading Australian renewable energy company with extensive operations in Australia and South America. He is also a Director of ME Bank and was a foundation Board member of Melbourne’s Docklands Authority as well as its successor, VicUrban. Garry’s involvement in superannuation and funds management follows a successful career in the Australian union movement, which culminated in him being elected Assistant Secretary of the ACTU in 1986. Garry played a seminal role in the development of the industry superannuation fund movement and in 1994 founded Industry Fund Services, the forerunner to a number of collectively owned financial service providers, including IFM.

Sam Cochrane is part of the UBS Macro Sales team based in Sydney. Responsible for covering

NELL HUTTONManaging Director & Head of Corporate Advisory Solutions

Goldman Sachs

Nell is head of the Corporate Advisory Solutions team in Australia and New Zealand. Prior to assuming her current role in 2011, she was co-head of Derivative and Superannuation Strategies in the Securities Division. Nell joined Goldman Sachs in 1999 in London and moved to Australia in 2006. She was named managing director in 2007.Nell earned an MPhil in Finance and Economics at Cambridge University in 1999 and a BCom (Honours) in Econometrics at the University of Sydney in 1997. She and her husband have two children and reside in Sydney.

RICHARD GIBBSChief Economist & Head of Economics

Macquarie Group Limited

Richard Gibbs is Chief Economist and Head of Economics for the Macquarie Group Limited. He has worked for Macquarie for the past 19 years and is responsible for the formulation and presentation of the Group’s economic scenarios and forecasts for Australia, New Zealand, Asia and the major industrial economies.He provides regular briefings to the Australia-China Business Council and frequently delivers the ACBC’s China Economic Updates. Richard regularly provides commentary on economic and business developments for CNN, CNBC Asia and BBC World. Richard also acts as Consultant Chief Economist to the Abu Dhabi Commercial Bank.Richard holds a Masters degree in Economics and Finance, an MBA and a Graduate Diploma in Applied Finance and Investment and is a Graduate member of the Australian Institute of Company Directors.

hedge fund clients in both Asia and the U.S. as well as regional Central Banks he is the ‘coal face’ of many of the economic financial trends arriving on Australian shores. Sam has worked at UBS for 3.5 years having spent time working out of the Hong Kong and London offices, and previous experience in inflation trading and cash credit sales. Prior to UBS, Sam has been a tutor at Bond University in the business faculty.

Sam Cochrane is a former Bond graduate with an LLB (Hons.) and Bachelor Int. Relations (Bus.) and is currently completing a Grad Dip in Mineral Geosciences.

SAMUEL COCHRANEAnzac Macro Sales

UBS

MODERATOR


Financial markets have been taken on a rollercoaster ride the past few weeks as the US Federal Reserve has kept investors on edge in the fear that there will be an easing of the US’s bond-buying program.

WHAT IS THE BOND-BUYING PROGRAM? In summary, the US Federal Reserve’s money printing through the purchase of about $US85 billion in bonds per month was aimed at lowering long-term interest rates in order to encourage borrowing, spending and investing. The program has been responsible for flooding the international share market with large amounts of liquidity. The program was aimed at improving the weak US economy, which hit rock bottom in 2009 with the GFC woes.

WHAT IS THE FED DOING? US Federal Reserve chairman Ben Bernanke has revealed that the US Federal Reserve will begin to ease back on its bond-buying program as the US economy improves. However, Bernanke stressed that it would only retract its quantitative easing program if the economy were strong enough. The US Federal Reserve would still like to see the US unemployment rate fall to 6.5% (currently 7.6%) and inflation rates to improve before any drastic cutbacks are made. In order to not disturb the market too much, the Fed also reassured investors that interest rates would

not rise just because there would be a tapering of stimulus measures.

WHAT HAPPENED ON THE ANNOUNCEMENT? The news caused the US dollar to soar with investors flocking to the US economy based on the prospect that interest rates will rise on an improving economy. Consequently, the Australian sharemarket lost around $25 billion on the same day the news was announced, hitting an all time two-year low as it dipped below 93 US cents.

SO IS THIS GOOD OR BAD NEWS FOR AUSTRALIA? To date, the Australia dollar has fallen almost 15% against the US-dollar in only two months. In fact, a chief economist at the Bank of America has stated that if the US economy continues to improve then the Australian currency will continue to drop. Some may believe the US Federal Reserve’s decision is concerning for Australia when the currency rallied above $1US dollar only a short few months ago. However, the currency dropping is actually goods news because it will assist in improving export returns, trade and stabilising the national income. The Reserve Bank of Australia actually announced that it has wanted to see the Australian currency drop because it acts like an interest rate cut. The downside to our weakening dollar against the US will mean that the cost of imports like oil could rise, with the cost of petrol potentially increasing 10c a litre.

