Few people would actually know of Salvus. It’s been an unremarkable existence on the NZSE since raising $20m in capital in July 2004 and if there are any original shareholders they have not been rewarded for their perseverance. Their $1 a share investment is today worth 83 cents and the company’s Net tangible asset backing (NTA) is 98 cents.
However, things may be about to change. The 17% stake held by Hubbard Churcher (a founding shareholder) has been sold to Milford Asset Management and a principal of that firm, Brian Gaynor, has been appointed to the Salvus board.
That leads to an obvious question: Is Milford a passive shareholder or does it have intentions to initiate a rationalisation? The Board appointment may suggest the latter, but then, Brian Gaynor may simply want to keep a close eye on the fund manager – the investment company can clearly do with someone of Gaynor’s expertise.
Having bought the shares at 70 cents and at a whacking 30% discount to NTA, it could simply be the deal was too good for Milford to pass up. A 30% discount is certainly at the extremities of what one would expect, even for the low profile Salvus. By having Gaynor on the board, maybe Milford is hoping to give the Salvus image a much needed makeover and in doing so shorten the NTA discount and add value to its holding (since the announcement the discount has already reduced appreciably).
Or maybe Milford intends initiating some sort of rationalisation – perhaps even a winding up. The assets are very liquid and given the deep and persistent discount to NTA all shareholders would be better off, at least in the short-term.
This also leads to a further question. How many people does it take to manage what is a very small funds management company? Salvus has 14 holdings worth about $17m – all based in New Zealand, yet it hires a management company (the promoter of the original listing), and with the addition of Brian Gaynor to the board, has six directors (two more than when it first listed).
A domestic portfolio of this size could be managed by one person so it’s difficult to see why Salvus would need a fund manager and five independent directors, all receiving fees. Surely the primary role of the directors is to oversee the performance of the fund manager? Why does it take five people to do that? Surely two, maybe three independent directors would be enough? At the end of the day one has to ask who the company is being managed for. To date, the directors and fund managers are the ones who have made money from Salvus, the original shareholders haven’t.
Frank Newman is the author of numerous books on investment matters and the creator of the NZ Investment Game which may be ordered at www.investmentgame.co.nz.
I thought they were interesting enough, particularly, where the Securities Commission hints it may demand – at some point in the future – greater disclosure of the actual underlying investments KiwiSaver funds hold.
In one of its guidelines, the Commission reiterates that KiwiSaver providers must stick very closely to the investment mandates and practices as published in their trust deeds. Any variance from those set mandates must be countered with the publication of a new prospectus:
“This can apply where a fund invests outside its stated policies and practices and where a fund limits its investment to a narrower selection of investments than disclosed in its stated policies and practices,” the guidelines say.
“In both cases this can be misleading as to the true nature of the investment offered.”
Providers who prefer a more flexible, opportunistic approach to investing money may try to get around these confines by setting vague mandates in the first place. But the Commission has thought of that too:
“Where scheme mandates or statements of investment policies and objectives are widely drawn so as to effectively allow unlimited investment discretion, the disclosures made should include the issuer’s actual investment intentions during the currency of the prospectus…
“The disclosures made should be sufficient to enable potential members to identify the nature of the fund concerned and the risks and likely returns of investment.”
In other words, if KiwiSaver funds are going to take your money to exotic places, at the very least they will have to send back regular postcards that say more than ‘Having a great time, wish you were here’.
Imagine that, mining a bit of Great Barrier. Imagine that, the Chinese owning our dairy farms.
Get over it. Imagine being Barack Obama today – praised by Fidel Castro for his health reforms. New Zealand being criticised by The Economist for threatening its green image by mining conservation land pales in comparison.
Imagine being a Pom, waking up this morning to discover that The Independent, a constantly unprofitable but modern bastion of English liberal journalism, is now owned by a billionaire Russian oligarch. Aargh!
In fact, if what Resources Minister Gerry Brownlee wanted was a signal to the world’s biggest mining companies that New Zealand’s mineral wealth is “open for business,” there could really be nothing more useful than having The Economist point out that a spot of careful mining in national parks is available here. That item will turn up in clipping services, and their on-line equivalents, delivered to senior executives of those mining companies everywhere.
