One year living with Rudd

We are at the one year anniversary of the election of the Rudd Government. Time flies when you are having fun - is that what we've been doing for the past 12 months? Although we see the Prime Minister on the news and in the papers most every day it pays to check the scoreboard and review the wins and losses of the new administration.

Has this been a year of success or disappointment? Big Kev's couple of weeks included three significant tasks - the signing of Kyoto agreement, declaration of an apology to the Stolen Generations, and the announcement and ramp up towards what would be the 2020 Summit.

The Kyoto agreement will presumably be superseded in Copenhagen shortly, and Australia remains on track to meet it's absurdly soft-handed targets. The ridiculousness of Howard arguing to light targets due to Australia's 'special circumstances' and then his refusal to actually sign the document anyway was washed away in an instant and the signing was a very popular move. Since then the Emissions Trading Scheme - a.k.a Carbon Reduction Scheme - has been slightly discussed and largely prescribed and appears to be immensely insufficient and slow-moving, but Kyoto itself was a very popular move.

An official apology to the Stolen Generations was, like Kyoto, a popular and long-overdue action that gave the Government a big slice of popularity pie. The apology is essentially a speech and a ceremony accompanied by a lot of press coverage. The inept opposition couldn't decide whether they agreed or disagreed and so presented a completely confused and schizophrenic argument which include both viewpoints, thereby proving that you can have our cake and eat it provided you don't mind making a mess. Moving on, however, we are still in the midst of an 'Intervention' and have not seen any significant changes in Indigenous policy. Rather, the Government seems content to continue existing Howard programs unchanged. The Apology was a popular move yet seems to have little practical effect at this point.

Finally, the 2020 Summit gathered together some of Australia's 'best and brightest' thinkers - as well as a handful of sports-people and Cate Blanchett to get Bazza and Shazza onside - to brainstorm a number of goals and grand ideas for Australia. The idea was that these grand ideas, agreed up by the 1000 attendants, would be passed to Kev for implementation. It made for fantastic tv and was also a popular move especially for the progress intellectual types (the new swing voters?). The summit provided a great document (have a read) which details hundreds or thousands of ideas that the government could execute to great success. Presumably this document is now sitting on the corner of Kevin Rudd's desk for convenient reference when coming up with new policies, but one year in we haven't seen anything actioned.

Julia Gillard, when asked of for primary successes of the Rudd Governments' first 12 months on Insiders 23/11/08, declared that the two biggest actions were Kyoto and the Apology. Apart from the 2020 Summit and the discussion about Emissions Trading, National Broadband Network (and internet censorship) I don't recall many other initiatives. None of these issues have resulted in tangible outcomes, yes Kevin Rudd remains more popular than ever. As some commentators have pointed out, the thing that has become most evident during these 12 months is that Kevin Rudd is a fantastic politician.

After the farce that became the Howard Government, we were all expecting big bold initiatives - or at least policy rollbacks? - from the Rudd Government. Yet at time of writing even the dreaded Workchoices has not been completely rolled back. No identifiable initiatives have been implemented and the vast majority of policy positions remain exactly the same. Presumably we are setting up for a really big year next year!

Little lost Swan

Wayne Swan 'pooh-poohs' Malcom Turnbull's idea of buying mortgages from the banking sector with the aim of increasing liquidity, especially to the minor lenders. It is actually a very good idea - a lot of the smaller, non-bank lenders (Aussie, Wizard) borrow money from overseas to fund mortgages but can't get it at the moment due to the credit crisis. This lack of funds is what caused RAMS to bust about a year ago.

According to Swan, 'our banking sector is light years from the USA, everything is fine'.

He even discussed the topic on ABCs Q&A program

After a few days of shouting abuse at Turnbull over his idea, Swan comes up with his own - to buy $4bn worth of mortgages from the banking sector. I suppose I am supposed to believe that it's a much better idea when it comes from Swan's mouth than from Turnbull's.

Scary times for finance

The financial system is a mess at the moment. I always thought the derivatives were positive - risk mitigation, efficient cost transfer. But I suppose I naively assumed that they were being used responsibly. 25,000 people will lose their job as a result of Lehman's bankruptcy.

Below is Warren Buffett on financial derivatives (p13), back in 2002.

Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system. Having delivered that thought, which I’ll get back to, let me retreat to explaining derivatives, though the explanation must be general because the word covers an extraordinarily wide range of financial contracts.

