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New South Wales' gamble

Good morning! New South Wales entered a state-wide lockdown Saturday, with the few remaining open local government areas joining the rest of the state under stay-home orders until at least midnight on the 21st of August. The state reported new local case numbers over 400 for the first time on Saturday and again on Sunday.

Chart showing case numbers by source in NSW.
No improvements in New South Wales. covid19data

Further south it was not much better for Melbourne as new daily cases remained stubbornly over 20, half of which were not isolating. If transmission numbers don't fall soon, "some government ministers and health officials fear stay at home orders may be needed for at least another fortnight". 😔

Moving to the west, WA Premier Mark McGowan said that even after Australia reached an 80% of eligible adult vaccination rate, "our preferred option is zero COVID obviously and that's what we'll attempt to do".

🤔 Does the Premier not realise that vaccines only reduce, not prevent, transmission? Australia's unified reopening plan is starting to look shaky...


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Note: Brent oil, gold bullion and iron ore prices are the second futures contract.

Major markets were generally stronger on Friday, with the ASX200 hitting its seventh record high in the past eight sessions after gains from biotech giant CSL, Macquarie and Wesfarmers. Also hitting another record high was the US S&P500, which added 0.16% on Friday on the back of a solid earnings season.

Consumers downbeat: The University of Michigan's US consumer sentiment index crashed 13% to just 70.2 in August (preliminary), the lowest reading since 2011, following the reinstatement of mask mandates and other health restrictions in many jurisdictions.

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New South Wales' gamble

Dilbert cartoon on what the NSW government is paying for.
The NSW government is paying hundreds of millions in asset management fees to former fund managers. Dilbert

No, we're not talking about the losing bet the state took with the Delta variant. This time it's about the NSW Generations Fund (NGF), the state's sovereign wealth fund created in 2018, which happens to have a subsidiary fund called the Debt Retirement Fund (DRF) "to help retire debt and guard against intergenerational budgetary pressures".

Stepping back: Governments love sovereign wealth funds. Australia has had one since 2006 – the Future Fund, designed "to strengthen the Australian Government's long-term financial position" – created back when we used to run surpluses and needed somewhere to put the cash (other than return it to taxpayers, of course). The problem in NSW is that the government hasn't been... well, doing what it said it would. As Christopher Joye wrote in Friday's AFR:

"The DRF has not retired a single cent of taxpayer debt, despite the fact the budget has been punching out record deficits and debt has exploded from $35 billion in 2018, when the DRF was created, to a record $120 billion this financial year."

Growing debt: For a Debt Retirement Fund, it's not doing much retirement. The NSW government plans to grow the fund by diverting $13 billion in additional cash to it from the sale of the WestConnex toll road. Given the government is running a budget deficit and its debt has tripled since 2018, this is effectively debt-financed – the government could have reduced its debt by $A13 billion instead of making this transfer. It could also save taxpayers "over $A150 million annually in fees" paid to the "former fundies" running the DRF.

Why this matters: There is a moral hazard issue with governments borrowing on behalf of taxpayers to speculate "on equities when valuations are at 100-plus year highs". Taxation is not a voluntary contribution to a politician's hedge fund, and the incentives are not well aligned for long-term success. This is a huge gamble by the NSW government that will for a while go swimmingly – governments can borrow more cheaply than individuals, which makes it easier to earn above-average returns – until suddenly it doesn't, and guess who's on the hook: the taxpayer.

The Wrap Up

  • 👏 Britney Spears' father agreed to step down from his daughter's conservatorship.
  • 💉 The Polish government agreed to send more than 1 million Pfizer doses to Australia, effective immediately.
  • 🌎 At least 304 people have died following a 7.2 magnitude earthquake in Haiti on Saturday morning.
  • 🏉 New Zealand retained the Bledisloe Cup for the 19th straight year after a record 57-22 victory over the Wallabies at Eden Park.
  • 🍁 Canada's government will in the coming weeks require crown corporations and federally regulated private sectors – e.g. domestic and international air travel, interprovincial rail and ferries – to mandate vaccination for staff and passengers.
  • 🗳️ Canada's prime minister, Justin Trudeau, called a snap election last night for 20 September. Trudeau could have waited until 2024 but is "gambling that his government's generally well-received handling of the pandemic will translate into political success if an election is held soon".
  • ⚔️ The Taliban now control all major Afghan cities, including the capital of Kabul. The President has fled the country and power will be handed over to the Taliban.
  • 🍎 Apple employees are voicing their concerns about its controversial plan to scan people's devices, with over 800 messages about the issue on its internal Slack channel.
  • 💍 Amazon's new Lord of the Rings television series will no longer be filmed in New Zealand, due to the country's "very strict pandemic lockdown policy".