“Hmm,” they will say. “Usual greeny carping, but it’s doable if we do it right.”
This is not the Helen Clark Labour Government of 1999 that stopped the experiment in logging beech forests on the West Coast, an intriguing and scientifically compelling example of what sustainability perhaps could look like. The chance to prove it was stopped.
And yes, no one could be sure about the outcomes. There were some scary diagrams suggesting great clumps of deforested bush where the canopy would be knocked back from its old growth status. But nobody was sure, and the results were interesting, albeit politically unacceptable to the government of the day. That was the end of the Timberlands SOE.
This is a different government. It has a sense of smell, proven by the fact that it baulked at the mining proposals for so long because of New Zealand’s clarity about the importance of environmental integrity.
It’s a guess, but here’s a theory. This week’s mining announcements had been stuck on the Cabinet table for weeks. Action Man Brownlee was fretting and he pushed hard to get this stuff out. Who knows? Maybe the Cabinet logic ran: let’s get this dead rat released and it’ll confuse the natives when we do the mid-week welfare reforms. If so, it probably kind of worked.
For a start, the numbers in favour of testing the country’s mineral wealth is overwhelmingly strong. If half the population will admit to a pollster they’d dig for gold if it meant a richer country, you’d better believe there’s a lot of green waverers out there – who used to believe in climate change but grudgingly, let off the hook by the failure at Copenhagen, are now willing to hear a new, more optimistic story.
And for a certain type of National voter, a pro-mining, anti-welfare sentiment is just the ticket.
Meanwhile, making peace with New Zealand’s environmentalist conscience is fairly simple.
Don’t mine Great Barrier, go easy on Coromandel. Check out the platinum and rare earth metals in the Paparoa National Park – they are the minerals of future technologies to a greater extent than gold – we all get that.
Don’t let anyone make a mess. Let’s remember that Ianthe Scenic Reserve – proposed by National as a new Schedule 4 untouchable reserve – hides a moonscape created in one of the last indiscriminate rimu fellings in the mid-1990′s.
That’s getting to be a while ago. A lot has been learned.
The government’s commitment to the environment is obvious from the way it flayed the farmers over dirty dairying last week. It is serious about working out what to do about Canterbury water. It is unsympathetic to the appalling example of farming practice set by the Crafar family. Someone will always be the lowest cost operator. And that operator will always be on the cusp of regulatory compliance.
If the country gets poorer, it will probably thrive. If the economy is supporting a higher level of environmental protection and standards, it will face pressure to improve or fail. Unfortunately, the Crafars failed.
The Chinese would-be buyers, fronted by Chinese national and New Zealand citizen May Wang, were already negotiating with the Crafars for their farms and some 20,000 unusually genetically unsophisticated cattle, before environmental regulatory non-compliance tipped them into receivership earlier this year.
At the time, one of the Crafars issued what resonated as a dog-whistle racist threat, that he’d just sell to the Chinese. What he didn’t say was that he’d already been planning to.
So anyway May Wang’s Natural Dairy crew may be the 2010 version of the wine box, Rocky Cribb, European Pacific, and other Winston Peters scandals. Or maybe May Wang is a hard-working entrepreneur who’s had some setbacks. Who knows? In the end the Chinese will be buying our dairy – and as Fonterra would attest, we are buying theirs.
As the New Zealand Herald noted in a story this week, tax changes introduced last year, but scheduled to take effect this April, could disadvantage KiwiSaver investors unless they advise their providers of their correct tax rate.
And while it is important for KiwiSaver members to check the right prescribed investor rate (PIR) is applied to their accounts after April 1 – providers should be helping out here by reminding investors of the changes – the new rules cover all portfolio investment entities (or PIEs, of which KiwiSaver funds are a subset) and bank accounts.
The IRD has issued a useful note explaining how the new tax rates work.
However, many people may not be aware of the bank account withholding tax realignment, which will probably result in most seeing a hike in the impost as the current default rate of 19.5 per cent rises to 21 per cent after March 31 (the same is true for KiwiSaver and other PIEs).
I haven’t seen the maths on this but you’d have to think the government comes out on top in this deal.
Lower income-earners (ie those earning $14,000 or below in a tax year) can claim a lower PIR of 12.5 per cent but banks (and PIE sellers) must be notified by account holders.