With the US Federal Reserve’s announcement to taper its bond-buying program in the future, investors responded by ensuing the sky-is-falling sell-off in the market. Whilst the news may have caused financial loss to institutions around the world, it certainly is not a bad thing if the US Federal Reserve believes that the market is just about ready to stand on its own two feet.

GOODBYE

MR. FED

HELENA MICHAEL

RBA


RBA

The RBA dropped the cash rate to 2.75 per cent in May 2013, and since then the Aussie dollar has slipped to below 93 US cents – depreciation of more than seven per cent against the US dollar.

Weaker data coming out from Europe, China and India, and mixed data coming from the US has highlighted the downside risks to the Australian economy, as seen by this rapid fall in the Aussie dollar as perceived and interpreted by the markets.

The questions now are: in anticipation of downside risk, will the dollar fall further? Or will the present levels be adequate to lift Australian exports and supply a burst of fresh air to the Australian economy?

WHICHWAY?

The result of leaving interest rates unchanged at 2.75 per cent from May was in strong agreement at the RBA, as nine members were in consensus. It is a tricky game of finding a balance, weighing needs and coming to a subsequent decision of whether to lower or increase the cash rate; this process is undoubtedly on the minds of the Shadow Board members – which way should they go?

The sustained weakness in the Australian economy highlights the need to lower the cash rate whereas the weakened Australian dollar and expansionary stimulus stemming from the historically low cash rate prompts the need to raise the cash rate. What is the probability that rates

should increase? In the next six months, this figure is approximately one third, which is somewhat less than the risk that rates should be lower.

What do the Shadow Board members think? Over the next 12 months, they have attached a 40 per cent probability that the cash rate will need to increase. This is more than the probability that the cash rate will need to decrease.

Concerns about subdued consumption, falling commodity prices, weaker global demand and stricter fiscal policy is reflective in the small shift in favour of lower interest rates, at a six-month and twelve month sphere.

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BITCOIN 101They’re a bit like money, and they’re a bit like financial bubbles. They’re Bitcoins, and they could be what the future of money might be like.

WHAT IS IT?In its simplest definition, Bitcoin is a form of virtual currency that has been made available and brought to life with the Internet Revolution. The willingness of people to adopt and utilise new forms of monetary exchange has given the Bitcoin great publicity. It is very similar to other forms of online payment such as PayPal or credit card transactions; you can buy pizza using Bitcoins, subscribe to your favourite superstore, or even register for an online dating service using Bitcoins. However, unlike dollars or pounds, Bitcoins are not backed by any government. They are a complete decentralised form of money and it does not get liked to any sort of central banking system or issuing authority. This is where the big part of their appeal comes in. Instead of being swallowed into a system that is often abused by human greed and manipulation, this form of currency exists in the online world and instead of being regulated by the government; it is governed by mathematic algorithms and sophisticated encryption protocols.

HOW IT WORKS?Just like any other currency, Bitcoins are extremely easy to use. You can use Bitcoins for all sorts of real transactions. In order to do so, you purchase Bitcoins using your credit card or bank account, and watch these Bitcoins get transferred directly into you Bitcoin wallet. This will allow you to send and receive payments directly to a buyer or seller without having to go through another financial institution. As mentioned, Bitcoin is decentralised and is only governed by mathematic algorithms and encryption. Payments of Bitcoins are as easy as sending an email, and this can also be done with smartphones. Since there are layers of encryption, this creates complicated mathematical algorithms securing these transactions, making them ‘legitimate and secure’.In order to start using Bitcoins, you need wallet software that encrypts and maintains the Bitcoin numbers that you have. This can easily be done with a simple Google search, and using the account that you have just registered, you can purchase your own Bitcoins and use them in real transactions.

HOW DID IT START?In 2008, during the Global Financial Crisis, a group of

CHAWIS CHAMNARKIT

AN INTRODUCTION TO HOW THEY ARE USED IN CURRENCY WARS


BITCOIN 101AN INTRODUCTION TO HOW THEY ARE USED IN CURRENCY WARS

people (or one individual) working under pseudonym Satoshi Nakamoto published a document outlining the feasibility of the Bitcoin concept. In this article, Nakamoto mentions the failures of government-backed currency and the corruption of existing banking systems as the prime motivator to inventing this new virtual currency. When this article was first published, many financial and technical gurus thought of it as a ‘purer form of money’. Since it is not regulated by any government, it would be seen as a currency that serves the citizens of the world, rather than the governments of the world. Some of you would have already heard about this concept, but servers such as Mt.Gox allows financial trading and investing through Bitcoins, and this has already created fortunes for many investors.

