Archive for March, 2009
Monday, March 30th, 2009
The pivotal events in the next few weeks will be whether further signs emerge of a second half global recovery (albeit probably a weak and choppy recovery).
There are some signs amongst leading indicators but confirmation will be sought in the next few weeks before the collective sigh of relief goes out. One key statistic this week with high impact potential is the US ISM Manufacturing survey due Wednesday night. Any hint of a turnaround could reignite the global risk-buying wave that petered out last week.
The most probable scenario is that recovery signs will be patchy and slow to emerge, and hence the USD broad sideways pattern may persist for a few weeks yet (NZD/USD approximately 50-60c).
But the risks have changed. The eventual breakout looks more likely now to be a higher NZD/USD. Three recent changes are noteworthy:
- there has been the strong bounce of equity markets, feeding through in particular as support for the previously weak South Korean won (KRW/USD +14% in 3 weeks), as well as for the NZD.
- there is the interdependent buying of commodities (Oil +15%) and investment flows into commodity-producing countries (as reported by major funds custodian State Street).
- local interest rates are up, especially relative to the US (expected Dec 90-day rates wider by 0.75% in NZ over 3 weeks and by 0.72% in Australia).
In short, there is renewed interest in the NZD and AUD. It may be reignited this week should news emerge of a turnaround in global fortunes. It may emerge next week once the next RBA rate cut is out of the way. Or it may be that we have to wait until later. But a rally is likely in the next few months.
PS. there will be plenty of interest Thursday night but the ECB press conference is likely to be more influential than the G20 leaders’ brief London meeting.
Monday, March 30th, 2009
Remember where you read it first: “New Zealand is in a better position than most advanced countries to face the global storm, given its sound macroeconomic policies, including a flexible exchange rate, low level of public debt, flexible labour markets, and healthy banking sector”.
So says the International Monetary Fund, reporting back on one of their regular jaunts through Wellington to take the pulse of that plucky, reliable, champagne-taste-on-a-beer-budget economy, New Zealand.
In the past few weeks, coinciding miraculously with claims first made in Smellie Sniffs The Breeze in February, the IMF’s assessment has become the official line on how things are here.
The rate of bad news is tapering off. Fixed-term mortgage rates have turned back up, and superannuation funds are moving out of bonds and into cash, preparing for an equities up-tick.
Sharebroking websites, which have had a dreadful time since late last year, are seeing growing traffic as the savers start emerging, looking higher yields.
However, there is another part of the story, which we forget at our peril, the bit in the IMF report that falls under the general heading: “Downside risks in the outlook are high and linked to the unprecedented uncertainties surrounding the depth and duration of the global recession.”
In that context, this week’s GDP and balance of payments statistics were a bit of a gift, both coming in slightly less awful than pessimists had predicted.
If all goes well, this is the bottom of the cycle for both of these critical measures.
Likewise, the stunning slump in the US GDP reported this week was within the range of expectations and regarded as “the bottom of the cycle”.
If we just try to ignore the jumpy talk of replacing the US dollar as the world’s reserve currency – no matter how inevitable that looks over time – it was the second largely positive week in a row.
The US toxic assets plan, and the thrum of presses at the world’s mints printing more money, show some early signs of working.
At home, there are tax cuts kicking in from Wednesday next week and, compared with Australians and Americans, New Zealanders are almost recklessly optimistic. According to the latest Westpac McDermott-Miller confidence survey, we’re only mildly net-pessimistic.
Perhaps it just goes to show the power of a summer holiday. The depths of northern hemispheric gloom have occurred in the depths of an uncommonly icy European winter.
What remains to be seen, however, is whether this apparent upturn is merely respite, a brief period spent apparently safe on a precipice which is about to collapse.
We are far from out of the woods.
“I have to tell you, what we are seeing at the moment is the early part of the wave,” one of New Zealand’s most respected merchant bankers, Rob Cameron, told the Commerce select committee during hearings this week.
