OK, everybody take a deep breath. Underneath all the fog of commentary and arm-waving, a fairly simple thing has happened to South Canterbury Finance today.

Its affairs are in the hands of receivers, as has happened to many a company in corporate history.  What makes it special is that it has also triggered the provisions of a government guarantee scheme that was put in place to ensure such a collapse did not derail the economy.  That makes things better, not worse.

In the wings are various potential investors, all of whom are probably hoping that it now becomes easier to pick apart the good parts of the SCF book, while leaving the taxpayer to pick up the pieces.

We’ve been here before, when the BNZ damn near fell over 20 years ago, not once, but twice. In those cases, the BNZ really was “too big to fail.” Nor was there a government guarantee in place, other than that implied by government ownership. There was certainly no money in the bank to anticipate the crisis it provoked, early in one of the more prolonged of the four recessions to hit New Zealand in the past 40 years.

SCF is clearly not “too big to fail.” Its total assets comprise barely 1.3% of total farm activity, and a little over 3% of total farm lending, estimated by the New Zealand Institute of Economic Research to be around $47 billion.  And farming is only one part of the economy.

Since the Crown can expect to recoup at least half that $1.6 billion over the next four or five years, the real cost to the taxpayer will be less again. This is not exactly a Lehman Brothers moment, although NZIER principal economist Shamubeel Eaqub worries the impact on national economic confidence could be far greater than the issue’s real importance.

Coming from a man normally noted for an almost funereal turn of phrase about current economic prospects, an injunction from Eaqub for sanity to prevail should be taken seriously.

Most of all, there is no reason for the SCF process to end messily. The government guarantee scheme was put in place for this very purpose and for everyone who howls now about bail-outs and waste of taxpayers’ money, let them contemplate the possible alternatives. A run on SCF would have done no one any good.

Instead, it’s still possible a commercial solution will emerge. There’s likely to be a gradual and orderly realisation of so-called “bad bank” assets, even if takes a few years. The Crown didn’t want the BNZ’s bum loans 20 years ago, but it did manage to quit them at a profit.

Who knows? It’s entirely possible that a $600 million bill to bail out SCF will turn out to be no worse an investment than the unbelievable $665 million paid for KiwiRail by the previous government, from which the taxpayer can have no serious hope of commercial returns any time soon.

Of course, today is an absolute tragedy for Allan Hubbard and his legacy of both boldness and kindness as an investor, and the millions he has spent on good works over decades that will make him out forever as a pioneering New Zealand philanthropist of extraordinary generosity. No one will ever accuse him of living high on the hog.

However, further humiliations are likely in store as the spider-web of cross-party Hubbard empire transactions is picked apart by the Serious Fraud Office and the Hubbards’ personal statutory managers. That will be hard to watch, and difficult for Hubbard and his friends and supporters to bear. It will definitely not look “fair”.

But those issues are not part of today’s action, which is the result of nine months’ largely under-the-radar effort by the rescue CEO, Sandy Maier. Had the atmosphere stayed a bit calmer ahead of today’s deadline for an extension of the SCF Trust Deed waiver, Maier might even have got a deal over the line.

Instead, the biggest business news story of the year has attracted inevitable white-heat media attention, egged on in part by the actions of zealous, well-meaning but ultimately wrong-headed supporters, with whom Hubbard is increasingly aligned.

His statement today, saying he would fight on to save his reputation and attempt to rescue the business was issued by the StandByHubbard group, a small outfit of vociferous local supporters whose Facebook page, boasting more than 4,460 supporters, has been a hotbed of “two and two makes five” type amateur sleuthing and polemic in recent days.

By aligning with this group, however sincere and understandable its sense of hurt and betrayal on Hubbard’s behalf, Hubbard will only abet a sense that his sidelining from the business he built and loves, while brutal, was probably necessary.