BUT WAIT…This is more than a ‘Bit’ scary. Before going on the internet and setting up your Bitcoin account, it is important to know some problems that it may create. The biggest problem right now is the issue of trust in this ‘virtual’, ‘ungoverned’ currency. Speculations surrounding Bitcoins have essentially turned the environment of Bitcoin users into a roller coaster ride. In early 2010, one unit of Bitcoin was worth a few cents and by the middle of 2011, it increased up to approximately $30. At the end of the year, it violently slipped down to only $2 before making a remarkable recovery to a new record of $230 early this year. However, it has recently crashed once again, dropping to below $100. Can you imagine trading in this environment? Although it has made huge amounts of money for many traders, many people have also suffered from the unpredictable movements of this virtual currency.

CAN IT BE USED IN CURRENCY WARS?Since it is possible to convert Bitcoins to local currency and from local currency to Bitcoins, and all this trading and conversion takes place in a decentralized system, Bitcoins offer a very tasty target for government regulators and malicious computer hackers. Without going into too much detail, Bitcoins are essentially a new form of currency that is virtual, decentralised and ungoverned. This adds a whole lot to the equation of currency wars and how it might create an impact to several economies around the world.

Since the Global Financial Crisis, China has been on an unabated campaign to displace the dollar’s

coveted position – Bitcoin provides a potentially game-changing tool in that arsenal. As financial journalist Jonathan Stacke once said:

“If China successfully aids the proliferation of Bitcoin, the implications on the global currency system could be monumental. Rather than having to use USD as an intermediary currency or establish swap lines to support international trade, a world conducting trade with Bitcoin would mean the USD currently used for this purpose would be leaked as additional supply in the Forex markets, driving down the value of USD and driving up borrowing rates for the US. This change, on a large scale, would drastically accelerate the effects of the inflationary policies already taken up by the Federal Reserve. A significant inflationary trend in USD could potentially create a devastating cycle as global banks looking to preserve their wealth seek alternative reserve currencies, even further reducing the dollar’s value.”

- Jonathan Stacke (2013)

Sources:

Stacke, J. (2013). Bitcoin: The Newest Tool In China’s Currency

War Chest. Retrieved From: http://thegenesisblock.com/bitcoin-the-newest-

tool-in-chinas-currency-war-chest/

Chandler. N. How Bitcoin works. Retrieved From:

http://electronics.howstuffworks.com/everyday-tech/bitcoin.htm


Often called ‘The shadow banking system’ or ‘dark liquidity’, dark pools have recently been lobbied against by three large U.S stock exchanges.

Dark pools occur when stock trades are concealed from the public. They account for approximately 13 percent of all stock-market action, growing 4 percent over the past five years. Initially set up to allow large investors to make vast trades without the news of their orders move the price, private venues are becoming less regulated forms of traditional stock exchanges.

Dark pools can be traced back to the 1980s when the Securities and Exchange Commission (SEC) permitted brokers to chain buyers and sellers together to trade anonymously. Instead of the traditional method of sending order to the traditional exchanges, brokers found themselves able to relay them to their own internal systems, profiting from the spreads on prices and transaction fees. It is said that as much as 40 percent of US equity trades occur outside of public stock exchanges.

In recent years, the use of dark pools has exploded, reflecting the higher operating and compliance costs of the major stock exchanges. Major investment banks including Goldman Sachs, UBS and Barclays own three of the five largest private trading platforms.

Unfortunately, U.S. stock exchanges have felt this growth, with volume

falling in excess of 30 percent over the past three years. It has been argued that the resulting fragmentation has meant that buyers and sellers are no longer meeting in a central hub of information sharing, which could potentially endanger efficient markets. On the flipside, dark pools have forced stock exchanges to advance with technological innovation.

One particular method of dark-pool activity being monitored by regulators is whether firms are in fact making orders in the public market with an inherent goal to manipulate prices within the dark pools. As a result, high frequency traders may be able to benefit from knowing the public price before it lands on a dark pool. Financial Industry Regulatory Authority (FINRA) Chief Executive, Richard Ketchum recently stated that there would be a broadened oversight on dark pool activity with an emphasis on ascertaining whether orders were being placed on public exchanges in order to move prices or encourage sellers that may advance their trading in the dark market.

Brokers and operators of dark pools have recently attempted to cease the lobbying campaign, disputing evidence given by the exchanges. Research has proved to be indecisive on the matter, with academic studies giving fragmented results. Some attest that dark trading is related with wider bid-offer spreads on stocks and higher levels of volatility, while

others have concluded it’s aligned with lower transaction costs and higher prices.

The growing interest in how dark pools operate partially originates from a recent investigation. In 2011, the SEC fined Pipeline Trading Systems, a US dark pool operator, $1 million for its inability to disclose that one of their private trading units interacted with the large majority of client orders. Another dark pool operator recently settled with SEC after the allegation that it revealed private client trading information to a unit of Citigroup.

