People's Republic of Western Australia

TMM had a rough start to the morning after yesterday's Mad March Hare car crash in equities, with some pretty daft (or very smart, depending on which way you look at it...) comments coming out of the PM of New Zealand about rates. Suffice to say, if you elect an ex-FX salesperson/punter as PM make sure there is someone there to remind them that in their new position of public office no one is going to compensate them for their morning wrap blast – in fact, some might see it as crimping Central Bank independence and all that. We can only hope Bollard takes a page out of Voldemort’s book and do exactly what everyone isn’t expecting or do it at an unexpected time to make a point.

However, it is during these slower, more range bound periods in the market that TMM start to daydream or try to think slightly bigger picture and deeper thoughts. A few oddly disparate thoughts have been floating around lately:

1) Cost competitiveness in a lot of basic industries is coming down less to labor than access to cheap inputs. Look below at Chalco, that old chestnut of the TMM “equities with no long term futures list”: labor is maybe, maybe 12% of costs.

And flipping over to Maanshan Iron and Steel it is plain to see that COGS are mostly just raw materials of which wages make up very little, CNY 2.5bn of the roughly CNY 58.5bn of COGS. It’s hard to see just what edge China has in this business given it doesn’t have particularly cheap power prices or any high quality iron ore.

2) Everyone is talking about re-balancing of trade/capital accounts but developing nation claim that they are only a short way along in urbanizing and developing – as such, they should be allowed to take the piss in FX markets some more. Complaints typically cite lower GNP/GDP per capita in places like China to claim they are still middle income countries and arguably lower income countries in poorer areas inland.

3) Despite an enormous amount of noise about climate change no one wants to do anything about it until other countries get involved. Some unfortunate Australian politicians have now been getting death threats. Classy.

Well folks, TMM has the solution to all these problems: The People’s Republic of Western Australia. The transaction would work as such.

1. China gives Australia a bunch of steel and aluminum plants for free and deposits them all around Broome and Port Headland.
2. China gives the population of Sichuan province to Australia for free (alleviates population pressures, moves a labor surplus where it is needed).
3. Australia gets a grip and goes nuts over uranium mining and nuclear power. 4. Guangdong Nuclear builds a 15 GW of nuclear power plants in North West Australia for a fee, perhaps around Port Headland.
4. Population of Sichuan province works in the steel industry or mining. Air is fresher, wages way better.
5. Australia sells China steel at a fixed ROE like a utility given that it has a lock on iron and power costs. Australia’s current account improves and becomes much more stable.

The benefits of this interventionist industrial policy are hard to get out in a single post:

• China can raise interest rates because it doesn’t have to subsidize capital for heavy industries that don’t make an economic return and thus gets asset and real estate inflation under control.
• Inflation volatility in China would go down as key input prices get locked in.
• China could allow FX to appreciate because it doesn’t have to defend exports of a bunch of loser high cost producers in basic materials that do not actually employ that many people.
• US trade complaints would drop off materially.
• World carbon emissions would go through the floor as heavy industry moves from dirty lignite and high sulfur coal to nuclear.

But back to markets. After the past couple of day's rather punishing market moves, TMM limp to the sidelines to ponder which particular instrument of torture Mr T and the A-Team are likely to bring with them to tomorrow's ECB press conference.