Given the general inertia of consumers when it comes to banks, it’s likely that many potential 12.5 per cent taxpayers – kids and non-working spouses, for example – will end up paying almost twice as much in tax on their savings as they have to.
While overall the PIR changes may result in bank/PIE investors paying more tax on earnings, they also create some tax-minimisation opportunities, as I covered in a previous blog.
Either way, the PIR changes will affect just about everybody, and if you don’t pay attention to them, your odds of losing out lift considerably.
As taxpayers you may have thought that you already owned a piece of these assets, and you do, sort of. But rather than the diffuse sense of ownership with which most citizens regard public assets, investors in the NZSIF will have a more intimate and direct relationship with specific jails, schools, hospitals and whatever else can be lumped under the ‘social infrastructure’ tag.
The basic philosophical premise of the public-private-partnership (PPP), of which the NZSIF is an example, is that while governments may be good at identifying social needs, they’re not very good at developing and running the infrastructure that fulfils those needs.
As Kim Ellis, NZSIF chairman, says in the introduction to the fund’s investment statement: “International experience using a PPP model to procure infrastructure has demonstrated that projects have generally been delivered on a more timely and cost effective basis than traditional infrastructure procurement methods, and have allowed governments to succeed in delivering essential social services to the public.”
So, if you believe the line, it’s a win-win for taxpayers and investors over the long-term.
The NZSIF investment statement cites various international studies that prove its point without actually identifying them – but that detail perhaps would’ve unnecessarily lengthened the document beyond its 68 pages.
There may be some, however, who don’t care whether taxpayers get a good deal out of the PPP and will only want to consider the NZSIF on its investment merits.
If so, the investment statement is a must-read. The NZSIF has a complex investment structure with many layers of legal entities, and fees, involved.
It is an interesting long-term prospect – the fund will last 18 years with little, if any, prospect to sell out on the way – but carries the usual investment risks, along with a number unique to the NZSIF model.
I counted about 30 named risks in the investment statement, including one headed “Exculpation and indemnification”, which says: “The Limited Partners, including NZSIF, are also responsible for indemnifying the General Partner and the Investment Manager (and their employees and agents) for any losses or damage incurred by them except for losses incurred as a result of their fraud, negligence or wilful default.”
If fraud does occur, however, investors may take some comfort in the knowledge that the perpetrators could be serving time in a jail they helped construct.
Like deluge from a dirty drain, a whole pile of news landed on the dairy sector at the end of last week.
No sooner had the Clean Streams Accord annual review reported that, thanks to dairy farming, streams were actually getting dirtier in many areas, than Fonterra was leading an effort to clean it up, and Federated Farmers was whinging about it.
So far, so normal as far as who stood where. However, none of that alters the fact that the Clean Streams Accord outcome for 2009 is very disappointing, and a blow to the focus Fonterra places on sustainable practice in New Zealand, albeit that they keep cows in sheds in China.
Agriculture Minister John Carter’s unequivocal ticking-off to the dairy sector, and the “every year audit” policy announced by Fonterra in a well-managed piece of damage control, show this is a serious challenge to New Zealand’s ability to claim valuable margins for products made by “natural” farming methods.
Many media have bought that argument too. The tabloid instinct would be to call shed-based dairying a kind of “factory” farming, but with almost no PR pressure, the nebulous but perhaps more palatable concept of “cubicle” farming has become embedded as a media descriptor. Most journalists are patriots too, and everyone knows that giving New Zealand food a bad name offshore is just voting yourself poor. Imagine the field day they’d have in Europe or the damage it could do in China, where Fonterra’s San Lu tainted milk scandal taught our only multi-national how to deal with issues involving catastrophic risk.
The cubicle farming promoters themselves talk of keeping the cows in “stables”, which sounds almost genteel, while producing twice as much milk as traditional pastoral dairy farming. They also claim far greater control over the whole effluent outflow from the herd than a farm based on nitrification and other pollution occurring anywhere in a field as cows crap and pee all over the countryside.
Indeed, one of the reasons the Clean Streams Accord report was bad was that it measured effluent getting into waterways from under-road tunnels and the concrete pads where cows stand during milking.
From that point of view, these McKenzie Basin blokes may have a point.