The exchanges’ united front against dark-pool trading has been resisted by opposition from Direct Edge Holdings, who own the third-largest exchange by volume with clients including dark-pool operators Goldman Sachs, Knight Capital Group (KCG) and Citadel. Additionally, a firm involved in dark pool research has recently concluded that a more centralised market theoretically would yield better information about prices, however research doesn’t prove that more off-exchange trading is measurably harming market quality.

It can be concluded that dark pools have shaken up the stockmarket and will continue to do so until the SEC and dark pool operators reach a compromise. They offer a private method to trade stocks and can be potentially manipulated to earn excess profit from unsuspecting investors. Their growth will be carefully monitored and scrutinised and time will tell whether their existence will endure.

DARK POOLSKINGSLEY ADVANI


Australia must rethink its approach to the mining industry within the country. It is a well-known fact that the mining industry is a lynch pin that underlines the Australian economy, and with the recent drop in the mining sector, there is a gathering need to re address why this is, and how to fix it.

Dr Damien Guirco, research director of the UTS Institute for Sustainable Futures said the current state of play in Australia is inadequate. The minerals industry has always operated in an evolving global landscape, but it’s becoming clear that social and environmental factors will become more important to head off future vulnerability (newsroom.edu.au).

So is there a future in the market for a new approach, one focused more at cutting cost rather than the ground? There is an emerging idea to start automating the change face of the mining industry.

Mining giant Rio Tinto has been at the forefront of automation, having set up a remote operations centre near Perth airport from which workers operate equipment more than 1000km away in the Pilbara (The Australian).

There is an existing presence of this type of technology, the Rio Tinto mine mentioned has already adopted 30 automated trucks into operation at its Yandicoogina, Nammuldi and Hope Downs 4 mine sites, It has also been reported that Rio ordered 150 autonomous trucks from Japan’s Komatsu for delivery during the next four years.

Mr Brinsden, Atlas Iron chief executive said. “The mining industry has relied really heavily on classic drill and blast technology that’s been around for many, many decades

AUSTRALIA’S MINING FUTURE

but I would expect that mechanical mining methods would become much more prevalent, particularly in iron ore.”

Other advancements in mining technology includes:

» Autonomous load haul dump (LHD)

and truck haulage systems These

vehicles have on-board intelligence and

perception technologies and GPS.

» Autonomous train transportation (which

may be controlled remotely off-site).

» Automated underground mining

systems which allow greater accuracy of

cutting sequences in continuous longwall

mining and haulage operations, reducing

shift changes and operator fatigue.

“On the one end you’ve got the sort of equivalent of NASA, which is what Rio brings to its train set (through automation) but you also have some clever applications being worked out for human resource management, for people-management, for online training, for the creation of specialist skills, for providing bulletin boards on activities, for keeping workers better informed and connected with home”, said Resource Minister, Mr Gray.

These new technologies can optimise fuel consumption, improve tyre life by consistent driving patterns and minimise collisions. The outcome is a safer mine and a more efficient fleet of vehicles.This development opens up a platform for new developments, improved performance, and possibly a new development in the future of how the mining industry in Australia operates.

REINHOLD SCHMIDT


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After decades of slow growth, the African continent has the ability to follow in the footsteps of Asia and change the face of our global economy. It seems a distant thought to us in the Land Down Under, and just how much it will change our country’s economy is something we don’t yet fully understand.

Over the past decade, six of the world’s ten fastest growing countries were African. In eight of the past ten years, Africa has grown faster than East Asia, including Japan.

The commodities boom is partly responsible for this rise with around a quarter of Africa’s growth coming from higher revenues from natural resources. Further, countries like China, which originally invested so heavily in Australian resources, are starting to look elsewhere to less regulated, lest costly and friendlier options for

their resource requirements: Africa.

In the next forty years, over half of the increase in population in the world will be in Africa. This population will service an exponential growth in manufacturing and service economies that will lead to a rise in Africa’s general economy.

Over the past ten years, real income per person has increased by more than 30%. Over the next decade, its gross domestic product (GDP) is expected to rise by an average of 6% a year, not least thanks to foreign direct investment. Foreign direct investment (FDI) has risen from $15 billion in 2002 to $37 billion in 2006 and $46 billion in 2012.

So why is this story still on the back-page? Well, things in the country aren’t as optimistic as the statistics might suggest. A majority of the continent lives on less than two dollars per day. Much of the continent struggle to make ends meet. Africans still don’t have enough to eat and lack access to education. Nevertheless, over the past decade, malaria deaths (which have plagued the continent) have declined by 30% and HIV infections decreased by 74%. Life expectancy across the African continent has increased by about 10% and child mortality rates in most African countries have been falling.

