Money Education From RONIN Asset Management

How Exchange Rates Work
Maybe you’ve travelled to the U.S. or Canada, and exchanged your Aussie dollars for the Green back or Loonies. Or, perhaps you’ve traveled from England to Japan and exchanged your English pounds for yen. If so, you have experienced exchange rates in action. But, do any of us really know how they work?
You’ve probably heard the financial reporter on the nightly news say something like, “The dollar fell against the U.S. today.” In this article, we’ll attempt to explain what exchange rates are and some of the factors that can affect the value of currency in countries around the world.
The Cost of Money
National currencies are vitally important to the way modern economies operate. They allow us to consistently express the value of an item across borders of countries, oceans, and cultures. We need exchange rates because one nation’s currency is not always accepted in another. You can’t walk into a store in Japan and buy a loaf of bread with Aussie Dollars. First, you’d have to go to a bank and buy some Japanese yen with your Aussie Dollars. An exchange rate is simply the cost of one form of currency in another form of currency. In other words, if you exchange 1 Aussie Dollar for 86 Japanese yen, you really just purchased a different form of money.
The Floating Exchange Rate
There are two main systems used to determine a currency’s exchange rate: floating currency and pegged currency. The market determines a floating exchange rate. In other words, a currency is worth whatever buyers are willing to pay for it. This is determined by supply and demand, which is in turn driven by foreign investment, import/export ratios, inflation, and a host of other economic factors.
Generally, countries with mature, stable economic markets will use a floating system. Virtually every major nation uses this system, including Australia the U.S., Japan, Germany and Great Britain. Pegged rates are for economies trying to get themselves up to the international standards required for the free flow of money. They have their currency pegged for stability, China is in the news at the moment about this very thing. With countries like the U.S. saying that the Chinese are using their pegged rate as leverage and that they are now in a position to let their rate float. Floating exchange rates are considered more efficient, because the market will automatically correct the rate to reflect inflation and other economic forces.

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Australia's unexpected record trade surplus

hot gossip - When is good news seen as bad, and yet still good?

When is good news seen as bad? When you see the trade surplus figure below!
Australia's trade surplus unexpectedly reached a record in June as Chinese demand spurred exports of coal and iron ore, while imports stagnated amid a slowdown in domestic spending.
The excess of exports over imports reached AUD$3.54 billion, a Bureau of Statistics report showed in Sydney today. A separate report showed house-price gains decelerated in the second quarter, underscoring the impact of the central bank's six interest-rate increases since early October. An example of this is a client of ours at Ronin who told us this week that the value of his house at Palm Beach in Sydney had been devalued to the tune of 30%, ouch.
This has lead to the creation of a new term, "the two speed economy" in which domestic spending has been throttled back and yet external spending (China buying coal and steel) had almost doubled, giving concern that the RBA may raise rates again in an attempt to slow any gain in inflation caused by the flood of money coming in to the country.
Exports gained 7 percent in June to AUD$26.7 billion, today's report showed. Sales of metal ores including iron surged 23 percent and coal shipments jumped 15 percent.
Today's trade surplus, the largest since the statistics bureau began measuring the balance in 1971, has expanded for three straight months, ending 11 consecutive months of deficits.
It is true that the policy makers did expect that a trade surplus was inevitable after the GFC proved to be very short lived in Australia it is also true that this surge was not expected to be as large as we have seen.
The other concern running around in the back of the RBA's mind is the effect of NOT having a mining super tax, and let's be realistic if the Labor party wins the next election I think it is safe to say they have been really stung by the backlash from both Queensland and WA, and thus it will be allowed to stay well and truly buried in the pile of things to think about, never to see the top of that pile.
And yet still Good?
All that being said we feel this is good news for traders as the miners are still out there digging holes and that's good. The banks are lending money and that's good. You can't make a good return on your property so your money goes into the market and that's good.

FRANCHISES AVAILABLE HERE !!!

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THE PROPERTY INVESTMENT INSTITUTE & EQUINEX

Your oceans, my oceans or the public's oceans

There's nothing the mainstream press enjoys more than an environmental disaster.