“It’s going to get a lot, lot, lot more difficult for companies,” he said, while arguing for much streamlined, lower cost rules for certain types of capital-raising to be implemented swiftly.
The IMF says something similar about where we sit at the moment, as a highly indebted country which is forecasting the government debt-to-GDP ratio will blow out to beyond 50% by 2013, almost twice what it was at the end of the good times last year.
“A key vulnerability for New Zealand is the high level of short-term external debt, mostly owed by banks,” the IMF report says. “A low probability but high impact event would be a loss of investor confidence in banks or the sovereign. This could lead to a further increase in the cost and/or reduced availability of external funding, which would require a more painful economic adjustment.”
Ouch – when the IMF talks about “a more painful economic adjustment,” you just know it’s a euphemism.
Dwell a moment on how carefully they’ve thought about what we’ll do if a really bad “global disruption” hits us now.
“The government’s wholesale funding guarantee and increased term funding from banks’ Australian parents have provided important cushions. If in the event of a large shock these prove insufficient, official foreign exchange reserves, the government’s offshore borrowing capacity, and some use of the swap facility with the U.S. Federal Reserve should limit the extent of a disruptive economic adjustment.”
Hopefully it never comes to that.
But it explains why the Key Government isn’t riding a fiscal wheelbarrow the size of Barack Obama’s.
As the IMF puts it: “There is very limited scope for additional fiscal stimulus beyond the sizable stimulus already in the pipeline.”
In fact, what the IMF says – and will get – is a plan in the May 28 Budget to “stabilize gross public debt in the medium term and bring it back to around the current level in the longer term”.
Interestingly, the IMF also suggests that the RBNZ consider how it might use quantitative easing – ie, money-printing – as well as conventional monetary policy which “by contrast with many advanced countries … remains effective in New Zealand”.
It is hardly unimaginable that there are further shocks in store for the global financial system. If that happens, we’ll get a massive version of the swaps rate pressure that had our banks scrambling this week to match the flood of mortgage-holders seeking to lock in recent historically low interest rates.
Read the IMF, and the tea-leaves carefully. There is cause for cautious optimism, but it’s still against a bleak and volatile global background.
The IMF report is here.
Friday, March 27th, 2009
I do hope Professor Armin Falk of the University of Bonn was paid exactly what it was worth for this study showing that money, or even the thought of it, can makes us high.
It’s hard to put a price on such knowledge but it does provide great value for headline-generators such as myself.
“Money like a drug,” the Herald headline begins and it’s an apposite analogy for the times, as governments around the world inject cash into the banking system while everyone else is suffering from withdrawal (or maybe ‘non-withdrawal’ is better) syndromes.
Back to the study itself, which, according to the Herald story, suggests “that the human brain is innately susceptible to the illusion of wealth that money can bring”.
At its core, Falk’s study supports the notion that most people are distracted by headline numbers and pretty crappy at applying simple maths to reality.
But as this story on US website Portfolio.com demonstrates, sometimes investment professionals are pretty crappy at applying reality to mathematics.
You may be sick of reading about credit default swaps and collateralised debt obligations – the financial instruments copping the blame for our current little financial crisis – but the article (originally published in ‘Wired’ magazine) is particularly illuminating about the way financial types measure risk and how the beauty of a single formula blinded many to the ugly – statistically speaking – real world.
“They think they can model just a few years’ worth of data and come up with probabilities for things that may happen only once every 10,000 years,” the Wired story concludes. “Then people invest on the basis of those probabilities, without stopping to wonder whether the numbers make any sense at all.”
Now that’s a real money illusion.
Tuesday, March 24th, 2009
The standout trend at present remains volatility, not necessarily any one currency direction.
The NZD/USD jump of 6.4% last week resulted from the sharpest weekly drop in the USD since 1985, in turn the response to the US Fed’s commitment to continued “quantitative easing“.