However, the continent is too big and different to generalise. Each country has its own path to a better future. One thing that most have as their key need is democratic institutions. The emergence of strong financial institutions generally follows the establishment of democratic government. When democracy is more prevalent in Africa, we can expect to see a massive change in the world’s financial landscape.

HOW LONG WILL THIS TAKE? No one really can predict this continent’s rise, but one thing that is promising is that on the back of a rise in FDI along with internal growth, benefits are due to materialise. FDI of $46 billion in 2012 doesn’t demonstrate results in 2013 but within the next decade we can hope to see improvements. Schools, technology, mines and aid are looking to shift the system to a brighter future, one that will revolutionise global commerce for our generation, or the next.

HOW WILL THIS AFFECT OUR COUNTRY AND OTHERS? Well, if the above developments materialise in Africa we can expect to see the continent become a competitive player in the international market. The continent will largely reduce its dependence on primary commodity exports and associated vulnerability to shocks, and emerge as a new global growth pole. The African continents and their associated governments are already forging international partnerships, boosting infrastructure investment and sharing skills and technology –- and this will only increase with time.

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ABBOTT VS RUDDAustralia is heading into a new era where the opportunities in Asia are changing from iron ore to high end services. Australia doesn’t have any natural advantage in meeting these new demands. Australia is already being weighed down by an aging population, and by choosing to protect underperforming industries, we will undermine the incentive for more viable industries to make themselves competitive, and Australia’s competitiveness and potential growth will be reduced. The overall effects may not become apparent, but the source of the problem is the decisions made now. That makes Rudd and Abbott dangerous choices for prime minister.

Kevin Rudd and Tony Abbott will bring out the worst in each other. Rudd is a protectionist. He has already made a point of stating his views hadn’t changed: he didn’t want to be prime minister of a country that could not make things. The only manufacturers in danger of not being able to make things are the uncompetitive and economically inefficient minority, mainly the car makers. More and more manufacturers are joining the queue for handouts. It is easier for them to get assistance from a protectionist government than struggle for productivity gains or invest in high-risk innovation. Rudd has signalled his support of handouts and Abbott’s response will be to at least match Rudd’s offers of assistance.

Abbott and Rudd both confuse increased production generated by subsidises with the lasting productivity gains and innovation needed for Australia’s longer-term survival. Growth and prosperity during their political careers has been inherited from the reforms of the 1980s and 1990s

or rained on Australia from the China boom. Neither the public nor the major political parties put a high priority on strong economic management.

Rudd the protectionist is not content to leave the allocation of resources to the capital market, with its long-established record of success. He wants us to believe he can improve the result by helping pick the winners in the race for resources. It is a strategy with a record of almost total failure.

Unfortunately for Rudd and the heavily-assisted manufacturers, that failure has become embarrassingly obvious with the decision by Ford to close its Australian manufacturing. Protectionism badly needs a new poster child. The new flavour of year for the industry policy brigade is food processing. Food is the new obsession of populist politics.

Far from resenting the new members of the handout club, the car industry will welcome the distraction of public attention from its failure. The damage to the economy will come from the misallocation of resources, the higher tax rates, and the diversion of business time and energy away from innovation and other productivity-enhancing activity to rent seeking.

Yet for Rudd and Abbott protectionism is an easy way to gather votes and the damage to the economy is a secondary concern. The only question that will trouble them is the extent to which they should push the protectionist barrow.

Abbott v Rudd, how will our economy be affected?The failure of protectionism has become embarrassingly obvious with the decision by Ford to close its

Australian manufacturing. The views of this article are that expressed by Alan Mitchell of the AFR.

BRENT LOESKOW


For Australia to cement its place as a leader in the changing global economy, we need to look within to prevent us going without. We cannot hope to remain relevant, let alone dominant, unless we utilise the full potential of our own population.

At present, there is enormous disparity between male and female representation in our workforce, particularly at management levels. Forty-eight companies - in other words, almost 25% of ASX200 companies - don’t have a female representative on their board and only 15.7% of total directors are female. This article isn’t about championing quotas for women on boards but a recent report commissioned by Credit Suisse indicates overwhelming support for the role that women can play. Over the last six years, of the 2,360 companies analysed, those with at least one female or more on their board outperformed those without women in regards to return on equity, lower gearing, higher price multiples and higher average growth. It is logical that if having women in a boardroom is beneficial for the world’s largest companies that the same principle trickles down into so many other professions. However, female participation rates are at 65% compared to the 79% of males and this cannot simply be attributable to ‘domestic factors’.

There is no doubt that the difference between male and female participation in the workforce has historically been highly influenced by the typical gender roles in society. As society has modernised, these gender roles have become more flexible but there is no doubt that women still fulfill a more domestic role than men, generally. Women give birth to children, they sometimes receive maternity leave, and they sometimes quit their jobs or take time off work to spend more time at home with their young children.