And if Hubbard does fight on, there’s a danger he may still be capable of doing harm to the process, making an orderly settlement of its affairs all the more difficult, and a greater cost to the taxpayer more likely.

The only people who’ll gain from that will be the would-be investors in SCF’s assets, who will drop their offer lower every time the Timaru lender’s affairs become shakier.

The change in tone in global financial markets and websites in the past two weeks has been sudden and alarming and I must comment on the change.

As reluctant as I am to be swayed too much by emotion it seems the recent appearance of the “<a hr

ef=”http://en.wikipedia.org/wiki/Hindenburg_Omen” target=”_blank”>Hindenburg Omen‘ has the major American markets quite mesmerised and this is always dangerous.

Given it occurs in global markets that have every reason to feel frail and a little scared, the danger becomes significantly greater.

The Hindenburg Omen is a technical signal based on a number of simultaneous technical readings from the NYSE – the detail can be found easily on the web should you be interested, but suffice to say it has been quite accurate in forewarning a sizable collapse in equity markets – it has apparently been present in every sharp sell off in the past 25 years, with the last occasion being October 2008.

Since the first sighting on August 12 there has been two confirmations recorded, and every confirmation strengthens the signal. The resulting expectation is that the market will collapse sometime between one day and four months from the initial signal.

There have of course been ‘false positives’ where the markets have not suffered a sizable setback, but these have generally occurred when only one Hindenburg Omen appearance was seen.

Wikipedia however suggests that most often the Omen has been identified by back-testing and hasn’t been recognised as present until the sell-off occurs.

So, what do I think?

I have been saying for some months that the major factor at play in the markets generally is confidence. If the actual economic and financial numbers were the only things at issue we would have fallen on our face some time ago.

So I’m concerned about the self-actualising potential of any signal with a successful history, as I am about the high level of correlation in global markets generally.

With all the words of warning I’ve penned over the last years how can I recommend anything other than be very careful if your money is important to you – ‘head in sand’ is not the ideal posture right now.

Nevertheless large sell-offs do occur from time to time, and most often they represent opportunity as well as chaos, so be ready for anything.

However my underlying attitude is this; If governments worldwide had been following realistic policies that benefitted their constituents then what the markets did or didn’t do would hold no fear at all.

But they haven’t, they’ve been wasting resources at an ever increasing rate, and putting most of the cost on the tab.

So of course they are scared of what markets might do because they’re beholden to them in their fund-raising efforts, and borrowing is getting competitive.

But markets don’t care who is right and wrong, neither really do the individual participants – every player would take a win over a correct opinion every time, and the global players they don’t care which side of the trade they take either, just so long as they win.

Politicians don’t understand this. They think that if they help out the financial sector once then the financiers will help them next time – they won’t, not if it means a large and legal profit on a trade comes between them.

What politicians need to comprehend is that markets have an even greater worry – the turnover volume is collapsing, investors world wide are deserting markets as they get chopped and diced by volatility and High Frequency Trading, and so the game itself is under threat.

Steering a country on the basis of the confidence of markets is a futile task, the markets are shell-shocked, collectively they would probably wish to be anywhere than right here, right now.

Equities are struggling, the major bond markets are frighteningly overpriced and still being bought, real estate is still slipping – everyone is seeking safety without being certain what that means.

But knowing they could be fatally wrong in 30 minutes.

(N.B. Tuesday’s trading in the US produced a third confirmation of the Hindenburg Omen. Given this comes from a increase of both new highs and new lows it goes some way to show just how schizoid the market has become.)

This further confirms the thought that investors have begun a flight to safety even though they are fleeing in all directions, not all of them apparently sane. Just a few standout details of the last 24 hours in the trenches:

• Yen at a 15 year high against the US dollar
• Swiss Franc at an all time high against the Euro
• US bond yields at historic lows
• US existing home sales down 27.2% against an expected 13.4%
• Nikkei at a 15 month low
• Congressional Budget Office estimates 4.5% of Q2 GDP came from stimulus (suggesting a negative stand-alone figure of 3% plus)
• Ireland receives a rating downgrade from S&P – AA to AA-

These market concerns lead sooner or later to the rather large elephant that has taken up residence in the front room – how the hell do we deal with the overhang of global debt without blowing up what debt has created?

