Breaking the Code ARU, CA, AFL, NRL: A World of Less Demand

Dear Reader,

What a mess our nation’s sporting codes are in.

Their financial woes reflect the broader complacency that crept into society. ‘Don’t worry, there’s more where that came from.’ ‘Tomorrow is going to be better than today.’

Tens (if not, hundreds) of millions of dollars have been squandered. The hubris in sporting codes has been laid bare in numerous news articles.

Over bloated and excessively remunerated administrations. Overstaffed clubs. Overpaid players.

There have been broadcasting rights worth billions, sponsorship deals and game day receipts in the millions.

Yet, each code is scrambling for cash. Taking out loans. Going cap in hand to international bodies. Seeking government assistance.

Rainy day funds? No need. The sun always shines in the world of sports.

In a brand new report, market expert Vern Gowdie warns of the dangers waiting in a post-COVID-19 world. Plus, he outlines the steps you must take now to protect your wealth. Learn more.

And, if your sport was fortunate to have cash reserves, the lure of a booming share market proved too tempting…

The Australian and The Age newspapers have reported that CA’s [Cricket Australia] financial reserves had been hit by a slump in the world’s stock markets caused by the Covid-19 pandemic.

Sources told The Age that [Cricket Australia CEO] Roberts informed senior players that CA had lost some A$40 million in shares, almost half the A$90 million listed under investments in last year’s financial report. But the association claims the loss is less than A$5 million.

Its [CA’s] cash assets dipped to A$26.6 million last June, according to its 2018/19 financial report, down some A$175 million in three years.

Straits Times, 19 April 2020

Let’s do some quick maths on the reported figures.

In the 2018/19 financial report, Cricket Australia had $116.6 million…of which, $90 million (77%) was invested in local and international shares.

If the numbers are accurate, this is absolutely unbelievable. On what planet is it deemed prudent to invest more than 75% of your cash reserves in an asset class that can (and does) inflict serious capital losses?

Cricket administrators from the post-Great Depression era would be turning in their graves. They saw firsthand the devastation share markets can inflict on capital. Unfortunately, the lesson learned by that generation have been long forgotten or ignored.

When a board of directors sign off on such an ill-fated strategy, it’s an indication of where society’s thinking (or more to the point, lack of thinking) is at.

Good times are here to stay. Risk assets pose NO risk. What has been will continue to be so.

Predictably, Cricket Australia — along with a host of other investors — remain resolute. Don’t panic. Shares will eventually recover.

A reflection of the same groupthink that got them into this mess in the first place.

It’s truly amazing that no one on any of these sporting boards joined the dots. If they had, a greater level of prudence would (or, should) have been exercised.

In the October 2019 issue of The Gowdie Letter, readers were informed of the ‘secret’ behind our nation’s economic ‘success’:

The attainment of the [Australian] Dream has been made possible by access to credit.

More people accessing more debt to live the Dream.

Australia’s last recession ended in September 1991.

According to the Australian Debt Clock, our nation’s total debt at that time was (a mere) $850 billion.


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Source: Australian Debt Clock

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The latest snapshot from the Australian Debt Clock, puts our total debt at a touch under $8,000 billion ($8 trillion).


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Source: Australian Debt Clock

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Over the past three decades, the Public and Private sectors have been able to increase debt (almost 10-fold) due to the falling cost of debt…lower and lower interest rates.

The almost 10-fold increase in debt is the real story of our nation’s much heralded recession-free run.

Denying or dismissing or ignoring the overwhelming influence this additional $7 trillion of debt has had on economic activity is truly baffling.

It’s blindingly obvious how much of a booster this has been to GDP growth.

Job creation. Wage increases. Asset price appreciation. Our recession-free record bred complacency.

Credit was the great enabler.

People paid (via the credit card) for pay TV, to attend sporting fixtures, buying merchandise.

Networks borrowed cheaply to fund billion-dollar broadcasting deals, knowing they could generate ad revenue at premium rates. Advertisers and sponsors ponied up in the belief debt-funded consumption would continue.

Clubs accessed finance for facility expansions. More staff needed to be employed. Playing talent shared in the spoils. New stadiums were commissioned into existence. And on it goes.

The upward spiraling of revenues and expenditure (not to mention share price appreciation) was made possible on one critical proviso — the debt-funded growth model remained operational AND exponential.

History tells us emphatically that all debt growth has its limitations. And when those limits are reached, debt is purged from the system.

The failure to learn from history is proving to have been a serious error of judgement.

Sporting codes are going to have to adapt

Whether it was COVID-19 or some other ‘pin’, this debt bubble — as shown throughout history — was always destined to burst.

Those entrusted with the prudent management of their code’s finances should have been building an adequate cash buffer AND definitely not investing those reserves in shares.

Too much of a good thing makes you forget or dismiss the fundamentals of sound financial management.

It appears that a high level of asset price appreciation corresponds with very little appreciation for the value of cash.

The bursting of Japan’s debt bubble 30 years ago has given their society a much greater appreciation of cash.

This is an extract from the September 2019 issue of The Gowdie Letter:

Modern day Japan

The current crop of Japanese executives have been conditioned by an entirely different set of economic circumstances to those in the ‘Rest of the West’.

They’ve been living through the aftermath of the bursting of a massive private sector debt bubble.

Three decades of low inflation/recession/depression changes your outlook on the prospects of future growth. These influences affect your thinking…creating a greater degree of caution.

That caution is evidenced by this Bloomberg headline on 3 September 2019…


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Source: Bloomberg

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As reported by Bloomberg (emphasis is mine)…

“In banks across Japan sits a pile of money that’s bigger than most countries’ gross domestic product — the cash reserves of the nation’s companies…

“Japanese executives’ penny-pinching ways are no surprise to many market watchers, who say most firms adopted a conservative attitude when asset prices collapsed in the early 1990s. The ensuing period of economic stagnation, dubbed the lost decades, saw failing financial institutions who could no longer lend to businesses.

“Three decades later, company executives still want to be independent of debt financing. ‘The strategy is to have a lot of cash because that gives you strategic flexibility for acquisitions or a cushion for a rainy day because who knows when the economy might go bad,’ Khan of Jefferies said.”’

Japan has been living through what I think we are entering — a prolonged period of deflation.

Sporting codes (and other industries and professions) are going to have to adapt to a world of less demand.

Fans go to less games. Buy less merchandise. Networks place a lower value on broadcasting rights. Advertisers and sponsors pay less due to reduced consumer demand. Employee numbers are trimmed. Playing and coaching staff are paid (much) less.

Adding to the financial pressure will be the now wiser and more wary administrators doing a ‘Japan’.

Retaining more of the revenues to build a cash buffer…just in case another pandemic or unexpected disruption should happen.

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Sadly, it’s taken a near breaking of the codes for them to appreciate the value of prudent financial management and the importance of holding significant cash reserves.

If this group think catches on, then we’re in for an entirely different period to the one that saw our nation’s debt load increase 10-fold.

COVID-19 blew the whistle on a period of excess and now the rules of the game have changed.

Regards


Signature
Vern Gowdie,
Editor, The Rum Rebellion


Vern has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia. In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback. In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry. In 2013, he joined Port Phillip Publishing as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter. Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors. His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.


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