interesting reading..................

Business Spectator
15/10/2008 11:13am
Robert Gottliebsen

Governments around the world have put on the table various rescue packages and we have seen a huge surge in share markets, interrupted by some understandable late session caution on Wall Street.

Last night I was dining with the cream of Australia’s consumer debt collectors and credit controllers at a dinner organised by Dun & Bradstreet. I was regularly being asked: “What happens next?”

So today I will list 10 events that I think are likely as a result of the co-ordinated international and Australian government actions. When we look back, I know we will not get 10 out of 10, but these projections should be assessed in the light of your own experiences – and please do tell me via The Conversation what you are seeing. Here's what to watch for:

Stock market purge
Two wonderful events have taken place in our share, commodity and to some extent currency markets. Two of the great drivers of recent selling were those who had to sell (hedge funds and weak margin borrowers) and those who believed the end of the world was coming. Both have been driven out of the market. That’s why we saw this week’s huge share price rises and this is exactly what we experienced at the bottom in past crashes. There is, therefore, a good chance we have seen the bottom of the overall share and commodity markets, but not for those specific stocks that are destined for future troubles. What happens next, is that we go through a period where some company results turn sour and markets begin to move with individual corporate performance. After every crash, there is a big rise in regulation – none of which helps avoid to next crash – but it makes everyone feel better and longer term it restores confidence.

A downturn is unavoidable
We are still going to experience a significant world downturn. When President Bush says the US is going to quickly return to the old days, he is talking nonsense. Our Prime Minister, in warning of much tougher times, was telling the truth. We will encounter recessions in many countries and that may even include Australia, given the problems in our largest state, NSW. Over time, this massive injection of money into the system may create inflation, which will require higher interest rates at a time of low demand – so called 'stagflation'. I am not forecasting that, but it is a danger.

More capital is needed
The American banking system still requires massive injections of capital to cover the huge losses it has incurred and the efforts to raise that capital will stunt Wall Street. In Australia, the level of any capital raising by Australian banks will depend on how many bad debts they incur as a result of the downturn. It will take a year or so before we know. However, a large number of Australian companies currently need to restore their balance sheets and this market rally provides the opportunity.

The China factor
Australia depends on selling resources to China and Japan for a big chunk of government revenue and if China falls over we will run into deep trouble. I don’t think that will happen. Chinese demand will underpin the prices of our products but the absence of mass buying by minerals speculators will mean that for an extended period we will see prices down from the peaks. We are going to reassess many new mineral projects, because capital is much scarcer and selling prices are lower. For example we are not going to see all those Queensland coal gas projects go ahead at once.

A shift to long-term thinking
The winners on the share market will be the so called value investors – those who look at long term strategies and the ability of companies to perform. The current crop of highly paid short-term forecasters will pass. Extensive retraining will be required.

Contractors will suffer
The economic downturn will lift unemployment but, much more importantly, the enormous area of independent contractor income will be affected. A great many families will still be receiving income, but they will be seeing a lot less of it because the companies they are working for need less of their services. That can be as simple as working four shifts instead of six or it can be that a contractor loses a major client or has much less work. This will be hidden from the official statistics and politicians will pat themselves of the back for limiting unemployment and may not understand the deeper events. At the dinner, I warned the debt collectors and credit controllers to watch this situation on a case by case basis.

Credit will tighten
Globally, banks are going to be much more cautious animals. At the dinner last night, one former UK credit controller said that he knew that HBOS in the UK was going to hit serious trouble when he watched them up lending levels to six times income. It had never been done before, anywhere. In Australia, HBOS was operating through BankWest. They may not have done anything as silly as their UK parent, but according to senior bankers they did take big risks on property loans in some areas. Tighter bank lending means that commercial and resident property markets decline. One of the property areas hardest hit will be commercial property, where capital is hard to find and where there is extensive property on the market for sale. The other vulnerable property area will be expensive homes where lower incomes and tighter bank lending will cause a serious crunch (Expensive houses are next, October 13). Lower interest rates will help contain these falls.

Director remuneration will be reined in
Globally, company boards that sign up for big executive remuneration packages, only to find that their company does not perform, will be dismissed. Directors will therefore be putting their job on the line with every generous package they sign. There will be many more executives available, so an increase in supply will help contain executive pay. As Alan Kohler explains, the restrictions themselves will not cause a change because they are easy to get around. The community has been sickened at the actions of boards and the equity deals will deliver chilling messages to delinquent directors. Having said that, if a company gets the right CEO, then it is transformed. Get the wrong CEO and shareholders will lose their shirt. However, we are going to see a better balance. Just as the politicians caused the boom in salaries by publicising pay levels, so the publicity will work the other way.

Infrastructure finance will be tight
In Australia, interest rates will come down sharply. But governments are going to be shocked at the cost of funding infrastructure. Institutions backing past Australian infrastructure projects have been taken to the cleaners by over-optimism and bad financial structures. Regulation of prices and returns will need to be much more realistic and badly researched demand figures in non take-or-pay areas will be laughed at.

Ratings agencies will lose clout
During the boom, credit controllers have had a decade of drought. Much of their activity was outsourced to rating agencies who handled it extremely badly. Ratings agencies are to be regulated, but they have lost their clout. It’s back to doing the hard work and “kicking the tyres”. One credit controller asked: “How long will the good times [for credit controllers] last?” My answer was a minimum of two years but up to four years. In other words, the downturn is not a short-term wonder.

As I left the dinner last night, the credit controllers were settling down to long celebrations because the drought had been broken and good times were ahead.