Essentially, these instruments call for money to change hands at some future date, with the amount to be determined by one or more reference items, such as interest rates, stock prices or currency values. If, for example, you are either long or short an S&P 500 futures contract, you are a party to a very simple derivatives transaction – with your gain or loss derived from movements in the index. Derivatives contracts are of varying duration (running sometimes to 20 or more years) and their value is often tied to several variables. Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counterparties to them. In the meantime, though, before a contract is settled, the
counterparties record profits and losses – often huge in amount – in their current earnings statements without so much as a penny changing hands.

The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it seems, madmen). At Enron, for example, newsprint and broadband derivatives, due to be settled many years in the future, were put on the books. Or say you want to write a contract speculating on the number of twins to be born in Nebraska in 2020. No problem – at a price, you will easily find an obliging counterparty.

(snip)

Charlie and I believe, however, that the macro picture is dangerous and getting more so. Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one other. The troubles of one could quickly infect the others.

(snip)

Indeed, in 1998, the leveraged and derivatives-heavy activities of a single hedge fund, Long-Term Capital Management, caused the Federal Reserve anxieties so severe that it hastily orchestrated a rescue effort. In later Congressional testimony, Fed officials acknowledged that, had they not intervened, the outstanding trades of LTCM – a firm unknown to the general public and employing only a few hundred people – could well have posed a serious threat to the stability of American markets. In other words, the Fed acted because its leaders were fearful of what might have happened to other financial institutions had the LTCM domino toppled. And this affair, though it paralyzed many parts of the fixed-income market for
weeks, was far from a worst-case scenario.

One of the derivatives instruments that LTCM used was total-return swaps, contracts that facilitate 100% leverage in various markets, including stocks. For example, Party A to a contract, usually a bank, puts up all of the money for the purchase of a stock while Party B, without putting up any capital, agrees that at a future date it will receive any gain or pay any loss that the bank realizes.

Total-return swaps of this type make a joke of margin requirements. Beyond that, other types of derivatives severely curtail the ability of regulators to curb leverage and generally get their arms around the risk profiles of banks, insurers and other financial institutions. Similarly, even experienced investors and analysts encounter major problems in analyzing the financial condition of firms that are heavily involved with derivatives contracts. When Charlie and I finish reading the long footnotes detailing the derivatives activities of major banks, the only thing we understand is that we don’t understand how much risk the institution is running.

The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Knowledge of how dangerous they are has already permeated the electricity and gas businesses, in which the eruption of major troubles caused the use of derivatives to diminish dramatically. Elsewhere, however, the derivatives business continues to expand unchecked. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts.

Charlie and I believe Berkshire should be a fortress of financial strength – for the sake of our owners, creditors, policyholders and employees. We try to be alert to any sort of megacatastrophe risk, and that posture may make us unduly apprehensive about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.

* 'Berkshire' refers to Berkshire Hathaway, a hugely successful investment company.
'Charlie' is Charles Munger, VP of Berkshire Hathaway.

Carbon trading

The following is a quote from Ross Garnaut's National Press Club address, 5 September 2008. This was a response to a question from the floor as to whether China would commit to a emissions target at Copenhagen.

The week before last, China announced a 15% export tax on aluminium. In a series of measures over the last few years, it's raised the cost of energy to energy-intensive industries, it's discouraged investment in the energy-intensive industries.

China has, by far, the world's biggest program for promotion of low emissions energy sources of many kinds; biomass, biofuels, hydroelectric, wind, nuclear. In every one of these, it has the world's biggest program. And solar -- a huge program putting solar on roofs -- run in the private sector by a bright young graduate of the University of New South Wales who's made himself a very rich man doing it.

The trouble is, China is growing so strongly, its energy demands are growing so strongly that it can be putting in place half of all of the nuclear capacity going on in the world in the next dozen years. It can be putting in place a wind program so big that it has driven up the price of the clever high intellectual property parts of the wind generators so that they become more expensive for everyone in the world, putting in so much hydro capacity on the Yangtze that we're all worried about the environmental consequences.

It's promoting biomass and biofuel at a village level right through the country. It's doing all of that but it's still accounting for more than half of the world's growth in coal consumption. The numbers are truly daunting. China has set itself the goal of reducing the energy intensity of GDP by four percentage points per annum. The President and the Premier both made reference to it. For a couple of years, they weren't making much progress. I was concerned that the high-level policy wasn't biting.

We got figures last week through Xinhua for the statistical office of China on energy intensity last year. It fell by 3.7 per cent last year, so 2007 is the first year of concrete progress. The progress on energy intensity, the progress on low emissions energy, all of the low-emission energies that I spoke of, together with other things that they're doing, hold out the prospect of China being able to hold emissions growth to about half the growth of GDP.