And paradoxically, there's nothing the green lobby gets a bigger kick from than an environmental disaster.

But the real disaster isn't the oil spill it's the fact that eleven people were killed when the oil rig exploded in late April.

Not that you hear too much about that.

You see, as terrible as it may seem, and as incomprehensible as the amount of oil leaking into the Gulf of Mexico is - up to 162,000 barrels equivalent per day - the long term effect of the oil spill is likely to be, well, hardly noticeable.

Sure, you've seen the protests about the impact on wildlife and oil washing up on the beaches. And sure, there have been plenty of references to the Exxon Valdez in 1989, which according to our friends at Wikipedia resulted in the deaths of "100,000 to as many as 250,000 seabirds."

We'll agree, that's a lot of birds. Although, when you put it in perspective, even the top-of-the-range number would have only resulted in a decline of the world bird population by 0.00025%.

And even the population of the formerly endangered bald eagle was barely dinted by the Exxon Valdez. According to the same Wikipedia reference, 247 bald eagles died following the incident.

If we assume they died as a direct result of the Exxon Valdez oil spill it still only reduced the total bald eagle population of the Alaska/British Columbia region by about 0.35%, given that population numbers in that region in the early 1990s were forecast to be between 60,000 and 80,000 individual birds.

In other words would would have taken a disaster 243 times larger than the Exxon Valdez to wipe out the entire bald eagle population.

So the miniscule impact on wildlife following that event hardly warrants the use of the term "ecological disaster."

Ecological annoyance would probably be more accurate.

Look, I'm not saying that you can just go around killing things and then say, "Oh, but it's only 0.0000000001% of the total population, it doesn't matter." What I am saying is this...

First of all, there's a tendency by the mainstream media to fall for the environmental propaganda too easily. All they need is a couple of videos of a budgie covered in oil and a distressed rock drenched in the same for it to make front page news.

But secondly, and perhaps more importantly, whenever such a "disaster" as this happens it's invariably the case that the blame is apportioned to the wrong person or organisation.

As you'll have noticed, the evildoer tag has been attached to BP, with the CEO Tony Hayward being cast as the Dick Dastardly of the corporate world.

But as is usually the case, the real cause of the problem has been overlooked. You see, it's not BP that is ultimately to blame, even though the oil has come from their oil rig. And it's not entirely the fault of the legislation passed in the US during the 1980s that limited the liability of oil companies to just USD$75 million if a spill occurred.

No, the ultimate cause of the problem is something as basic as a lack of private property rights.

Yep, that's right, a lack of private property rights over gulfs, oceans and shorelines is the direct and ultimate cause of the BP oil "disaster" and the Exxon Valdez oil "disaster", and any other oil disaster you can think of.

A few weeks ago Daily Reckoning editor Dan Denning referred to a term known as tragedy of the commons.

The gist of the argument is that property that is either owned communally or by no-one in particular is cared for less than property that is freely owned by a private individual or organisation.

You can see that in almost every instance in society. In most cases where property is privately owned and where the owner values the property, it is better taken care of than property that is publicly owned.

Which is exactly the reason why the oil spill in the Gulf of Mexico occurred.

A lack of private property rights over seas and oceans naturally means that individuals and organisations are less careful about what they do in it or to it.

As an aside, take for example the case of the young American lass who was trying to sail around the world and had to be rescued in the Indian Ocean at a cost of $300,000 to the Australian taxpayer.

Do you really think that if the oceans were privately owned the owner would allow a 16 year old to sail through unassisted, without paying a fee to do so, without insurance should an accident occur, or without paying the private owner an insurance fee in the event of a rescue being needed? Something not too dissimilar to the fees you pay to the RACV or NRMA I suppose!

Anyway, when nobody owns something then there's no recourse for compensation should you do any harm to it. Even if it's publicly owned property the quest for compensation will be less rigorous than if it's privately owned property.

Simply because of the lack of a profit motive and the lack of direct ownership. If oil washes ashore at a theme park located on a private beach and a public beach, odds are that the private owner will act faster to clear the mess as it could have an impact on revenues and profits.