Their bigger real problem is that they want to do all this using water diverted from the Southern Alps which then flows into Canterbury, the most over-stretched water resource in the country, which the government has now decided is also the most badly managed.
Any day now, a commissioner will be appointed to replace the regional council, Environment Canterbury, and probably move to set up a new special agency to manage the Canterbury water resource ahead of the mid-year reportback from Smith’s consensus-building Land and Water Forum.
There is some speculation that former Prime Minister Jenny Shipley is in the frame for the commissioner’s job. Her Ashburton roots make her an appropriate choice, were it not for the fact that she is also chair of Genesis Energy – about to inherit the Lake Tekapo hydro scheme under electricity reforms, and with an active interest in local dairy ventures.
Just down the road is her former Cabinet colleague Ruth Richardson, who is a director of Synlait, an ambitious example of Kiwi cleverness seeking to make money from milk in ways that the monolith Fonterra will always find hard to replicate. A little further down that road is former National Party leader, Don Brash, with an interest in another Canterbury irrigation scheme. And chairing ECan as it prepares its own execution is former National MP Alec Neill.
It looks as though the government is taking a principled approach at a policy level, while seeking enablement from a coterie of old mates, some of whom arguably have conflicts of interest.
At the very least, water lobby participants will be breathing a sigh of relief that the McKenzie Basin proposals are out of the picture for now. If they haven’t already, these plans threatened to tar all water users with the environmental wastrel brush.
Now, a calmer national discourse on water management can occur.
At the heart of the McKenzie Basin issue is a concept that is becoming rooted in the New Zealand national story, and feeds the “100% Pure” tourist branding. One agricultural ideas man calls it “Pasture Harmonies”. It’s the underpinning idea that drives a company like NZ Farming Systems Uruguay, although that firm’s recent problems may make it a less-than-persuasive example.
This nationally recognised idea allowed Environment Minister Nick Smith to describe the proposal for McKenzie Country cubicle farming as “a completely foreign farming style to New Zealand”.
And on that basis, he argued, the promoters rather than the taxpayer should pick up the tab for getting permission to do it, especially when the $2.6 million they are being asked to spend on their idea would be expensed against a business forecasting $30 million annual turnover.
Fair enough.
In a week when the tide turned and proposing careful mining in conservation lands started looking like vandalism, the dairy issues were an unimpeachable opportunity for the government to show the right stuff when it comes to the national brand.
It was no surprise that the Reserve Bank has, for the moment, left the Official Cash Rate (OCR) unchanged at 2.5%. The OCR has been used by the Reserve Bank as a short-term stimulus measure and Governor Alan Bollard has for some time now said he
will be lifting the OCR when he feels the economy can be taken out of the critical care and off life support. This, he says, is likely to be around the middle of this year, but some economists believe that may be delayed by a slower than expected recovery.
By using interest rates as a stimulus, the Reserve Bank has created the unusual situation where short-term interest rates are significantly lower than the two, three and five year fixed rates which are around 7.1%, 7.7% and 8.5% respectively. That aberration will not continue indefinitely. In the long-run short-term rates are expected to be at least equal to or higher than long-term rates.
The dilemma for property investors is trying to pick the best time to switch back to fixed rates. Coming up with an answer comes down to taking a guess about the speed and size of the rises.
Should the Reserve Banks start increasing the OCR in June and increases it by 0.25% in every quarter (1% a year) for the next two years, then by March 2012 the variable interest rate will be 7.5%, but the average rate would be 6.63%. This is lower than the current two-year rate (7.1%) and under these assumptions mortgage holders would be better off with a flexible rate mortgage.
Having crunched the numbers, in general terms, if an investor thinks variable mortgage rates will rise by more than 1.5% a year, they should switch to a fixed term. If they are of a view that short-term rates will rise by less than 1.5% a year, then stay with variable rate. Should interest rates rise more rapidly, then locking in a fixed rate now is the better way to go.
Doing this sort of crystal ball gazing reminds me of the difficulties when forecasting, especially when forecasting the future!
Frank Newman is the author of numerous books on investment matters and the creator of the NZ Investment Game which may be ordered at www.investmentgame.co.nz.