Unfortunately Japan is already doing likewise and Europe may yet go down that path also, so the US policy announcement need not be a harbinger of a widespread exit from USD to either JPY or EUR (the other two major currencies).
At this stage, the best that can be said is that the USD remains within a very broad, sideways pattern that could easily take the NZD/USD to 60c again, and then back to 50c once more.
Any immediate NZD rally may seem perverse when a 1% (or more) drop in NZ December quarter GDP will be announced Friday (see Calendar) but even a drop of this magnitude is less than that experienced in the UK, EU and US and pales beside the recent experiences of some Asian economies. In other words, the NZ situation is tough but it is worse elsewhere.
As always, there are forces pulling in different directions. The higher local interest rates (see Futures) and NZD exchange rates since the 12-Mar Monetary Policy Statement may elicit another easing by the RBNZ 30-Apr. The RBA are very likely to lower their cash rate 7-Apr.
These forces will tend to push the NZD/AUD higher near-term but more generally push the NZD downwards in the next few weeks. But these pressures will be secondary to the USD trend. The key driving forces for currencies remain international.
Friday, March 20th, 2009
You’d think the US Federal Reserve’s decision to will US$1 trillion into being would be hard to beat as the number one financial news story of the week.
But a television debate between a funnyman and a moneyman has overshadowed the nuclear ‘quantitative easing’ efforts of the Federal Reserve. The confrontation between Jon Stewart, host of satirical ‘The Daily Show’ (which screens on C4 in New Zealand), and Jim Cramer, frontman of the CNBC ‘Mad Money’ program has dominated online and mainstream media comment, in the US anyway.
Essentially, Stewart accused Cramer – and the financial media in general – of being empty-headed cheerleaders in the investment game, rather than unbiased commentators.
But, Cramer, a hedge fund manager turned financial commentator, says at one point in the interview, ‘they lied to me’, and he sounds genuinely surprised. Which is a surprise, the default position for any journalist should be that they’re being lied to – our job is to tease out a fact or two.
The Cramer/Stewart fight has sparked a vigorous online debate about the culpability of the media in fanning the flames of the global financial conflagration, this comment on the Wall Street Journal, for example, makes some interesting claims.
“The reasons the financial-entertainment biz failed us are many and complex, but they ultimately come down to this: In the marketplace to describe the marketplace itself, there is precious little competition,” the WSJ comment says. “There is a single, standard product that comes in packaging that is alternately sultry, energetic or fun – bitter, brainy or Cramer ‘crazy’ – but which rarely strays beyond certain ideological boundaries.”
There is no real equivalent of Cramer in NZ. Here financial TV is more about how to profit out of property or how to save money by buying homebrand two-minute noodles but the WSJ point still holds. Financial players tend to get treated as either geniuses or crooks in the media when really most of them are ordinary people doing a sometimes-difficult job.
Meanwhile, as the WSJ piece concludes “the small investors whom the personal-financial industry claims so much to adore remain bystanders in a drama they neither understand nor control”
Thursday, March 19th, 2009
The New Zealand savings industry has come down from its KiwiSaver-induced high. The mad rush of blood that resulted in the launch of 54 KiwiSaver schemes by over 30 different providers has receded – what’s left behind is a few firms hooked up to a steady supply of money while the rest are in bad need of an infusion.
Most of them will be fresh out of luck. The combination of a global financial crisis and National’s halving of KiwiSaver contribution rates has brought the endgame for many of the smaller providers that much closer.
As Good Returns reported this week, it looks like one of the first schemes to throw in the towel will be the Australian-owned Eosaver.
It is understood, Eosaver is in talks with a number of larger providers to take over its 3,300 or so clients, although putting a price on such a business is problematic. KiwiSaver schemes are not exactly ‘sticky business’ – members are free to leave at any time (even if, due to apathy, most of them won’t in all but extreme circumstances).