But the public beach would have less of an incentive. The clean up process would probably need approval from committees or boards. It would need to be the "right" kind of cleaning process, not just any old process, and so on. The bureaucrats would be in their element. Looking busy doing nothing.

Then there's the matter of private ownership of the oceans. It's not such a crazy idea you know. It's no crazier than private ownership of land.

Of course we'll agree that it's harder to erect a fence in the middle of the Atlantic Ocean, but that's the beauty of technology that can simply and easily record boundaries electronically on maps. Just as national waters are recorded on maps today.

Consider the situation in the Gulf of Mexico right now if specific areas of the gulf were owned by the private sector. As an owner of a particular area you'd be keen to ensure that those using it took good care of it.

Not only because it would make it more attractive for others to do business there - eg. Other oil drillers or fishermen or tourist operators - but also because of the consequences of inappropriate actions by firms in your property could have on adjacent sea and land properties.

We've got no idea whether BP has been negligent with their drilling operations or not. But what we do know is, that if BP was drilling in a privately owned Gulf of Mexico, the private owner would want to be darn sure that BP was behaving itself.

The private owner would want to receive a fee from BP for the use of that particular sea area. Doubtless the owner would also want to make sure that BP had adequate insurance should anything happen.

The private owner may also provide addition services to those using it's sea property - such as oil spill services.

After all, an oil spill by one driller would have a major impact on other companies doing business in that area of private sea - other drillers, fishermen, shipping firms, etc.

And imagine the consequence of the oil drifting into adjacent sea areas.

For the private sea owner, if one business causes other businesses to stop using that area of the sea then that's going to be bad news for the owner.

But as another aside, what about other issues, such as piracy on the high seas? If you own a section of the ocean and you're able to charge ships to use it, you'd be able to attract more traffic if you can demonstrate how secure your section of the ocean is. That ships can pass freely without the fear of ambush.

Anyway, getting back to the oil spill. While BP is being cast as the villain, the truth is that BP isn't as villainous as the mainstream media, politicians and special interest groups claim.

I mean, does anyone seriously believe that BP intentionally caused the oil rig to explode, killing eleven men and releasing millions of barrels of oil into the Gulf of Mexico.

Yet listen to the mainstream knuckleheads and you'd think BP couldn't give a stuff that up to USD$11.3 million worth of oil is leaking into the Gulf each day. Could it really be true that BP doesn't care that it's losing so much money in potential profits?

No, of course it isn't. BP would rather have the oil flow into a tanker rather than into the sea.

However, because of a lack of private property rights there's no private owner putting pressure on BP to clean the mess up. In addition, there's no private owner who could have invested in equipment or chemicals to ensure the problem didn't spread into adjacent privately owned areas.

Or, there was no private owner to stipulate that BP should have an emergency plan in place should the worst occur.

Instead you've got US president Obama calling the oil spill "the worst environmental disaster America has ever faced." And claiming that he's going to "kick ass" - we assume he means kicking bottoms not kicking donkeys.

But funnily enough, nearly two months after the rig exploded we're yet to see exactly what governments or government agencies have done.

The fact is that if oceans were privately owned BP may never have been able to afford to locate a rig where it did. After all, drilling thousands of metres under the sea bed is pretty expensive and risky.

But as is usually the case, when you've got a government manipulating a market to encourage offshore exploration in areas that otherwise would not be economical, it will always create distortions and lead to unintended consequences.

Especially when a government passes a law limiting the liability of offshore drillers to just USD$75 million. Which - if you'll pardon the pun - is a drop in the ocean compared to the billions the clean-up is forecast to cost.

So look, I won't deny that perhaps BP deserves to shoulder some of the blame. But the fact remains that the biggest contributor to the current oil spill, the Exxon Valdez, and all other so-called environmental disasters is actually the basic lack of private property rights over the seas.

Cheers,
Kris Sayce.
Money Morning

Aaaah Teresa. What you've done....

Hell explained by chemistry student!
by: Mr Nice Guy ( Friday, May 7, 10:00 )

The following is an actual question given on a University of Washington chemistry mid term.