Format
It was no surprise that the Reserve Bank has, for the moment, left the Official Cash Rate (OCR) unchanged at 2.5%. The OCR has been used by the Reserve Bank as a short-term stimulus measure and Governor Alan Bollard has for some time now said he will be lifting the OCR when he feels the economy can be taken out of the critical care and off life support. This, he says, is likely to be around the middle of this year, but some economists believe that may be delayed by a slower than expected recovery.
By using interest rates as a stimulus, the Reserve Bank has created the unusual situation where short-term interest rates are significantly lower than the two, three and five year fixed rates which are around 7.1%, 7.7% and 8.5% respectively. That aberration will not continue indefinitely. In the long-run short-term rates are expected to be at least equal to or higher than long-term rates.
The dilemma for property investors is trying to pick the best time to switch back to fixed rates. Coming up with an answer comes down to taking a guess about the speed and size of the rises.
Should the Reserve Banks start increasing the OCR in June and increases it by 0.25% in every quarter (1% a year) for the next two years, then by March 2012 the variable interest rate will be 7.5%, but the average rate would be 6.63%. This is lower than the current two-year rate (7.1%) and under these assumptions mortgage holders would be better off with a flexible rate mortgage.
Having crunched the numbers, in general terms, if an investor thinks variable mortgage rates will rise by more than 1.5% a year, they should switch to a fixed term. If they are of a view that short-term rates will rise by less than 1.5% a year, then stay with variable rate. Should interest rates rise more rapidly, then locking in a fixed rate now is the better way to go.
Doing this sort of crystal ball gazing reminds me of the difficulties when forecasting, especially when forecasting the future!
Frank Newman is the author of numerous books on investment matters and the creator of the NZ Investment Game which may be ordered at www.investmentgame.co.nz.
Path:
New Zealand’s KiwiSaver industry is now at the point where the competitive spirit is blossoming – with about $5 billion at stake now and a, more or less, guaranteed growth path for the next 20 years, scheme providers are jockeying for position.
The energetic way competitors pounced on the Huljich KiwiSaver scheme, for example, after its rather loose disclosure regime was disclosed to the public last month, shows the game is getting serious now.
But, with the exception of two scheme closures last year – Eosaver and the union-based IRIS KiwiSaver fund – the mooted sector consolidation has not happened.
In fact, a number of new KiwiSaver providers are waiting in the wings. KiwiBank, for example, is expected to launch its new offering shortly after ditching KiwiSaver ‘partner’ Mercer last year. Others, including New Zealand Funds Management and the nascent Perpetual Asset Management are also understood to be considering how to break into the KiwiSaver market.
But if new niche players are drawing up their game plans, others may soon be pulling up stumps.
Simon Power’s promise last week to “tighten up KiwiSaver” – prompted by the Huljich scandal – could encourage others to rethink the logic of remaining a provider.
Whatever comes out of Power’s review, KiwiSaver providers will almost certainly face higher compliance costs. And for the majority already facing a big spend to remain in competition, that extra impost could end their innings sooner, rather than later.
Workplace Savings NZ (the group formerly known as ASFONZ), while supporting a review of the sector, asked the government not to drown providers in red tape.
But what else does government do?
Smaller providers are certainly mulling over their commitment to the great KiwiSaver dream.
For example, Sean Carroll, head of Suncorp Wealth Management NZ (which offers the Asteron scheme), says the group was regularly reviewing its KiwiSaver strategy.
Asteron KiwiSaver, with about $31 million under management and 6,100 or so members at the last count (December last year) would be classified as a marginal player and Carroll acknowledges it’s tough to justify the expense sometimes.
“We’re committed to [KiwiSaver] now but that’s not to say we won’t make a decision [to exit] in the future… we’re always looking at it,” Carroll told me.
Good news was released this week, we, the taxpayers, creamed almost $300 million out of financial institutions during the recently-forgotten global financial crisis (GFC).
In a release announcing the end of the government guarantee for wholesale funds, Finance Minister Bill English let slip that the GFC was actually a huge revenue-generating opportunity for the New Zealand government.
“Since the wholesale guarantee was set up, 24 guarantee certificates have been issued, covering $10.3 billion of borrowing by banks. The scheme has made no payouts and the Government will receive almost $290 million in fees,” the release revealed.
So, given it’s been such a great money-spinner you’d have to ask why the government getting out of the guarantee business – the profit margins look fabulous.