Most people I talk to and read have some idea that we are looking at a significant reduction of living standards, and most of them don’t mind that much about the prospect provided everyone takes a cut.

But how do we do this without destroying what has been created, without blowing away the fabric of life because a vast number of people have been caught in a massive Ponzi scheme fashioned by central banks, politicians and banks between them?

What I’m talking about is the impossibility of settling up in a fractional banking system when gearing levels have escaped the corral.

Depositors globally can’t have their money back because the fractional banking system cannot pony up without destroying itself.

It is especially impossible when the assets that banks hold have suffered serious erosion in value, although we don’t talk about that either. Nevertheless the weekly parade of closing US banks shows a regular shortfall of around 40% in book values which given the collapse in US real estate is about what one would expect.

Bill Gross from Pimco, the globe’s largest bond fund, had this to say: “Having grown accustomed to a housing market aided and abetted by Uncle Sam, the habit cannot be broken by going cold turkey into the camp of private lending. The cost would be enormous in terms of yields – 300–400 basis points higher than currently offered, crippling any hopes of a housing-led revival to the economy.”

Given our own big four banks have an exposure to real estate between 60-70% of assets New Zealand is in the same situation, but without yet experiencing the gut-wrenching total collapse in house prices and employment.

The same story exists in Australia, but they’re in a position of believing they actually beat the recession and are heading to their deserved place fairly close to the sun. Dan Denning had a paragraph on that yesterday – “This is what “avoiding the recession” accomplished in Australia. It encouraged Australians to believe the world is not as financially dangerous place as it actually is and to continue with behaviour (taking on mortgage debt) which makes them even more vulnerable to the next credit shock. That is not “saving” anyone. That’s leading them straight into the waiting room of the next financial slaughterhouse.”

A response to my previous post by Tony Kan summed up my thoughts precisely – “The problem can only be solved through massive debt forgiveness or we print more money and devalue everyone’s assets once again.”

I’ve been thinking about potential solutions ever since I figured we had a large problem looming and these are the only alternatives I can see. However I don’t see any likelihood that massive debt forgiveness will occur until all other efforts have been exhausted, (and maybe not even then), and predicting the timing of this is impossible.

I expect that we’ll see further money creation first in an attempt to establish manageable inflation that slowly erodes the impact of debt. Whether or not this is even possible time will tell, but it certainly isn’t a quick fix.

Meanwhile the markets will have a very beady eye on the Jackson Hole Kansas City Fed Economic Symposium being held on 26-28 August, eagerly awaiting the speech by Ben Bernanke on Friday – should he not get the words exactly right then look out below. However given the presence of so much angst, the odds are probably just as good for a moon shot.