The statistic of female participation in the workforce takes into account women between the ages of 20 and 74 and therefore the actual number of these women, captured within the 65%, with small children is a proportionally small demographic. However, given these relatively low participation rates, the question must be asked - why is it so low? Is it because

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E the pressure to sustain such a domestic role, having taken time off work to have children (or not), is such that women feel they cannot or should not return to the workforce in the same capacity they once were?

Having regard to current costs of living, it is becoming increasingly necessary for an Australian household to have more than one income. However, there are clearly still social barriers obstructing the abolition of stereotypical gender roles, equal pay for women, and the opportunity for women to rejoin the workforce after starting a family. Steps are being taken in the right direction; with political parties developing policies in favour of professional mothers returning to the workforce (such as the Liberal Party’s proposed Parental Leave Scheme), but the most effective way to initiate change is through awareness of the current social climate and the need to change it.

The Sydney Morning Herald’s Anne Summers estimated that, “if Australian women’s workforce participation was at the same level as men’s it would add around 13 per cent to Gross Domestic Product”. This emphasises the enormous potential that exists within our borders. This provides a solution to both the resource and Chinese slowdowns without looking to foreign countries to sustain our own innovation and growth.

However, there are serious disincentives to female participation that must be addressed in Australia. Fifty-four percent of Australian university graduates are females and yet, on average, a man’s salary will be 17.5% higher than his female counterpart. Evidently, there is no question about the ability of females to fulfill crucial professional capacities but the remuneration does not reflect this. Supposed safety nets such as Fair Work Australia have gender pay equity provisions but do not actually enforce equal remuneration. There needs to be a combined social and political effort to further encourage female recognition and participation because we know that the Australian business landscape will be all the better for it.

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Online shopping is the craze of the century, as more and more people discover the wonders of getting everything they need, delivered to their door, at bargain prices without needing to lift more than a finger. But this could all change in the near future.

Businesses and unions have recently reignited the discussion of decreasing the tax-free threshold on imported goods. Currently, the government only charges tax on imports that are worth more than $1,000. Businesses are currently lobbying for this threshold to be reduced to as low as $20. This means that the everyday Aussie who buys products from overseas will have to start paying GST.

This may seem like another way for the government to dig deeper into consumers’ pockets whilst satisfying domestic businesses, but there is far more to it than simply revenue raising.

One of the main arguments in favour of decreasing the threshold is to protect domestic industries, particularly the retail industry, from unfair overseas competition. Businesses argue in favour of tax neutrality, meaning that overseas businesses should be charged the same amount of tax as domestic businesses. Businesses just want a fair playing field, where all businesses pay the same amount of tax.

Local businesses argue that without any changes to the threshold, they are disadvantaged and are not able to compete. Research conducted by Ernst & Young shows that between 20,000 and 33,000 jobs are at risk if the government does nothing to balance out the playing field. This will happen because more consumers will start buying products

GST IMPORT

REFORMS

from overseas where they can avoid extra costs from tax.

However, anyone who has done any studies in economics should know the basic principle that free trade is good therefore tariffs are bad. Surprisingly, both Woolworths and Coles are leading the way in opposition to any changes in the threshold. They argue that imposing taxes on imports will simply take away our only cheap alternatives, raising the cost of living.

Leaving the threshold at $1,000 also forces local businesses to be more efficient and reduce prices. By taking

away their main competition, retailers have less reason to innovate and become more

efficient, meaning less incentive to achieve lower prices.

In New Zealand, import duties are only charged when the

duty is more than $60. This equates to a threshold of approximately $227 for clothing and $400 for other goods. The reason for this amount is because a lower threshold would mean that the administration fees of collecting the duty would be

more than the amount paid. This is a much lower threshold

compared to Australia, although still higher than the proposed $20

threshold.

It should also be noted that there are other methods available to provide a fairer playing

field for businesses. Evaluating the domestic GST system and even lowering minimum wages would address the issue without inhibiting free trade.

Overall, it really comes down to whether the protection of domestic businesses and jobs in the short-term is more important than achieving ongoing efficiency and competitive prices.

JONATHAN COLAK


RESOURCES: A BLESSING OR A CURSE

The winning article entry from the ‘Win a ticket to

Titans of Industry ‘ Competition

ANDREW KIGGUNDU


Resource Curse, Dutch-Disease and economic stagnation. The mythological three headed dog Cerberus which guards the gates of the underworld to prevent those who have crossed the river Styx from ever escaping, is a similar tale to the effects of a mining boom’s broader impact on a nation’s economy.