Well, as English put it, the guarantee was merely a “temporary measure for extraordinary times”.
From now on, it’s back to ordinary time, for large financial institutions only, however.
Retail deposits, or some of them remain under guarantee until late next year. The retail scheme has also not been cost free with the government bailing out investors in two finance companies so far, Strata and Mascot.
Introducing the reams of data and pages of analysis, Reserve Bank governor Alan Bollard appears ‘cautiously optimistic’ that NZ, along with the rest of the world, has just about shaken that nasty global financial crisis.
“At the same time, risks around the global outlook have increased, although not to the extreme levels seen at the height of the crisis,” Bollard says.
The implication is that the recovery party will be a subdued affair for most of us – not for these guys, though.
“The number of billionaires has soared in the past year, and dozens of people who lost that elite status in the credit crisis have won it back as stock markets and commodities prices have rebounded,” the story notes.
Things are moving so fast in the markets and global economies that most writers I follow are complaining of the same thing – there is so much of value being written that it is near impossible to keep up. When top writers such as John Mauldin and George Friedman complain of the volume of their reading you realise that everybody has the same problem.
Add to that the speed of change within the strategies of individual governments and you have the situation where very important changes can occur and be totally missed, and so I thought I’d do my best to elaborate on really significant things I read over the two months that are sure to have some impact in the months and years to come.
USA – the most significant thing I saw was the move on Christmas Eve by the Federal Reserve and Treasury together (and not Congress who should have decreed such a move) to open the flood gates in their unlimited support of the GSE’s Fannie Mae and Freddie Mac over the next three years. John Hussman has written 2 essays on the topic, calling it a fiscal ‘Coup d’etat’. “In short the Fed is now engaging in unlegislated, back-door fiscal policy”. And “If Congress does not forcefully defend [it’s legislative] prerogative it will have relinquished the power of fiscal policymaking into the hands of unelected bureaucrats”.
It seems to me that this is the move that allows Bernanke to claim the ‘stimulus’ actions including “Quantitative Easing” have been successfully ended, which is clearly a nonsense, to add to all the other nonsense flowing from the man. What is more to the truth as pointed out by Bloomberg is that the US authorities have increased debt by close to $US10 Trillion in all without delivering a sustainable lift in the economy apart from during each stimulus action as it occurs. Once the action ceases so does the supporting evidence of change. The simple truth is the banks are not lending and the people are not spending, so any stimulus action that has taken place is just being hoarded to no-one’s benefit but the financial elite. Or to put it another way ‘the brain is being flooded by its drug of choice (near-free money) but the body of America is slowly dying of starvation.’
A further change occurred in late January when the Supreme Court ruled that corporations can run political adverts during an election campaign – and in so doing in one move guaranteed that corporations can bully or intimidate politicians at will. This is surely the end of any semblance of a democracy responsive to the average American. As the UK Independent said in an article describing the above, Senator Dick Durbin says “The banks own the senate” ……..and the fossil fuel industry owns Congress. So what’s really changed? – In practical terms, nothing.
Now hold on, wasn’t it in the name of spreading democracy that the US went to war in Iraq?
Probably the most fascinating piece of research was the study by Robert J Barro that analysed the multiplier effects of both stimulus payments and taxation, and the results have implications that are quite stunning – The money multiplier in USA has apparently fallen to below 1 – it is now NEGATIVE and furthermore the multiplier effect of taxation may be as high as three according to Barro.
So this suggests money taken in taxation and then spent by government in current conditions has a negative impact of greater than three times the size of the meddling. Now isn’t that a vote for smaller government. It tells us that rather than directing stimulus activity governments would do a better job just to reduce the size of government, reduce taxation and leave the solutions to the people – now who didn’t already know that!
Nevertheless given the money multiplier in the late 1980’s was three the drop to below one is quite an alarming change.
China. Following on from my recent China blog I discovered a far less glowing comment from a leading Chinese economist Yu Yonding reported in the blog of Michael Pettis – he was particularly scathing about the stimulus and had this to say – “When a country has an investment rate over 50 per cent [of] GDP and rising, you say this country is not suffering from overcapacity! … are you serious? ”To judge whether there is overcapacity you cannot just do a head account. With a 1.3 billion population and human greed, China’s needs are unlimited, you can say that China will never suffer from overcapacity!”