The answer by one student was so 'profound' that the professor shared it with colleagues, via the Internet, which is, of course, why we now have the pleasure of enjoying it as well :

Bonus Question: Is Hell exothermic (gives off heat) or endothermic (absorbs heat)?

Most of the students wrote proofs of their beliefs using Boyle's Law (gas cools when it expands and heats when it is compressed) or some variant.

One student, however, wrote the following:

First, we need to know how the mass of Hell is changing in time. So we need to know the rate at which souls are moving into Hell and the rate at which they are leaving. I think that we can safely assume that once a soul gets to Hell, it will not leave. Therefore, no souls are leaving. As for how many souls are entering Hell, let's look at the different religions that exist in the world today.

Most of these religions state that if you are not a member of their religion, you will go to Hell. Since there is more than one of these religions and since people do not belong to more than one religion, we can project that all souls go to Hell. With birth and death rates as they are, we can expect the number of souls in Hell to increase exponentially. Now, we look at the rate of change of the volume in Hell because Boyle's Law states that in order for the temperature and pressure in Hell to stay the same, the volume of Hell has to expand proportionately as souls are added.

This gives two possibilities:

1. If Hell is expanding at a slower rate than the rate at which souls enter Hell, then the temperature and pressure in Hell will increase until all Hell breaks loose.

2. If Hell is expanding at a rate faster than the increase of souls in Hell, then the temperature and pressure will drop until Hell freezes over.

So which is it?

If we accept the postulate given to me by Teresa during my Freshman year that, 'It will be a cold day in Hell before I sleep with you,' and take into account the fact that I slept with her last night, then number two must be true, and thus I am sure that Hell is exothermic and has already frozen over. The corollary of this theory is that since Hell has frozen over, it follows that it is not accepting any more souls and is therefore, extinct ...... leaving only Heaven, thereby proving the existence of a divine being which explains why, last night, Teresa kept shouting 'Oh my God.'

THIS STUDENT RECEIVED AN A+.

Thanks to WWW.ZAZZ.COM.AU

Mr Henry, what have you done to us ???

What the Henry Review means for the property sector – RP Data


The comprehensive review of the Australian taxation system contained plenty of recommendations but resulted in little action from the Federal Government. For property investors the playing field remains largely unchanged.


Titled ‘Australia’s Future Tax System’, the Henry Review report spanned almost 1,000 pages and included 138 recommendations for taxation reform. The Review is arguably the most thorough assessment of the Australian taxation system and processes undertaken. The response from the Federal Government to the Henry Review has been characterised by a distinct lack of recognition for the vast majority of these recommendations.

The most significant recommendations to be supported by the Government were announced together with the report release on Sunday May 2. These included:

* A reduction in the company tax rate progressively from 30% to 28% by 2014/15.
* Superannuation reforms, including shifting the compulsory employer contribution from 9% to 12% by 2019/20 and a $500 annual superannuation bonus for workers earning under $37,000 per annum
* A 40% tax on profits from the resources sector (known as the Resource Super Profits Tax (RSPT)) which should funnel $12 billion in revenue to the Government over the first two years it is implemented.
* Establishment of a new infrastructure fund which will support state infrastructure projects.

The Henry Review had the potential to change the way Australian’s view the property market as an investment class The big ticket recommendations for the property sector were associated with negative gearing, capital gains tax and stamp duty reform – all of which remained virtually untouched in the Federal Government’s response to the review.

The Henry Review recommended replacing personal taxation discounts such as negative gearing and the 50% capital gains discount with a broader reaching 40% discount on interest income, net residential rental property income, capital gains and some interest expenses (recommendations 14 to 17). In the Federal Government’s response these recommendations were largely ignored.

Investors can continue to use negative gearing to offset losses on their investment property against their personal income tax and capital gains are still subject to a 50% discount if the asset is held longer than one year.

It should come as no surprise that these tax discounts remained untouched, particularly in an election year. One only has to cast their mind back to 1985 when Treasurer Paul Keating attempted to tamper with negative gearing, replacing the policy with a system that offset net losses against future profits. The result was that investment in property declined significantly and with no introduction of new rental stock, rental rates shot upwards. Two years later the policy was wound back.