The resource curse exists where a country that has an export-driven natural resource sector, generates large revenues on the short-term but ultimately ends up with a stagnant economy. Australia is blessed with natural resources, holding the world’s greatest reserves of lead, zinc, silver, brown, coal, rutile and nickel - unlike most countries that only have one type of commodity to export. Australia also ranks as a top four resource-holder for over the 15 demand minerals, including bauxite, iron ore, gold and uranium. The land down under has been endowed with a bountiful supply of resources and minerals across the spectrum of industrial and commercial uses - contributing to over 40% of Australia’s total exports.

For many countries that have been economically stagnant for decades a resource boom gives rise to transformative opportunities for development. However, there is often a failure to harness the boom due to wrong decisions made by the government. The main issue surrounding the effects of the resource curse arise from misaligned incentives and mistakes based around short-term strategic planning. Typically, in emerging countries there are smaller adult populations, few people who possess secondary or tertiary education, and salaries for civil servants are modest at best. This inability to harness a resource boom was witnessed in the Netherlands, which experienced a gas boom in 1950 and Venezuela, which had a twenty year boom period. Generally speaking, the blessing of resources is more likely to manifest into a curse in emerging countries, opposed to developed countries, due to the lack of well-trained decision makers and transparency surrounding the resource tendering process. The representation of well-informed decision makers within governments to address issues surrounding mining and petroleum issues is relatively non-existent, resulting in wrong decisions with ramifications that are generally only felt in the long term, once the boom has come to an end.

The Australian government has made significant investments into the development of the mining industry, through the widespread approval of mining drilling and exploration leases over the past decade. The political and legislative framework have provided for transparency and specific processes have prevented mining companies from exploiting the nation’s resources. The advanced business infrastructure place in Australia ensures that there are adequate structures in place to regulate the industry including: corporate banking, underwriting services, due diligence, auditing, debt structuring, logistics and contracts administrations. This infrastrucature prevents mining companies from under-valuing assets or issuing illegal tenders, which occurs typically in countries where there is a lack of skilled professionals.

At a strategic town development level, there is minimal effort required to develop towns into cluster zones similar to Silicon Valley. The approach adopted is orientated towards

a ‘boom town’ structure that exists for the life of the overall project. As a result, inflation, housing affordability, and local infrastructure are choked and abandoned after the closure.

The stigma associated with a resource boom is that governments only focus public investment in sectors closely related to the resource sector such as: refineries, fertilizers, mining, and engineering services. Additionally, the large foreign direct investment in the form of mining exploration and leases, royalties, resource rent tax, and newly minted carbon tax builds large expectations with the public, which often results in dissatisfaction.

The development of the coal seam gas industry in Queensland has demonstrated the fundamental need for political stability during boom periods. As the windfall profits from resources have shifted from developmental policies to predatory policies, the federal government looks to address revenue leakages across different industries. The conflict surrounding whether the carbon tax is constitutionally valid is based loosely on the notion that it specifically discriminates against states that are significantly involved in mining activity, forcing those states to compensate for the remaining non-mining states.

The characteristics surrounding the resource curse are founded on the idea that there are only a few options when it comes to investing or off-setting revenue volatility. The unequal distribution of minerals across the nation (amongst the mining states and non-mining states) has created disparity in relation to people’s average annual incomes. For example, the procurement of the oil, gas and natural resources and development of related industries occurs predominantly in Northern Queensland and Western Australia. These states witness a significant amount of investment around rural towns and cities, as workers fly or drive in to capitalise on the jobs related to the resource boom. The government should be implementing long-term planning initiatives and domestic policies to keep pace with the global market, however, it may already be a case of too-little-too-late.

ANDREW KIGGUNDU


WHAT THE FINANCE?Sixteen weird financial buzzwords explained.

1 ANKLE BITER. This phrase — used outside the world of finance to describe small children who are so little that

they, metaphorically at least, barely reach an adult’s ankles — can also be used to describe a small cap investment. Small cap just means a company with a relatively low value, or market capitalization — usually somewhere between $300 million and $2 billion.

2 BIG UGLIES. Big, older companies, usually in “dirty” industrial sectors like mining or steel. Though they

can be solid investments with good, steady returns, many investors ignore them for “cleaner,” trendier stocks.

3 CHASING NICKELS AROUND DOLLAR BILLS. The practice of big companies trimming small,

trivial costs (like candy in the lobby) instead of big, serious costs (like the entire research department).

4 COCKROACH THEORY. The theory that when a company reports bad news to

the public, there’s usually a lot more bad news behind the scenes

that may come out later. It

can also refer to industry-

wide suspicions — if one subprime lender is going bankrupt

(like New Century Financial was in 2007), other subprime lenders might have similar problems

behind the scenes.

5 COOKIE JAR ACCOUNTING. An accounting practice in which a company stores up funds during

good times to dip into during bad times. Because it effectively misleads investors — making them think goals are being met even when the company is losing footing — this practice is forbidden by the SEC.

