Argus & Teele – Two Grumpy Old Men: How We Messed Up The Boom

Posted in Wealth
19/08/2013 Level One

This was an article written by Richard Gluyas in The Australian on 17th August 2013.

IN a well-appointed Collins Street office in Melbourne, Bruce Teele pauses for a moment of self-reflection and turns to his long-time colleague and former BHP Billiton chairman Don Argus. “Don, we’re sounding like a couple of grumpy old men,” he jokes.

The two 75-year-olds with a combined 61 years of experience, soon to step down from the board of our largest listed investor, Australian Foundation Investment Co, have been debating the ills of Australia Inc — and there’s a lot to be concerned about.

There’s the wilful destruction of corporate memory, the “scandalous” lack of capital discipline surrounding the National Broadband Network, the erosion of blue-chip listings on the Australian Securities Exchange, the unwanted introduction of sovereign risk and a desperate plea to resolve an emerging budget crisis by lifting the GST.

But when it comes to the resources boom, that once-in-a-lifetime windfall that has now passed its lucrative peak, Teele casts aside any vestige of caution.

“The goose is dead, or it’s lost a leg at the very least,” he tells The Weekend Australian.

“I’ve been in the market for over 50 years and this has been the greatest failure of infrastructure, planning, regulation, whole masses of things.

“A lot of this is just a replica of the Japan-driven boom, but it’s a whole lot bigger, and my theory is the corporate and advisory memories have gone — the practical and experiential memories.”

So, what does the nation have to show for the swollen $200 billion river of cash that flowed into government coffers across the past decade or so?

“Egg,” says Teele.

Egg? “Yes, egg. Egg on our international face.” It was 47 years ago that Teele joined the board of AFIC, which was a satellite of the establishment JB Were & Son stockbroking franchise. He became chairman in 1984 while serving as Were’s chairman and chief executive from 1978 to 1997.

Argus, by comparison, is an AFIC novice, joining the board in 1999.

The bond between the two men is so strong it’s like a mutual admiration society.

Argus, chief executive of National Australia Bank from 1990 to 1999, has described Teele as a local version of legendary US investor Warren Buffett.

He credits him with helping to launch NAB’s golden age of prosperity in the 1990s by convincing the bank to launch what was then the biggest rights issue in Australian corporate history: a one-for-five offer at $5.25 a share to raise $1.055 billion.

NAB, as result, emerged as a powerhouse from the early 90s recession, only to squander its position as the nation’s most valuable bank in 2004.

Teele says of Argus: “He ran the bank at a very interesting time and was able to make some very bold moves, and the bank was always properly capitalised and secure.”

Argus says simply: “Yes, we knew our risks.”

It’s a theme to which the former NAB chief returns, but in a global context.

When Teele describes the financial crisis as “scary”, even against AFIC’s long history dating back to 1928, Argus sheets home blame to banks that were blind to their balance sheet structures and the need to preserve liquidity.

The risks, he cautions, are still out there.

“I don’t think the banks around the world trust each other, and that’s evident in the inter-bank borrowing rates,” he says.

“People are wary about who’s going to be there when you need them.”

Teele chimes in: “You need to watch that one every day. The inter-bank rates are telling you something that you don’t read in the headlines.”

Argus says the core problem in Europe is that banks have been “stuffing their balance sheets” with bonds issued by technically bankrupt countries, when their true function was to be “a messenger” in the economy.

He says economic stimulus and “washing false money through the system is, to me, very short-term”.

Teele’s view is that the financial system has “become used to steroids, or other opiates”, a practice it must abandon sooner or later.

It’s an issue, he says, that AFIC considers in its long-term investment decisions.

While Europe and the US is the focus of much discussion on system-threatening debt levels, the AFIC duo consider that our currently stable AAA credit rating offers false comfort.

“We’re comparing ourselves to bankrupt economies, for goodness sake!” Argus protests, saying New Zealand’s slide from AAA status is a warning for countries such as Australia that continue to rack up cash deficits.

“If you add in the consumer debt, Australia is carrying one of the world’s biggest debt loads; we’re up to pussy’s bow in it and everyone thinks it’s someone else’s problem.

“All this stuff about ‘Don’t worry, everything’s all right’ is just nonsense.”

The nation’s fiscal challenge is magnified, he says, by 45 per cent of its revenue base coming from the debt-laden consumer.

Both men believe the tax take from corporates is also under long-term pressure, with the number of companies in AFIC’s porfolio dwindling from 200-300 when Teele joined the board to its present level of less than 100.

He blames a lack of competitiveness due to high costs and eroding productivity, with large corporates increasingly seeking a superior return from investing offshore.

Argus laments that if there were 200 companies creating significant value in Australia, then the nation would not have a problem with its cashflow budget.

“But if you spend more than you earn and you haven’t got enough companies paying tax, then you’d better do something about it pretty quickly,” he says.

Talk of high costs and lack of fiscal discipline, of course, brings us to the National Broadbank Network.

Argus says the NBN is “scandalous”, while Teele says it has defied “normal commercial processes” with its lack of proper costing or cost-benefit analysis.

“If a company did that they’d be dog meat. They’d be out. And so they should,” he says.

Interestingly, Argus is prepared to shoulder some of the blame for the same lack of capital discipline shown by the resources industry at the height of the boom.

When Teele says the industry’s returns profile would have been better had it paid more attention to its dividend-paying responsibilities rather than “chasing production”, Argus, the former BHP Billiton chairman, agrees.

“The truth is that resources wasn’t front and centre for BHP until it demerged the steel business, so we had to play a catch-up game because we hadn’t invested in iron ore for three to four years,” he says.

“But we could have prioritised the returns differently in favour of the shareholders, which would have meant the capital expenditure would have been a bit slower.

“That’s one of the things you reflect on when you look back.”

It’s a significant concession, with Teele softening the blow by volunteering — somewhat tongue-in-cheek — that his views are “very, very old-fashioned”.

As to the future, Argus questions the source of all the recent talk that the boom is over.

He argues that Chinese-driven demand for our commodities is not going to go away, although prices could fall because of increased supply.

One thing is certain, though, and that is the federal Treasury will never be able to predict the revenue flow from the resources sector.

“I’ll say this and you can quote me,” Argus says. “Treasury has never been able to model the price curves of commodities; they’re always over-extending the revenue that we’re going to get from the resources industry.”

On a more positive note, Teele and Argus reserve praise for the local banking industry, and are not at all surprised that the four big banks in a lightly populated country are inside the global top 20 by market value.

Argus recalls the dark days of the early 90s, when Westpac and ANZ were teetering and “should have fallen over”.

He agrees with Teele that the heightened audit and regulatory supervision of the sector left it well-placed to withstand the GFC.

“The banks get belted unmercifully and I’ve criticised them for being giant building societies and not concentrating on business lending,” Argus says. “But we saw after 1989 that when two of the majors had their heads down and were trying to dig themselves out of the mire, that the nation didn’t grow as quickly as it could.

“The only thing is that the growth isn’t going to be there with the level of consumer debt.”

And for all their criticisms, the two AFIC directors, who will step down at the annual meeting in October, firmly believe a turnaround is achievable.

“Populism won’t do it but it might get you into office,” Teele says. “And the danger is that governments are leaving such a legacy at state and federal level that the incumbent almost has an impossible task. But it can be done because it’s been done before.”

Argus says the country has to encourage investment by controlling “spiralling” input costs.

“It’s as simple as that,” he says.


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