What I propose in the Supplementary Draft Report is that China accept a binding commitment to deliver that: half the growth of GDP until its per capita levels of emissions have reached the falling values of the developed countries, and then that it accepts the same decline to a low point of the other developed countries. I don't think this is pie in the sky. I don't think it's easy. I've talked it over with relevant people in China. I'd characterise it as achievable but difficult.

Bob Carr, hated though he is, suggested NSW implement a Carbon Trading Scheme back in the 90s. It would have made Australia a lot of money and developed hundreds or even thousands of jobs, but it's not hard to see why it didn't get off the ground. Ten years later and Australia still isn't prepared to cut emissions.

The Palin strategy

The divide-and-conquer (a.k.a. 'wedge') method is a tried and tested political strategy. Throw an issue into your opponent's support base (immigration, the war, abortion) and watch them scramble as they try to please both viewpoints. At the same time, soften/harden your position toward that issue to woo those disaffected voters. It's a favourite election winner.

Other strategies involve character based methods and attacks. This might include simple concepts such as painting as opponent as too old / more of the same, or too young / inexperienced. But more interesting is linking your opponent to public figure, to paint similarities with an undesirable candidate as a means of constrasting with your 'superior' candidate.

I think that the clever Republican strategists have thought long and hard about Sarah Palin. There are a number of reasons to choose a candidate like this; to
- strengthen the conservative credentials of the McCain ticket (as least superficially);
- reinforce the 'maverick' image of confronting the establishment for change; and
- potentially woo some of those disaffected female votes.

After speeches this week, I believe another powerful reason is that it is very easy for the Republicans to paint her with the same brush as Obama and demonstrate that while they are charming & brilliant they are both suitable for VP status only.

A lot of my Democrat friends (obsessively watching the DNC but unprepared to even watch news highlights of the RNC) laughed and ridiculed at the choice. Here was an inexperienced, unknown Podunk Mayor with controversial views. A shot term Governor of an unimportant state. Ripped apart by the media (I was disgusted at the interview with a McCain spokesman) and generally mocked. Reports about her family (Steven Colbert made fun of her kid's names - highbrow as usual), jokes about hunting moose, rumours of illegitimate children and extramarital affairs all flowed.

But after her speech the tone has changed - how amazing! She's not ready to be President, but she has a terrific life story with struggles and triumphs. She speaks to people personally while delivering a powerful message to the nation. She arouses passion for the nation and hope for the future. Her charisma is undeniable, even though she's relatively new to public life. In sum: she's great but not ready to be President.

Doesn't that remind you of a certain Demoncratic nominee?

There's a new team in town

Pragmatically speaking, nothing has happened within the Coalition as a result of the leadership 'deal'. Howard is still leader and Costello merely waiting for his turn, and we still don't have a handover date. Jump to late 2009 - who would honestly be surprised if John Howard declared that he feels full of energy and capable of contesting the next election?

But in the marketplace of politics we may see a boost in support for the Coalition. They have a new product for us, or at least an existing product repackaged. If they have learnt anything from their market research (we've all seen it), if they are to have a serious chance in this election, then we should expect to see a lot more of the 'team' and Costello in particular.

A lot of columns have lamented Howard's 'playing the man rather than the team'. It's a valid point, but it's not enough to have the 'team' involved and on the attack. Rudd's happy face will appear wherever and whenever necessarily to thwart petty political attacks. What the Coalition need to do is played the team but more importantly mark the man, and on the right issue a number of their team are strong players - Downer against McClelland, Turnbull against Garrett, Brough against Macklin, etc.

The Labor frontbench have a few good performers but quite a few placeholders or liabilities, and there are certain to be weaknesses to be exploited. Wayne Swan is a effective and intelligent man but Costello will eat him up in a debate - he has the sharp mind that a good politician needs. Anecdotally it seems that Julia Gillard is an extremely unpopular woman, while Joe Hockey is a likeable jovial guy - the jolly fat man. While Julia has it all over Joe in a factual discussion, Joe's charm can win the day.

After all it's a personality game. Focus on your strengths.

Downer puts it to bed

Alexander Downer, seemingly the main player in the leadership crisis, effectively killed speculation of a leadership change tonight on the 7:30 Report. Apparently 'they' have discussed various issues including the leadership of the party (apparently 'only natural') and come to the sterling conclusion that John Howard is the man to lead to Liberals to the election.

John Howard has the energy - oh, what energy! - that is required, and is the greatest Prime Minister that this country has ever had. And with that five minute conversation the decision has been delivered.

What this does mean, however, is that we won't be seeing an election in 31 days or mostly likely anytime in October. The later the better, as far as I'm concerned - an even longer campaign!