He believes China is trapped in a cycle where constantly rising growth in investment is constantly increasing China’s supply, but consumption has conspicuously failed to grow fast enough to absorb it. And so China is forced to increase investment in order to provide enough demand to absorb the previous round of increased supply, thus creating ever-widening cycles of oversupply.
In this manner, the investment share of gross domestic product has increased from a quarter of GDP in 2001 to at least half. “There is sort of a chase – demand chasing supply and then more demand is needed to chase more supply,” he says. “This is of course an unsustainable process.”
“From 2005 China’s overcapacity problem had been “concealed” by ever-increasing net exports – but that strategy was interrupted by the financial crisis. Then came last year’s globally unprecedented stimulus-investment binge, which might not have been so worrying if it were delivering things that people needed. But the Government’s hand in resource allocation has grown heavier since the crisis without reforms to make officials more responsible for what they spend.
“As a result of the institutional arrangements in China, local governments have an insatiable appetite for grandiose investment projects and sub-optimal allocation of resources,” as Yu previously said, in his Richard Snape lecture for the Productivity Commission in November.
So there are now airports without towns, highways and high-speed railways running parallel, and towns where peasants are building houses for no reason other than to tear them down again because they know that will earn them more compensation when the local government inevitably appropriates their land”.
So this certainly adjusts my thinking somewhat as does the very obvious fact that there is a raging debate going on inside China, and not the consensus that most Westerners assume. There is definite concern expressed by many Chinese commentators that the level of stimulus and particularly bank credit growth is particularly dangerous coming on top of the historically high growth trend.
A further fascinating analysis from the Pettis blog comments on the fact that it a misconception to assume that because China has accumulated near $US3 Trillion of reserves it is therefore unassailable. It pointed out that twice in history reserves have been accumulated to this magnitude (USA in the late 1920’s and Japan in the 1980’s), and that clearly having reserves of 5-6% of global GDP is no guarantee of only good things to come! In both cases referred to their stock market lost more than 80% of its value during the next decade.
Greece The following email was sent to and reported by John Mauldin and is very interesting.
“I am an avid reader and I just wanted to correct you about a comment in one of your articles, “The Pain in Spain”, specifically: ‘Somehow they forgot about the German government paying 115 million deutschmarks in 1960 — not a small sum back then.’
“This repayment of 1960 is undeniable. But the total amount owed was $10 billion ($3.5 billion for the return of the gold stolen and the repayment of the war loans Greece was forced into giving Germany, and $7 billion in war reparations awarded to Greece in 1946). As the DM/$ parity was then four for one, this means they gave Greece $29 million out of the $10 billion owed.
Germany also proclaims that they have given Greece over the years, in one form or another, €16.5 billion. But the fact of the matter is that despite these alleged payments, the issue of the war loans and gold is still not settled. Greece has never stopped asking for the money to be paid back … it is estimated that this sum owed now totals $70 billion [I assume the Greeks want interest – JM]. So even taking into account the €16.5 billion, more than $50 billion is still owed.
Helmut Kohl refused to even discuss the repayment, presenting as an excuse that this amount was owed by the whole of Germany and until Germany is unified the issue could not be discussed. Guess what, Germany is unified….”
Now how much of that is true? – It’s a new one on me, but certainly both sides of the political divide in Greece have joined forces to claim the Germans still owe substantial wartime reparations, so maybe the story is a bit more complicated than we know.
It seems to me that without the help of the major countries at the centre of Europe (Germany and France, or the IMF) the Greece story is going to be very tricky. Because while Greece only represents 2.5% of Europe the rest of the PIIGS constitute a very significant proportion of the Euro block, and what happens in Greece will be looked at very hard by others such as Spain with her current 20% unemployment for example resulting from a significant austerity programme. The problem of ‘moral hazard’ rears up again, and will be much harder to ignore when the problem is cross-border, and borders that have been crossed militarily over time.
The key deadline for Greece is March 15/16, and so the next week will be interesting here – I don’t personally expect the Euro-block to fall at the first hurdle, but they have many and higher hurdles to come yet as the combination of sovereign and banking exposures collide in a tight funding market.
