3 May 2022
The War in Ukraine Boosts Demand For Australian Exports!
Increasingly effective sanctions against Russia carry a silver lining for Australia. This is because Russia’s main exports of gas, oil, coal, other minerals, wheat and barley are very similar to Australia’s. As sanctions lead to much lower exports by Russia, the demand and the price of similar Australian exports rises. Look to Australia’s federal deficit being significantly lower than forecast as increased income across our resources and farming industries produce greater tax payments than the budget forecast.
Falling Unemployment Inevitably Leads to Higher Wages
Many employers are finding that the only way to fill critical vacancies is to increase the wage on offer, often leading to poaching of employees between employers. If unemployment falls further there will be increases in wages across many industries. Economics 101.
Misleading Comparisons
Recent reports of a massive fine levied on a hotel accommodation comparison provider indicate that the comparisons do not necessarily lead consumers to the cheapest alternative but rather to one preferred by the provider for its ability to generate revenue. This causes us to question the accuracy of health fund comparators who in reality get paid fees or commissions for switching clients toward particular providers.
If consumers understood the massive margin pocketed by health funds, ancillary health insurance (extras cover) would be unsaleable. The gross margin of premiums above payments to healthcare providers has long been around 30 percent. Clever advertising and extolling differing benefits confuse the buyers.
As dentists are painfully aware, they bear the brunt since approximately 50 percent of benefits are dental related with the remaining 50 percent dominated by optometrist services followed by physiotherapy, chiropractic and miscellaneous smaller items. If some dentists did not choose to support it by being preferred providers, ancillary health insurance cover would have a very small market indeed!
CSL Demonstrates the Strength of its Business with Huge Finance Raising
Major pharmaceutical company CSL Ltd has announced the successful raising of US $4 billion ($5.6 billion Australian dollars) in long term bonds which will be used together with CSL’s recent capital raising to fund the purchase of Vifor Pharma Ltd and provide additional working capital. With inflation about to generate substantial interest rate increases in the US and, inevitably, within Australia the issue of this quantity of corporate bonds broken into 5-year, 7-year, 10-year, 20-year, 30-year and 40-year components at interest rates below likely long-term inflation is a strong endorsement of the company. The increasing pharmaceutical product range, including the additional ones acquired with the Vifor Pharma acquisition indicate that CSL is a long-term growth business notwithstanding that share markets face declines as rising inflation in the US and elsewhere force up interest rates. There is rising demand for pharmaceutical products as people suffer a wide variety of illnesses which increase with ageing populations. CSLs business is overwhelmingly international in its scope and potential. I regard CSL as a core component of our family superannuation fund. Readers should do their own research.
Are Afterpay and Block Rubbish Businesses?
The lemming-like willingness to follow the mob into unstable business models never ceases to amaze. Afterpay went through a growth in share price not matched by its business model before being taken over by US company Block with a similar business model. The business model which involves lending for the purchase of consumer goods without credit worthiness analysis meaning that it was in some cases lending to borrowers who had already maxed their credit cards. With Afterpay/Block having to finance its loan book through borrowing from mainstream financiers there is high risk of bankers refusing to provide further finance or demanding much higher interest and imposing stricter lending criteria. It is vulnerable to wide scale debt defaults from the myriad of those using it to finance purchases. Debt recovery can be fraught with problems when dealing with vast numbers of relatively small loans. The falling price of Block means that Afterpay shareholders who were paid in Block share scrip and who chose to remain with Block have seen their share value plummet. There is an old saying about investors in unstable enterprises that a shareholders first loss is their best loss. Continuing as shareholders in a rising interest rate regime with tighter controls over lending by its bankers is likely to worsen the situation. Potentially regulatory controls loom.
I definitely have not invested in Afterpay or Block.
Thoughts on the Russian Invasion of Ukraine
My near lifelong study of military matters has naturally sparked my interest in the Russian invasion of Ukraine and the tragic consequences to date.
Some obvious conclusions to date are.