As well most of the smaller KiwiSaver schemes are what are known politely as ‘loss-making entities’. Eosaver, for example, sucked about $2 million out of its Australian owners in the last financial year, which is probably a good indicator of the minimum cost of running a KiwiSaver scheme.
Eosaver is interesting, too, because the Australian business is very experienced in running superannuation funds in its home country where the Eo Financial Services group runs a few ‘industry funds’. Industry and union-based funds form a powerful part of the Australian superannuation business, a factor which is singularly missing in New Zealand.
The failure of unions and industry groups to exert much influence in the KiwiSaver world has let commercial operators and a few colourful local identities take the lead. Even the union-backed superannuation provider IRIS, which has been running a savings scheme for years, has struggled to get its KiwiSaver product off the ground.
There are plenty of KiwiSaver providers who, like Eosaver, will be ‘reviewing options’ right now. But it’s worth noting that the closure of a scheme does not mean member funds have been lost, so don’t panic if you hear your provider has just shut up shop.
Friday, March 13th, 2009
I went to a select committee hearing for the first time in years this week.
Freshly re-accredited to the Press Gallery, I returned to a once-favourite haunt: the finance and expenditure committee.
It was hearing submissions on the Taxation (International Taxation, Life Insurance and Remedial Matters) Bill. But wait! There’s more…
It’s a hodge-podge which tries to deal simultaneously with the taxation of foreign direct investment, life insurance tax, and changes to the “associated person” rules which are simultaneously scary and bafflingly obscure.
For good measure, there are some new rules about meal allowances tacked on as well.
On one hand, the Bill is just fix-ups and why should we worry? On the other, its passage as drafted would change several fundamental parts of the tax system with rather uncertain effect. It is also in the hands of a rookie select committee under pressure to pass law that was supposed to be in place before the last election.
Many of the same MPs are also on the Emissions Trading Scheme committee – also on a mad timetable at the moment.
For some, the pressure is already telling. As he lays about him on the ACC while also shepherding the rush to a new carbon emissions regime, Environment and ACC Minister Nick Smith looks every day just a little closer to blowing a valve.
From such pressure are stuff-ups made.
The pattern is observable across the Government’s rapidly mestastasising agenda. Impatient to reform and get runs on the board, it is pursuing big ideas all over the place – the shape of the electricity market; a review of the public health system; ACC reform; the imminent rejig of national transport policy; the forthcoming defence white paper, to name but a few.
And looming over everything is the need for an active response to the world economic crisis.
Getting all those ducks in a row would be difficult at the best of times. The lukewarm reception this week to the nine-day fortnight, and the growing realisation that the Jobs Summit felt good but was over-hyped, had the whiff of a government in danger of speed wobbles.
John Key is setting the pace, and has seemed sure-footed to date, partly because of the fresh advice he’s getting from another rookie Minister: Steven Joyce.
Joyce is at last displacing Murray McCully as the National Party’s presumed Svengali, and also represents an umbilical parliamentary link to the non-parliamentary party elite.
However, the last Prime Minister parachuted in without experience of managing a Parliament was David Lange, the undisputed King of the Speed Wobbles.
Key needs to be very careful that he’s not creating a lot of sound and fury, some of which ends up meaning nothing or not very much – like the Jobs Summit – or over-committing key Ministers with multiple political firestorms, a la Nick Smith.
In the end, anything a government wants to do tends to need new law, so managing the House under this weight of new initiatives is also shaping up as a major test for Key.
Time to Buy a House?
Theme of the week after the Official Cash Rate cut this week was: is it time to buy residential property again?
At best, the signals are mixed as to whether it’s a “good” time to buy. What is clear, however, is that the market is unsticking. People who’ve held off moving for months are deciding to do it and be damned.
Only a mug would suggest they know where the bottom is in this market, but buyers can see that house prices have plummeted in some areas. Buyers are also emboldened by the prospect of fixing interest rates for as long as four years at interest rates under 6% and right to think that even though rates may fall a little more, this has to be near the bottom.