Wayne Lochore

Format

The change in tone in global financial markets and websites in the past two weeks has been sudden and alarming and I must comment on the change.
As reluctant as I am to be swayed too much by emotion it seems the recent appearance of the “Hindenburg Omen’ has the major American markets quite mesmerised and this is always dangerous.
Given it occurs in global markets that have every reason to feel frail and a little scared, the danger becomes significantly greater.
The Hindenburg Omen is a technical signal based on a number of simultaneous technical readings from the NYSE – the detail can be found easily on the web should you be interested, but suffice to say it has been quite accurate in forewarning a sizable collapse in equity markets – it has apparently been present in every sharp sell off in the past 25 years, with the last occasion being October 2008.
Since the first sighting on August 12 there has been two confirmations recorded, and every confirmation strengthens the signal. The resulting expectation is that the market will collapse sometime between one day and four months from the initial signal.
There have of course been ‘false positives’ where the markets have not suffered a sizable setback, but these have generally occurred when only one Hindenburg Omen appearance was seen.
Wikipedia however suggests that most often the Omen has been identified by back-testing and hasn’t been recognised as present until the sell-off occurs.
So, what do I think?
I have been saying for some months that the major factor at play in the markets generally is confidence. If the actual economic and financial numbers were the only things at issue we would have fallen on our face some time ago.
So I’m concerned about the self-actualising potential of any signal with a successful history, as I am about the high level of correlation in global markets generally.
With all the words of warning I’ve penned over the last years how can I recommend anything other than be very careful if your money is important to you – ‘head in sand’ is not the ideal posture right now.
Nevertheless large sell-offs do occur from time to time, and most often they represent opportunity as well as chaos, so be ready for anything.
However my underlying attitude is this; If governments worldwide had been following realistic policies that benefitted their constituents then what the markets did or didn’t do would hold no fear at all.
But they haven’t, they’ve been wasting resources at an ever increasing rate, and putting most of the cost on the tab.
So of course they are scared of what markets might do because they’re beholden to them in their fund-raising efforts, and borrowing is getting competitive.
But markets don’t care who is right and wrong, neither really do the individual participants – every player would take a win over a correct opinion every time, and the global players they don’t care which side of the trade they take either, just so long as they win.
Politicians don’t understand this. They think that if they help out the financial sector once then the financiers will help them next time – they won’t, not if it means a large and legal profit on a trade comes between them.
What politicians need to comprehend is that markets have an even greater worry – the turnover volume is collapsing, investors world wide are deserting markets as they get chopped and diced by volatility and High Frequency Trading, and so the game itself is under threat.
Steering a country on the basis of the confidence of markets is a futile task, the markets are shell-shocked, collectively they would probably wish to be anywhere than right here, right now.
Equities are struggling, the major bond markets are frighteningly overpriced and still being bought, real estate is still slipping – everyone is seeking safety without being certain what that means.
But knowing they could be fatally wrong in 30 minutes.
(N.B. Tuesday’s trading in the US produced a third confirmation of the Hindenburg Omen. Given this comes from a increase of both new highs and new lows it goes some way to show just how schizoid the market has become.)
This further confirms the thought that investors have begun a flight to safety even though they are fleeing in all directions, not all of them apparently sane. Just a few standout details of the last 24 hours in the trenches:
Yen at a 15 year high against the US dollar
Swiss Franc at an all time high against the Euro
US bond yields at historic lows
US existing home sales down 27.2% against an expected 13.4%
Nikkei at a 15 month low
Congressional Budget Office estimates 4.5% of Q2 GDP came from stimulus (suggesting a negative stand-alone figure of 3% plus)
Ireland receives a rating downgrade from S&P – AA to AA-
These market concerns lead sooner or later to the rather large elephant that has taken up residence in the front room – how the hell do we deal with the overhang of global debt without blowing up what debt has created?
Most people I talk to and read have some idea that we are looking at a significant reduction of living standards, and most of them don’t mind that much about the prospect provided everyone takes a cut.
But how do we do this without destroying what has been created, without blowing away the fabric of life because a vast number of people have been caught in a massive Ponzi scheme fashioned by central banks, politicians and banks between them?
What I’m talking about is the impossibility of settling up in a fractional banking system when gearing levels have escaped the corral.
Depositors globally can’t have their money back because the fractional banking system cannot pony up without destroying itself.
It is especially impossible when the assets that banks hold have suffered serious erosion in value, although we don’t talk about that either. Nevertheless the weekly parade of closing US banks shows a regular shortfall of around 40% in book values which given the collapse in US real estate is about what one would expect.
Bill Gross from Pimco, the globe’s largest bond fund, had this to say: “Having grown accustomed to a housing market aided and abetted by Uncle Sam, the habit cannot be broken by going cold turkey into the camp of private lending. The cost would be enormous in terms of yields – 300–400 basis points higher than currently offered, crippling any hopes of a housing-led revival to the economy.”
Given our own big four banks have an exposure to real estate between 60-70% of assets New Zealand is in the same situation, but without yet experiencing the gut-wrenching total collapse in house prices and employment.
The same story exists in Australia, but they’re in a position of believing they actually beat the recession and are heading to their deserved place fairly close to the sun. Dan Denning had a paragraph on that yesterday – “This is what “avoiding the recession” accomplished in Australia. It encouraged Australians to believe the world is not as financially dangerous place as it actually is and to continue with behaviour (taking on mortgage debt) which makes them even more vulnerable to the next credit shock. That is not “saving” anyone. That’s leading them straight into the waiting room of the next financial slaughterhouse.”
A response to my previous post by Tony Kan summed up my thoughts precisely – “The problem can only be solved through massive debt forgiveness or we print more money and devalue everyone’s assets once again.”
I’ve been thinking about potential solutions ever since I figured we had a large problem looming and these are the only alternatives I can see. However I don’t see any likelihood that massive debt forgiveness will occur until all other efforts have been exhausted, (and maybe not even then), and predicting the timing of this is impossible.
I expect that we’ll see further money creation first in an attempt to establish manageable inflation that slowly erodes the impact of debt. Whether or not this is even possible time will tell, but it certainly isn’t a quick fix.
Meanwhile the markets will have a very beady eye on the Jackson Hole Kansas City Fed Economic Symposium being held on 26-28 August, eagerly awaiting the speech by Ben Bernanke on Friday – should he not get the words exactly right then look out below. However given the presence of so much angst, the odds are probably just as good for a moon shot.
Wayne Lochore
Path:

One of our mortgages came up for roll-over in the past couple weeks and, after a squizz around www.mortgagerates.co.nz, and a general vague feeling that interest rates are only going to rise from here, we fixed for three years at a bit over 7%.

Who knows if that was the right thing to do?  Picking where interest rates will go with any precision has never been a strong suit.  In the early 1990’s, with big Budget deficits and inflation above the target band for the foreseeable future – or so I thought – we locked in at around 14%, a rate almost unimaginable to today’s generation of home borrowers.

What I didn’t anticipate was Ruth Richardson’s 1991 “Mother of All Budgets”, which knocked the stuffing out of the economy for an extra couple of years and dropped borrowing rates to below 10% for just about the first time since 1984, when Labour ripped out Muldoon’s regulated interest rates.

Even with break fees, it was cheaper to move to those new rates than staying locked in at 14%-plus.

Over the past couple of years, it’s been an easy choice as a borrower simply to follow floating mortgage rates down to historic lows that, at their best, came close to 5.5%.

Since about May, however, the talk has all been about when, how and at what speed should New Zealand interest rates return to something like “normal”.

Westpac economists Brendon O’Donovan, Michael Gordon and Dominick Stephens have been having a stab at that in recent days, releasing two thought-provoking commentaries on the future path of interest rates, assuming the global financial crisis really is “over”, or at least as over as it’s ever going to be.

By their calculations, the “effective mortgage interest rate” (EMR) averaged over the last 20 years, since inflation was tamed, has historically sat at around 7.7%.  For the EMR – a mythical construct created from various guesses about national mortgage trends – to return to that average level over, say, the next couple of years, the Reserve Bank’s Official Cash Rate would need to rise from 3% today to about double that – around 5.75% or 6%, which is what Westpac reckons was the widely assumed “neutral” rate for the OCR prior to the global financial crisis.

Westpac doesn’t expect that increase to happen any more quickly than this slow-paced recovery allows, so there’s no need to panic yet.

However, it does point to a substantial increase in borrowing rates over the next, say, two-to-five years.

More significantly, Westpac is sceptical that such a rates rise would take New Zealand back to “normal” interest rates at all, since there is plenty of evidence that monetary policy settings were far from normal before the global financial crisis hit.