1. Russia is the aggressor and its invasion has long been planned.
2. Many war crimes are being committed.
3. Vladimir Putin’s prior intelligence concerning Ukraine’s willingness to defend itself was wildly optimistic.
4. Ukrainian leader Zelensky is winning the global information war against Russia’s President Putin.
5. Russian army doctrine is rooted in Russia’s supremacy over Germany in World War 2 and involves using overwhelming force. Its World War 2 victories hide the fact that individually German soldiers were vastly better trained and effective than their Russian counterparts. Germany lacked the numbers to hold back the vast numbers of Russian soldiers, Russian tanks and Russian artillery. Some estimates are that 9 Russian soldiers were lost for every German soldier. Germany faced multiple fronts in Italy and Western Europe and had lost air supremacy as its industry was progressively destroyed by allied bombing. The Russian T34 tanks were rather crude but vastly outnumbered German tanks. Russian dictator Joseph Stalin observed that “quantity has a beauty of its own”. The huge force of numbers drove the German army back into the German heartland. The magnitude of Russian victories on the Eastern front at Stalingrad and particularly at Kursk dwarfed all other land battles of World War 2
6. Following Russia’s actions in Georgia and its seizure of Crimea in 2014 Ukraine had every reason to believe that it was likely to be Putin’s next target. The Russian army seems to have made little advance in tactics and strategy since World War 2. It assumed that by massing a large force on Ukraine’s border it would be able to march into the capital Kyiv with little resistance and appoint its own puppet as President. The smaller Ukraine army has been much better prepared and is capable of decentralized operations.
7. The lack of effectiveness of the Russian air force has been another shock. A mystery thus far is its apparent lack of serviceable tactical aircraft. It appears that the training of pilots in preparation for combat missions is seriously deficient.
8. Soldier for soldier and tank for tank Ukraine’s army has been vastly superior to the Russian army which is demonstrably ill prepared for sustained operations against a determined foe.
Russia may prevail through a ruthless use of larger numbers, disregard for its own casualties and for the lives of the civilian population but it will be at enormous cost militarily and economically.
The Response of the West
This has come as a surprise to Putin who has seen Russia’s foreign reserves frozen, and a reaction across Western countries applying sanctions and supplying weapons to Ukraine on a scale not previously experienced. Whether it will be sufficient remains in doubt but if Putin succeeds in crushing Ukraine it will be a pyrric victory won with enormous casualties. It will leave the Russian economy in tatters for many years.
Strategically it will improve the US ability to concentrate on the Indo Pacific region since the aftermath of the Ukraine war will leave Russia unable to invade any NATO country.
Interest Rates to Chill the Housing Market
When interest rates go up the housing market recedes. If interest rates increase substantially over the next 18 months, home values will decline substantially as borrowers will only be permitted to borrow the amount of loan that they can service which restricts the price that they can pay for houses. The break out of inflation in the US is spreading to Australia albeit that we remain in a better position relative to the US.
Higher interest rates limit the discretionary spending of consumers and limit inflation.
There will also be an impact on the share market.
The Best Time to Buy or Upgrade a Home
Contrary to popular expectations, the worst time to buy a home is when interest rates are lowest and the only future direction is up. Conversely the absolute best time to buy is when interest rates are at their zenith, house prices are at their lowest and those that buy then experience a cycle of falling interest rates and rising home values.
Payroll Tax Vulnerability of Dental and Medical Practice Owners
A dentist has drawn my attention to a decision of the NSW Civil and Administrative Tribunal in the case of Thomas and Naaz Pty Ltd v the Commissioner of State Revenue.
The Tribunal found that the contractual payments made to the doctors in three medical clinics in a typical services agreement were in reality wages resulting in a large payroll tax liability.
Armed with that precedent the NSW Commissioner of Taxation may spread the net widely to capture payroll tax from a variety of medical and dental practices contracting doctors and dentists. The major medical and dental corporates using similar arrangements will be particularly vulnerable to having large payroll tax assessments levied for multiple years.