(A further thought of course comes from the impact that the Greek problem has had on the Euro, and clearly a move from $US1.50 to $US1.35 as has happened over the past month is a bit of a ‘godsend’ to European exporters, with the major moaners a month or two ago being France and Germany. So not all bad, huh!)
However one of the most fascinating things I’ve noticed about the Euro block is not one member country is operating under the 3% deficit required by the Maastricht Treaty, not even Germany. Similarly there are few if any well behaved ‘Euro-blockers’ when we look at the debt-to-GDP maximum of 60%, also required by the Treaty.
Even so the focus on Greece is a strange one as it represents only 2.5% of Europe and is the first in real trouble; when we seem to have forgotten about California which is 12.5% of the entire USA, in far worse shape, and one of around 40 States in trouble. (Must be something to do with how much money there is to be made in kicking them around a bit!) News today tells us that the decrease in State revenue from Oct 2008 to Sept 2009 was $US87 Billion, the largest in history. So State tax increases, here we come!
Something I noticed which may be a guide to what’s coming is this – a list of headlines I saw on the Sharechat website the other day – look at this unedited list:
Toyota Motor Corp.’s president endured three hours of questioning by US lawmakers, pledging to restore consumers’ trust without shedding new light on the company’s handling of safety recalls…. More»
The chairman of US bank Morgan Stanley, John Mack, says that bankers are still paying themselves too much.… More»
Royal Bank of Scotland reports a loss of £3.6bn for 2009, but is set to pay bonuses totalling £1.3bn to its staff…. More»
Bankers in London’s financial center, which Mayor Boris Johnson called a “leper colony,” are battling to justify their right to make money and to prove their social value after British taxpayers assumed liabilities of more than 800 billion pounds ($US1.23 trillion) to bail out the country’s lenders…. More»
Federal Reserve Chairman Ben Bernanke told the Senate Banking Committee on Thursday that the central bank is looking into Goldman Sachs’ and other U.S. financial firms’ role in Greece’s debt problems.… More»
So is this a signal that the next phase is going to be dominated by blame shifting from the politicians onto the bankers? – Now that should be fun!! Although the possibility does remind me a bit of the famous comment from Oscar Wilde about fox-hunters – “the unspeakable in full pursuit of the uneatable.”
Japan: A very interesting piece here from William L Anderson which explains it all in one paragraph – always worthwhile.
For a brief moment in 1990, the Japanese stock market was bigger than the US market. The Nikkei-225 reached a peak of 38,916 in December of 1989 with a price-earnings ratio of around 80 times. At the bubble’s height, the capitalized value of the Tokyo Stock Exchange stood at 42 percent of the entire world’s stock-market value and Japanese real estate accounted for half the value of all land on earth, while only representing less than 3 percent of the total area. In 1989 all of Japan’s real estate was valued at US$24 trillion which was four times the value of all real estate in the United States, despite Japan having just half the population and 60 percent of US GDP.
William L Anderson – Mises.org
Australia: I’ll get on to Australia more formally in a couple of weeks, but enough to say I’m not fully convinced by the Aussie dream either. A recent analysis of housing ‘un-affordability’ by Mike Shedlock, (looking at the US, UK, Ireland, Canada, Australia and New Zealand) found that 12 Australian cities counted in the top 20 as the least affordable to live in. New Zealand was second, with Auckland and Tauranga the most expensive. Whereas the historic maximum norm was 3 times income, Australia had a median multiple of 6.8 and NZ 5.7. Dangerous to say the least! This was a silver medal we didn’t really want.
Secondly the December 2009 current account deficit came in at $Au 17.459 Billion which is a very large figure when one comprehends that Australia is reaping the best trade conditions of its history. So much depends on their relationship with China and as has been pointed out above there are real problems with the unsustainable level of Chinese capital expenditure. Given the long lead time in mineral extraction developments Australia could easily find themselves over-exposed to a collapsing minerals market, particularly when you look at their vastly enthusiastic expectations for a larger and larger market with China.
Lastly the Reserve Bank of Australia in their year-end analysis confirm a 7% decrease in business credit, which clearly confirms a contraction in money supply is underway, whilst the banking system also faces the prospect of rolling-over $Au 514 Billion in the next 12 months in the global debt markets, over one half of their total exposure.