“It is not at all clear to us that the neutral rate in the… pre-GFC period was circa 6%,” the economists say. Instead, the period before the world went phut was characterised in New Zealand by “excessive risk taking, dizzying credit growth, and rampant asset price appreciation.”

Inflation was at the top of the 1%-to-3% target range and the current account deficit was blowing out, compensated only by a seriously over-valued New Zealand dollar.  On that analysis, monetary policy was arguably loose then, even if it did produce some of the highest real interest rates in the developed world.

“A cash rate of 6.6% clearly did not deliver sustainable or equilibrium outcomes and it could easily be argued (with the benefit of hindsight) that it should have been closer to 7.5%.”

Uncomfortable conclusions follow.  The first is that, far from moving too early, the two OCR increases since May have been no better than Clayton’s moves – the monetary policy tightening you do when you’re not really tightening monetary policy.

Meanwhile, Westpac reckons the EMR continued to fall until very recently, as low fixed-rate mortgages softened the initial impact of a higher OCR on floating borrowing costs.

“We have been in the peculiar position that monetary policy stimulus for many has been increasing, even as the OCR was being raised, Westpac says. “It will take at least another OCR hike (and the interest rate curve pricing in prospects of more to come) just to stabilise the EMR,” which is currently about 6.5%, having peaked before the global crisis at 8.8%.

Confused? Perhaps you should be.

And the Westpac guys are certainly not claiming a mortgage on future knowledge, owing to that classic out-clause of any forecaster, the problem of “many moving parts”.

However, if current market pricing suggests an OCR at 4.25%, then the EMR is heading over the next couple of years towards, say, 7.25%, still well below the average of the last two decades.  If, as Westpac suspects, the return to normality means a return to an EMR at the historical average of 7.7%, then the OCR is heading back to 5.75% in that time.

In all that rather gloomy analysis, there is at least one ray of hope, unless you’re a bank shareholder: the one thing likely to keep falling, says Westpac, is banks’ lending margins.

Every cloud, eh?

Here’s a heretical thought: the great dog of the New Zealand sharemarket, Telecom, may just about be ready to sit up and bark again.

Having plumbed depths that took the share price to a historic low point in June of $1.78, sparking talk of break-up if it ever sank as low as $1.30, the stock has quietly picked up nearly 10% in value over the past month, trading today at $2.01.

Hardly stellar and still almost 29% down on the last year, but evidence perhaps that it has stepped back from the brink in the last few weeks.

Of course, the world has still changed for Telecom, as it has for telcos everywhere, and there’s plenty of change still to come.

But its announcement on Monday of the terms of its involvement in the government’s ultra-fast broadband initiative look not only realistic, but form the bones of a deal that a government looking for a rational outcome for a flagship policy would be mad not to embrace.

Those with a strong stomach, an eye to the future, and a calculated view that Telecom has been talked down so far that it’s starting to look like up, are also starting to think it’s time to buy.

“On UFB, even if Telecom isn’t going to be in the tent, it’s priced for them to be in the tent,” says one of the country’s shrewdest fund managers, who sees upside from here, even while acknowledging just how many imponderables remain about the future profitability of a structurally separated, two-part Telecom.

Telecom CEO Paul Reynolds acknowledged this in his benchmark Sydney investor presentation back in May, when he floated the demerger option that he finally confirmed this week.

“Which will be the more successful of those two companies?” he said of a future in which Telecom separated into fibre-owning Chorus and a service-providing Telecom. “Who knows?”

However, by lodging its revised bid with Crown Fibre Holdings with the demerger offer included, Telecom is starting to make it almost impossible for it not to be involved and for the company’s other great prize – regulatory relief – to be delivered.

Exactly what that relief will look like remains to be seen.  Not everything in the Telecommunications Service Obligations that Telecom objects to is relevant to UFB, but Telecom argues with some justification that many of these regulations don’t achieve much for consumers, while stifling the prospects of the country’s largest listed company.