Meanwhile, sellers are either seeing the writing on the wall, or having it pointed out to them. A new data series from Terralink shows mortgagee sales are now running at their highest rate since the 1990-91 recession, a tragedy for the seller but those sales will be establishing new benchmarks.
Houses commanding $800,000 two years ago will now sell at $600,000, and in toney suburbs and for doer-uppers in good streets, the market is active, if not strong. It’s not an investment play, apart perhaps from the shoebox Auckland apartment market, but it seems people with normal lives are starting to breathe again.
Such upbeat talk, however, irked the Reserve Bank’s Governor, Alan Bollard, when journos at his OCR briefing suggested the bank’s new economic forecasts are almost optimistic. The outlook was “extremely pessimistic,” he insisted.
Yet, by failing to forecast apocalypse and noting numerous sources of relative strength, such as net inward migration, loose fiscal policy, export volumes holding up, Australia looking OK, and banks that aren’t on their knees – it was easy to forget that the new forecasts confirm the Treasury’s pessimistic pre-Christmas scenario.
As Bill English puts it, the forward track for the economy suggests somewhere between $50 billion and $60 billion has disappeared from the next four or five years’ growth. To put that in perspective, the New Zealand economy clocks in at about $140 billion a year. So that’s definitely bad, and with more potential to be worse than better.
However, the Pollyanna mood here persists and much of it is to do with approval for the new Government. The right track/wrong track poll is always closely watched by politicians and here, 51% of people are saying the country is on the right track.
At the height of a global economic meltdown of biblical proportions, you’d have to say we’re surprisingly chipper. All the more reason for “Twinkletoes” Key to ensure he’s not balancing too many plates at the same time.
Friday, March 13th, 2009
I don’t think I was ripped off during ‘Fraud Awareness Week’ – no more than usual anyway.
It is possible I was overcharged for a bottle of wine at the local supermarket and several items purchased on special at K-mart may have been scanned in at the original price. The matters are under investigation with a full report expected to be published some time next year.
The insidious practice of mis-pricing on barcodes was highlighted in this TV3 story and it was a good little yarn – no doubt stolen from some other media outlet or pre-digested in a press release. Whatever, it was useful consumer information.
Perhaps these issues do not fall under the auspices of ‘Fraud Awareness Week’ but they should.
It’s more likely that New Zealanders are having cash unfairly siphoned off them during these mundane, quasi-legitimate economic interactions than from any get-rich-quick, Nigerian inheritance scam. And, to be frank, if anybody is still sending cash to the Nigerians, I reckon the Nigerians deserve it.
But, according to the Consumer Affairs website, just about “everyone has been the target of a scam at some stage in their lives, and many people have repeated, ongoing exposure to scam attempts.
“Overseas research suggests that one in ten people have lost money to scammers, with an average loss of over $2000- each!”
Not me. I’m aware of fraud. No thanks to ‘Fraud Awareness Week’, though – I don’t think it was very well promoted. I only stumbled upon news of the ‘awareness’ campaign a week after the celebrations had ended in this Commerce Commission press release.
Adrian Sparrow, Commerce Commission director of fair trading, informed me that the campaign was “an initiative to raise New Zealander’s awareness of the dangers of fraud and scams and to inform consumers about how they can protect themselves.
“Consumers should remember the golden rule – if it seems too good to be true, it probably is.”
But that word ‘probably’ is a big enough loophole to fool some of the people most of the time, how else can you explain Bernie Madoff (see this NY Times blog for an answer).
Or ask Bridgecorp investors who this week were told they would get back even less than previously thought despite the $150,000 raised from the sale of Rod Petricevic’s Porsche.
Unfortunately, Madoff was not available for “Fraud Awareness Week’ promotional purposes.