6 DEAD CAT BOUNCE. A small rally after a sharp decline on Wall Street. It could refer to a stock with a

plummeting share price or a market trend. An old investment saying goes: “Even a dead cat will bounce if it is dropped from high enough.”

7 GARBATRAGE. When price and trading volume in a particular sector surge due to a high-profile takeover in

that industry. Speculators often predict that more takeovers are right around the corner, even if they actually aren’t. Also

known as “rumortrage.”

8 JENNIFER LOPEZ. An informal term that describes what happens when a security reaches a low, then

gradually starts to go up again. On a graph, it looks like a curve at the bottom, which is why investors named it after the admirably round-bottomed singer.

9 PUKE POINT. Puking, in this case, is slang for selling an asset as the value is plummeting. The “puke point”

is the point at which the investor can no longer stomach the losses, and decides to sell the asset, regardless of its steeply falling price.

10 RAZORBLADE MODEL. When businesses sell dependent goods for different prices. The first part

is sold cheaply, but the second part is much pricier. It’s not unlike razors with replaceable blades. Often the razor is pretty cheap, but customers have to keep replacing the blade cartridges, and that cost adds up.

11 RUST BOWL. A bummer phrase used to describe northeast and midwestern areas where the auto and

steel industries used to thrive, and now either languish, or quasi-thrive thanks to federal help.As Investopedia puts it: “The term ‘Rust Bowl’ essentially epitomizes catastrophic

economic change.”

12 SANDWICH GENERATION. It

sounds like a fun term, but

the sandwich

generation actually refers to the age group sandwiched

between their aging parents and young kids. These adults are typically tasked with financially

supporting both their older and younger dependents while trying to save for their own retirements. The sandwich gen may eat actual sandwiches, but probably only as a way to save money (or to stress-binge).

13 SHARK WATCHER. A firm that specializes in keeping a lookout for takeovers. Usually this means

monitoring trading, keeping track of who’s accumulating shares, and reporting noteworthy activity back to clients.

14 SLEEPING BEAUTY. A profitable company — usually a start-up — with impressive assets but

bad management. These companies are great candidates for takeovers.

15 SUICIDE PILL. Any takeover prevention tactic that can end in the death of a company. Taking on

extensive debt is one kind of suicide pill. So is offering shares at a discounted price to devalue the company. A company takes a suicide pill when it would prefer to go bankrupt than undergo a hostile takeover.

16 SUSHI BOND. (Or bond sushi). A bond issued by a Japanese issuer in a non-yen currency. As

Investopedia notes, “sushi bonds are especially popular with Japanese institutional investors, since these bonds do not count toward regulatory limits on foreign securities holdings.”


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A BIG BARGAIN

HOW WELL DO YOU KNOW THE ORIGINAL VIRGIN?Ten things you probably didn’t know about previous Titans of Industry panelist, Sir Richard Banson.

1. There have been a lot of college dropouts, but Branson was a high school dropout, leaving at age 16.

2. Branson was lysdexic, yet started a magazine called ‘Student’ as a teenager that was successful selling ads.

3. Branson, knighted by the Queen, isn’t afraid to poke fun of himself, and has made numerous guest appearances on many popular shows such as Friends and Baywatch.

4. His company was called Virgin because of his initial inexperience in business. Virgin started out in 1969 a mail-order record company to help fund his magazine. Virgin is now is an umbrella to over 400 companies in over 30 countries.

5. Branson owns his own island called Necker Island, which coincidentally is located in the British Virgin Islands.

6. Sir Richard believes in a ‘bottom heavy approach’ to avoid bureaucracy

and enable employees to be creative and successful.

7. Branson sold his record business, Virgin Records, in 1992 for $1 billion. He wept during the entire contract process.

8. Branson is a Trekkie who invited William Shatner on the first Virgin Galactic flight, the VSS Enterprise.

9. In 2007, Branson started a group called ‘The Elders’ with Nelson Mandela, Desmond Tutu, Kofi Annan, and Jimmy Carter. The goal of the group is to find new ways to end human suffering, share wisdom, and find peaceful resolutions to difficult conflicts.

10. Branson was the first man to ever cross the Pacific and Atlantic in a hot-air balloon and is now looking to opportunities in space. He has always thrived by focusing on goals and projects that seemed unattainable. Virgin Galactic and Interplanetary are on the horizon

Using buzzwords not only makes your resume generic, but may also give the impression that you are trying to mislead your prospective employer.

STOP USING THESE WORDS ON YOUR RESUME!Are you a motivated, creative and responsible individual with expensive experience? Well, that’s great but so is everybody else.

THE TOP 10 BUZZWORDS THAT APPEAR MOST IN AUSSIE LINKEDIN

PROFILES

CreativeReponsible

Analytical

CommunicatorPositive

Innovative

Track Record

Extensive Experience

MotivatedEffective

THINK BIG

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