Welcome to the Mclowd Community Newsletter.

Downward pressure on interest rates and subsequent gains in asset prices are borrowing returns from the future and bringing them to the present. The more we book in gains now, the less we earn later.”
Today’s asset bubble is tomorrow’s black hole AFR, August 9th 2016


This month senior executives of failed retailer Dick Smith Electronics will be called to account for the balance sheet alchemy which led to the company’s collapse in January. (DSE used balance sheet funding – in the form of marketing rebates on inventory – to mask underlying weaknesses in the business which ultimately proved fatal).

Private equity firm Anchorage Capital pocketed a cool $400m for what was the microeconomic equivalent of putting lipstick on a pig.

As I said in a blog post at the time of the collapse, the problem with such a strategy is that – while it provides a sugar hit to the P&L in the short term – when the funding eventually (and inevitably) runs out:

  • The P&L tends to snap back to its ‘sugar-free’ state
  • As a consequence things can get very ugly, very quickly

In the case of DSE, this resulted in:

  • The destruction of half a billion dollars of shareholder value in just two years
  • The loss of 3,000 jobs

However one should be careful in being too critical of messrs Wavish, Cave and Abboud, because – as discussed below – at a national level few economies on earth are more dependent on balance sheet funding than Australia.

SMSF Accounting Update

Not surprisingly the start of the financial year has seen a step-change in the level of activity within the Community, as many users rollover their FY16 accounts or begin their migration to Mclowd for FY17.

We now have SMSF practitioners who are able to charge clients just $1,000 per annum for administration because of the lower cost structure offered by Mclowd, while individual trustees can manage their own Fund for less than half that figure (inclusive of audit).

Speaking about his involvement Paul Mattock of Evolve Small Business Accounting had this to say: “Mclowd has proven that it can make its core software freely available, supported by revenues from the distribution of related products and services. This is a game changer, and as the technology matures it will strengthen the relationship with my clients – who are becoming increasingly cost-conscious.”

Growth in the number of Funds being rolled over inside Mclowd also:

  • Provides valuable feedback about ongoing improvements to the software
  • Generates the upstream data required for online lodgement via our partner LodgeIT, for which Mclowd will charge a per unit fee of just $5.00

The Role of Balance Sheet Funding in the Australian Economy

I was reminded of the Dick Smith story when reading about a recent survey which indicated that 50% of private school fees are paid other than from recurrent income (ie the P&L of the parents of those school children).

However using a credit card or the grandparents’ balance sheet to prop up employment in private secondary education is a drop in the ocean compared to the accumulation of student debt, which is being used to underwrite the consumption of tertiary education, and hence employment in that sector. (Outstanding student loans represent nearly 10% of GDP in the US, and is climbing rapidly. Australia is on exactly the same trajectory).

But the process doesn’t stop there.

Almost 2% of Australia’s GDP is represented by the Federal Government’s budget deficit. That figure represents hundreds of thousands of jobs that would not exist but for the willingness of the Federal Government to drop $100 million dollars each and every day on to the collective credit card. (Which is the fiscal equivalent of Dick Smith borrowing from NAB to fund the acquistion of inventory in order to book the rebates which drove the P&L).

Almost every State Government is using similar balance sheet strategies to drive P&L activity / employment. Whether it’s the sale of Port Melbourne (Vic), Ausgrid (NSW), or the plundering of public sector pension funds (Qld).

But the piece de resistance of this macroeconomic fiction would have to be the hundreds of thousands of Australians who turn up to residential construction sites each day to expand our housing stock at levels which now exceed that required by forecast population growth.

Virtually all of those wages are paid not out of the collective P&L, but out of the expansion of the balance sheets of the major banks, leaving behind a toxic legacy of debt which threatens the stability of the banking system.


The monetary and fiscal authorities can drive interest rates to zero (or below), and borrow hundreds of billions of dollars in order to prop up Australia’s macroeconomic outcomes in the short term. They can even print money and drop it from helicopters if they so desire.

What they cannot do is answer the question as to just what all these people are going to be doing when the balance sheet funding eventually – and inevitably – dries up.


Ashley Porter
Managing Director
Mclowd Pty Ltd