In other words, their impact is arguably punitive without purpose.  If it starts playing nice, the theory goes, perhaps there will be an end to successive governments seeking to destroy shareholder value for political gain.

If that logic is even half-way accepted, then a deal is there to be struck with the government to ensure that Telecom is inside the UFB tent; that there is only one national fibre network; and that the already shaky economics of the UFB plan are not sunk by an aggressive incumbent undercutting the new fibre network.

That’s the outcome that the Australian government is achieving with its National Broadband Network initiative, which not only includes the biggest operator, Telstra, but recognises the power of its huge customer base in improving the likelihood of early fibre services uptake – the key to the economic success of any UFB roll-out.

If Telecom were excluded here, it would use its own already extensive fibre network and the fact that it can deliver broadband at high speed and low cost over copper wire for some years to come to undercut the new fibre network.  In that world, the prospect of mutually assured self-destruction is more likely an outcome than the great leap forward in national productivity envisaged by Prime Minister John Key and Communications Minister Steven Joyce.

There’s nothing to say that the government won’t still involve other partners in the fibre roll-out.  For example, the New Zealand Regional Fibre Group has a credible proposal, and the political glow of local community ownership.  Backed by local monopoly electricity and gas networks, it arguably also has plenty of lazy balance sheet capacity to fund potentially low-return fibre network infrastructure.

Either way, the result is a new national fibre network that operates as a monopoly, with its rates of return and investment plans overseen by the competition authorities, so that actual competition can occur in the services the fibre grid enables.

It’s here, in the negotiations about just how much money a separated Chorus would be allowed to make from its involvement in a single national fibre network, that some of the hardest parts of the trade-off for regulatory relief will occur.

Consumers who might otherwise have enjoyed two fibre networks racing to the bottom on price will be counting on the government not to blink when it comes to that part of the deal.