Dental corporates purchase the goodwill of practices and then engage dentists on contract to treat patients with the contracted dentist contributing a percentage of patient billings as a facilities fee in order to enable the contractor dentist to treat “their” patients. This arrangement is a nonsense because the corporates purchased the goodwill off previous practice owners and have stringent contractual agreements stopping the contractor dentists removing the patients to treat them elsewhere. The idea that the contractors are treating “their patients” when it is actually the corporate which purchased and accounted for the goodwill stretches the imagination.
It is likely that the corporates have legal opinions from major law firms concerning this practice and I expect this to lead to a significant degree of disputation. State taxation authorities share information and the NSW case is likely to be followed up by similar authorities in other states.
With the exception of WA, the states have massive debt and will be anxious to close revenue loopholes of which the payroll tax anomaly among medical and dental corporates and some larger private practices is an obvious target.
TPG Sells 45% of Greencross
Australian Super and Canadian pension fund HOOPP are taking 45 percent ownership of Greencross and TPG is also refinancing Greencross with a new debt package of $1.8 billion* enabling TPG to receive a major dividend in addition to sale proceeds. As to the business future the saying goes follow the money. In this case TPG’s payouts.
It seems near certain that the actual jewel in the business is the retailing arm of Pet Barn and City Farmers. Despite all the corporate hype its veterinary practices are known to have huge veterinary staffing limitations. According to the Australian Financial Review of 23 March, Greencross only has about 7 percent of the Australian veterinary practice market.
The explosion in pet numbers during Covid was better for its retail arms than its veterinary clinics which have steep competition from veterinary practitioner owned practices
*Note: correction from my previous newsletter.
Financial Success for Dentists
Financial Success for Dentists: Rules for How to Approach Your Dental Career sets out the key strategies which make dentists successful. It is specifically written for those dentists and dental specialists owning their own practices and for those aspiring to own practices. Among the topics included:
· Understand key practice valuation criteria.
· Learn how some dentists inadvertently reduce the value of their practice by $500,000
· Avoid long term errors when purchasing your practice.
There are many accountants, financial advisers, marketing consultants, web site designers and practice advisers who give advice from their particular disciplinary experience, but very few have the wider breadth of experience to define for their clients the key rules to follow to optimize their practice and their long-term financial outcomes. An otherwise competent financial adviser may have little understanding of what makes one practice much more successful than another. Many accountants have detailed knowledge of the taxation rules but cannot identify if a dental client has broached invisible barriers to practice growth or a threat to practice goodwill value.
I spent 33 years examining dental practice financial outcomes and reviewing the key strategies and decisions which separated successful Australian dental practices and practice owners from the less successful and this led to relevant conclusions and advice to dental practice owners.
A complete and comprehensive career guide for mature and aspiring dentists.
Based on real life situations and a lifetime of dealing with dental practice ownership outcomes this book is worthy of Text Book status for every dental teaching school.
—Merv Saultry, Founder Dental Innovations Network
To Obtain a Copy:
· Go to the Delany Foundation website at http://www.delanyfoundation.org.au
· Click on the Donations tab and make a donation of minimum $60. This is easiest by Mastercard or Visa.
· Email graham.george.middleton@gmail.com confirming that your donation has been made, as well as your name and mail address
· A copy of the book will be mailed directly to you
All production costs and mail costs are met by me personally, so all money donated goes to the Delany Foundation which contributes toward the running of schools in Ghana, Kenya and Papua New Guinea. Naturally donations above $60 are welcome.
The donation to obtain this publication will be the most cost-effective practice advice most dentists will ever receive.
Please Pass On
If you like these newsletters please pass them on to colleagues. Past newsletters and articles in Australasian Dental magazine on business issues are at grahammiddleton.com. I can be contacted directly at graham.george.middleton@gmail.com
General Advice
I sold my interest in a financial services and accounting group on 30 June 2020 and have no intention of starting another financial services business. My website is now available at grahammiddleton.com.
Those who find my newsletters of value to them are asked to consider making a donation to the Delany Foundation, a registered charity which assists schools in Papua New Guinea, Ghana and Kenya. Delany Foundation c/- Holy Cross College, 517 Victoria Road Ryde NSW 2112.
Best wishes to all readers
Graham Middleton