With Australia being largely reliant on private investors to introduce new rental stock, the resulting reduction in new rental supply that would result from a downturn in investment would likely be fuel to the fire of an already undersupplied rental market.

The Review also recommended major changes to stamp duty provisions, where state based stamp duties would be replaced by a more efficient and broader based land tax system. The recommended land tax system would apply to all land holdings and use a sliding scale for assessment based on value per square metre. In this way, more valuable land would be taxed at higher rates and concessions would be given to low value and agricultural land where the dollar value per square metre is likely to be relatively low. Additionally, land tax would be applicable to individual properties rather than across aggregated land holdings.

The Government has not commented on this recommendation, apart from stating that the family home would be exempt from any land tax. Removing stamp duties will not be a decision the Government makes lightly, considering that stamp duty makes up about 34% of State Government property taxes (which in turn comprise about 45% of the entire State Government revenue base).

Another key section from the Henry Review relates to housing affordability and housing assistance. The review proposes:

* “a review of institutional arrangements (including administration) to ensure zoning and planning do not unnecessarily inhibit housing supply and housing affordability”; and
* a review of infrastructure charges / developer charges to ensure they appropriately price infrastructure contributions from developers to ensure unnecessary costs are avoided, transparency of these charges is improved and reductions in regulation are introduced that will streamline the development time frame.
* an increase in the maximum rate of rental assistance and a provision for escalations in rental assistance to be indexed to rental rates rather than CPI.

All of these recommendations have been ignored in the Federal Governments response to the Henry Review.

Whilst the Government’s response seems to lack a great deal of support for the recommendations contained in the ‘Australia’s Future Tax System’ report, it is still early days. There are likely to be further announcements as the Government releases budget papers next week. In particular, the Government is expected to announce further intentions for tax simplification and savings incentives such as tax breaks on bank savings.

Overall for the property sector, it is largely ‘business as usual’ and potentially a case of ‘watch this space’.

Article by RP Data - www.rpdata.com.au

Budget 2010

Australia's Federal Budget 2010/11 - Making Sense of it
The Federal Budget is hardly the most riveting document you are ever likely to read. Sure you know it’s important, but the problem is that it’s a huge document with countless facts, figures and tables. And when it comes to analysis, economists seem to be writing for other economists; and accountants writing for other accountants.

It’s always important to remember that it is just a budget, the same that any household or company would prepare. Assumptions are made; forecasts are taken. And sometimes they can go awry – remember last year Treasury thought we were headed for recession, while unemployment was expected to hit 8.5 per cent. We didn’t experience a recession and unemployment peaked at 5.8 per cent.

At the end of the day most people want to know what’s in it for them. It doesn’t matter whether you are a student, pensioner or CEO of a major company.

So we have decided to make this analysis different.

Sure, there are the usual tables, graphs, facts and figures. But we reckon that there are only three questions most people want answered and that’s where we will be concentrating:
• Did the Government get it right?
• What does it mean for Australia?
• Who are the winners and losers?

First things first
• This year (2009/10) the budget deficit is tipped to hit $57.1 billion (4.4 per cent of our economy or GDP). Last November, a deficit of $57.7 billion was expected.
• Next year (2010/11) the deficit is tipped to be $40.8 billion (2.9 per cent of GDP), better than the $46.6 billion deficit forecast six months ago.
• The budget is expected to return to surplus three years early in 2012/13.
• Most of the measures have been previously announced: Health fund reform; company tax cut; resources super profits tax; increase in super fund levy and personal tax cuts.