Thursday, March 12th, 2009
Life insurance is a product that depends on both parties to the contract maintaining a certain degree of ignorance. If individuals knew their exact chances of contracting cancer or heart disease, for example, were very low, then they might not be in a big hurry to take out an all-encompassing life insurance policy.
Likewise, if insurers could identify the individuals most likely to fall victim to the common fatal diseases – well, they wouldn’t want them on their books.
If you follow this logic to its ultimate conclusion, everyone who needs life insurance wouldn’t be able to get it and the insurers wouldn’t be able to find any clients – at least, any clients they’d want.
(Of course, there remains the risk of accidental death – car crash, drowning, failed parachute and the like – which life insurers could still cover but these are more or less random events distributed evenly across the community. If you want to know the precise accidental death data, ask an actuary.)
Over the years life insurance companies have gradually weighted the odds in their favour, ramping up premiums for smokers, for example, and those who work in dangerous occupations. As well, family history of diseases is now also an important factor in pricing life insurance premiums.
Family disease history is a kind of crude attempt at genetic screening of at-risk people by insurance companies. Rapid advances in genetic technology, however, have now enabled insurers to apply much more refined screening of their potential clients.
Individual gene-testing has the ability to fundamentally disrupt the life insurance business model.
Which is why insurance industry, government and consumer groups have kept a close eye on the developing genetic testing technology.
Until recently, the threat of genetic discrimination by insurers has been theoretical but as this story in the Sydney Morning Herald reveals the reality has arrived in Australia.
The story refers to at least two cases where insurance cover has been refused or restricted because of genetic testing. The body representing Australia’s insurers and fund managers, the Investment and Financial Services Association (IFSA), said insurance companies were merely putting scientific advances into practice.
In a recent press release, Vance Arkinstall, head of the Investment Savings and Insurance Association (ISI) – New Zealand’s version of IFSA, said genetic testing in life insurance underwriting in this country “has been very low to date but over time this will almost certainly increase”.
By law, insurers in New Zealand cannot refuse anybody cover but they can alter the terms and premium of policies to reflect the risk. Arkinstall pointed out that – as per international guidelines – New Zealand insurance companies will not require anybody to complete a gene test. But if you have already had a gene test carried out the insurer can request it when figuring out how much your life is worth.
Importantly, though, if you’re life is already insured and you have a gene test an insurer can’t alter the terms of your cover based on this new information. The lesson is – wait until you’re insured before you get your genes tested unless you’re pretty sure the test would reveal your genetic perfection.
Wednesday, March 11th, 2009
Risk returned to the forefront last week in many guises, with NZ to the forefront.
Generally weak activity/profit figures (globally) and potential credit-rating downgrades (NZ, Portugal, Spain and a downgrade delivered for Greece) were the key themes.
However there were some hopeful signs: many share markets rallied on Friday, and the EUR/JPY appreciated; while fiscal and monetary stimuli continued to be delivered.
The global tension between fear and hope is likely to persist in the weeks ahead (rather than one dominate) and hence the most likely scenario remains the major currencies trading within a broad sideways pattern (recall the low points for the EUR/USD and AUD/USD were now 12 weeks ago and these trends are key determinants of the NZD/USD). This suggests a strong chance that the NZD/USD remains above 50c.
But there is a major difference between Oct-08 and now: it is starting to hit home just how much the global difficulties will impact on NZ output/profits and, consequently, on NZ government finances.
Two sharp jolts were delivered last week in the form of very weak business confidence and a downgrade warning for the Government’s offshore credit rating. The net effect was a quick narrowing of the gap between NZ and Australian interest rates (see Interest Rate Futures).
The RBNZ rate is likely to deliver another large rate cut 29-Jan (maybe 1%) and, consequently, the NZD is expected to experience general weakness heading into the announcement.
All in all, this confluence of global and local forces suggests opportunities to buy NZD/USD near the bottom of the recent range will emerge while the NZD/AUD cross-rate could slip below 80c near-term.
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