Did the Government get it right?
• The Government believes that a no-frills, no-nonsense budget is required. We beg to differ. Australia was successful in avoiding recession last year and, unlike other advanced nations, is not weighed down by huge deficits and debits. We should be building on that success. Spending should be cut, not curbed, so that the Reserve Bank – and home-buyers – don’t have to shoulder the burden.
• But policy decisions since November last year increase the deficit by $3 billion. The Budget deficit is tipped to improve by over $16 billion next year, but none of the improvement is due to Government efforts. The deficit is expected to improve by over $31 billion in 2011/12 and only $600 million of that is due to Government.
• The Henry Tax Review has been handed down but the Government has only opted for only a handful of the 138 recommendations. But where the Government deserves credit is to show some discipline on spending. (Effectively it’s promised a lot, but nothing happens any time soon). So we give the Budget a mark of: 13/20.
• Of course, we have to take a moment to focus on the budget setting. Last year the budget was set against the background of the global financial crisis. One by one, major economies were slipping into recession, and while our government tried to protect our economy as much as possible, policy-makers seemed resigned to the fact that we would probably go down the same path.
• The Government spent freely by way of cash hand-outs; tax breaks for businesses; home insulation schemes; spending on schools; and building social housing. As a result the budget moved from a surplus of almost $20 billion to a deficit of just over $47 billion. The Reserve Bank slashed interest rates from 7.25 per cent to 3.00 per cent. And it worked – Australia avoided recession.
• Of course the fact that we did so well then caused some to argue that we spent too much and cut rates too far. Hindsight is a marvellous thing. But it seemed like the right idea at the time. Of course not all the money was well spent, but that’s another story.
• This year the budget has been set against the background of a domestic economy now doing perhaps a little too well. The Reserve Bank has been active in winding back the stimulus, lifting cash rates 1.5 percentage points in just eight months. There have been concerns that we are witnessing Mk II of the commodity boom, with consequences for economic growth and inflation in Australia.
• But in the last few weeks, the positive sentiment has been dented by the European debt crisis (EDC). Could this be the second act of last year’s financial crisis, leading to ‘W’-shaped economies? That is, many countries recorded ‘V-shaped’ recoveries, but are they now headed south again?
• We would argue that our economy remains in strong shape; that China will continue to expand strongly; that Greece won’t de-rail the global economy; and that the US economy is on the path to recovery. On that basis, the Government should be winding back stimulus to the economy.
• The Government has given a commitment not to increase spending by more than 2 per cent in real terms until the budget surplus is more than 1 per cent of GDP.
• But while the government is to be applauded for its commitment to restrain spending growth, it has been lazy in other areas of fiscal (budget) policy.

What does it mean for Australia?
• Managing the economy is very much a balancing act. The Reserve Bank has a role by setting interest rates (monetary policy). And the Government has a role in deciding what to spend, where to spend and how to pay for it (fiscal policy).
• You can’t have one arm of policy moving one way, and the other arm of policy moving the other way. But that is very much that situation. The Reserve Bank has been winding back stimulus and now arguably monetary policy is neutral – not boosting or slowing down the economy.
• Given that monetary policy alone is controlling our economy, we believe the cash rate will have to rise further over the coming year to around 6 per cent by the end of next year.
• Over the coming year, the budget deficit is expected to improve by around $16 billion or just over 1 per cent of GDP. But all of that will come by natural means or the “automatic stabilisers” – more employment, so less unemployment benefits and more taxes; and higher company profits, so again more taxes. But the government isn’t doing anything to improve the bottom line. That is, there is little in the way of discretionary measures to cut spending or boost revenues.
• Still, it is an election year. To what extent could we reasonably expect the Government to slash and burn in this environment?

Who are the winners & losers?
• Low-income earners: There is another round of tax cuts. But even for those on $50,000 a year it works out at just an extra $5.77 a week. Tax simplification and less tax on bank deposits – but you’ll have to wait. Workers under $37,000 get extra $500 in super.
• Middle-income earners: Someone on $100,000 a year gets an extra $9.62 a week from July 1 via tax cuts.
• High-income earners: Those on $150,000 a year get a tax cut of $19.23 a week.
• Pensioners: No change. Cheaper medications from health fund reforms.
• Investors: Most investors hope for a satisfactory negotiation between the Government and miners on the super profits tax.
• Companies: Nothing in the short-term. Small business gets a tax cut from July 2012.

Source Craig James, Chief Economist, CommSec