I saw a quote today that summed up the state of mainstream economics more clearly than even Ben Bernanke could have done.
“The recession was un¬usually long and unusually severe and has proved unusually resistant to unusual amounts of stimulus,” says Neil Soss, chief economist at Credit Suisse in New York.
Or to take the contrarian viewpoint – if it doesn’t look like a duck, doesn’t walk like a duck, and doesn’t talk like a duck, then maybe it isn’t a duck!
That idea seems so far away from the consciousness of mainstream economics that they will flounder away for as long as it takes to prove beyond all reasonable and unreasonable doubt that we were never dealing with a simple recession in the first place.
Sadly ignoring this reality only means that the trajectory of the inevitable structural breakdown that particularly the Anglo-Saxon Western world is heading for is far steeper and more damaging than it need be, and all the average economist will say is no-one saw it coming.
Rubbish – I saw it coming in late 2004 and detailed the fact very thoroughly, as did any number of non-mainstream commentators – even Subcomandante Marcos, the leader of the Mexican rebellion called it as early as 1997, and Australian Steve Keen, an economist I do respect, was writing about where we were heading for the last 15 years. Minsky had it nailed about 40 years ago and Kondratieff (1892 –1938) wrote about long cycles over 100 years ago.
Nevertheless, politicians, bankers and economists together remain totally certain they can control and accurately manoeuvre the complex beast that is a modern day economy – the evidence for this is very poor but seemingly they still believe they have the means to corral the masses and direct their productive effort exactly where it is needed.
It’s the same old story – to a hammer everything looks like a nail; to a front-row prop everything looks like somewhere to put your head; to a politician everything looks like a legislative problem; to a banker and an economist everything looks like a liquidity imbalance.
But with apologies to hammers and props everywhere, the rest had a problem because it’s very hard to maintain a sense of direction when your head is in the trough and jammed tight in there by an unusual sense of entitlement.
Anyway, Alan Greenspan, the last Fed chief, has finally said something I agree with, and more significantly, something that helps explain a current conundrum – why are the equity markets of the world acting quite well when the rest of the economic signs are weakening? Greenspan had this to say: “If the stock market continues higher it will do more to stimulate the economy than any other measure we have discussed here.”
Of course when he says the stock market he means the Dow Jones and this is the one that has been subject to late afternoon pumping for some time, mainly because it’s easier to move as it represents only 40 stocks.
I first wrote about market pumping when discussing Japan back in January, and mentioned the similarity to the current Dow. As suggested in an earlier post, there is no question that purchasing the Dow futures at 3pm and selling at 4pm would work on the vast majority of days and this only happens in a market that is being ‘looked after’.
There are other reasons that the stock markets look so comparatively good – the alternatives looking pretty bad being the first. But one of the key things that has happened to larger companies since 2008 is the sharp improvement in their balance sheets, as they also have stopped capital spending, reduced staff, inventory and dividends, and so are flush with cash.
Add in the difficulties their smaller competitors are having in maintaining market share and profitability and it’s easy to see why the larger companies are attracting defensive investment.
Even in a docile economy they are looking far less risky than two years ago, and big companies have a big influence on indexes which may not be reflected in the underlying economy at all. In fact, given that most of them will be trading globally, their fortunes are likely not related to what’s happening in their domestic economy.
So as I said last time, be a little wary about being too bearish just now as any further slippage towards deflation will almost certainly generate QEII and that would send the equity markets sharply higher for a period.
Mr Greenspan was clearly feeling unusually candid as he also had this to say: “There is no doubt that the Federal funds rate can be fixed at what the Fed wants it to be, but what the government has no control over is long-term interest rates and long-term interest rates are what make the economy move. And if this budget problem eventually merges to the point where it begins to become very toxic, it will be reflected in rising long-term interest rates, rising mortgage rates, lower housing. At the moment there is no sign of that because the financial system is broke and you can not have inflation if the financial system is not working.”
(Clearly Greenspan was talking about interest rates alone in the last comment because the US housing market has begun a new leg down and with 18.9 million houses unoccupied and foreclosures accelerating, this is not a situation that is going to be solved quickly. This is one of the weird consequences of putting banks and economics ahead of people – save the biggest of the banks with taxpayers’ money and they in turn throw the people they last seduced into the housing market back into the street, and try and sell the empty house in a vastly over-supplied market, thereby hurting the next tranche of house-owners etc. etc. All the while the bank is allowed to value its securities as if they will settle at maturity, pretending that the undercutting process is not even happening.)
What is certain is that inflation is the tool that central bankers and politicians would most like to use, but this can only work if they can get the population spending and particularly taking on more debt.
However, what America and most other countries are finding is that spending is falling in all age groups as people seek to protect themselves from the helplessness of excess debt, being fully aware that should it be considered necessary they will be crushed like a bug in the interests of saving the financial system.
The only way the average person sees themselves not being a victim to such a move is to have no obligations to anyone, eliminating their debt as fast as possible and not be beholden to a merciless lender. Many individuals have already worked out that we are facing the ‘new normal’ but the influential members of the old normal won’t see the necessary changes occur without a substantial rear-guard action. Funnily enough, it’s exactly their own rears that they are seeking to protect, as true change frightens the hell out of them.
The rating game: One of the most amusing things I’ve seen lately is the Chinese developing their own ‘rating agencies’ and dropping the ratings of the Western countries to where they consider they should be.
Quite frankly, it doesn’t matter how they’ve come to their conclusions, they can hardly be worse than the corrupt nature of the big American rating companies. The story of how the securitised tranches of sub-prime mortgages, for example, were upgraded by the rating companies to AAA and then stuffed into investors worldwide is a scandal that should have seen the US rating companies wiped from the face of the earth.
In my view, this still has a good chance of happening as an increasing number of burnt investors are suing the rating agencies for their professional misjudgement. However, how a system where the company/country pays the rating service for the rating provided is ever going to avoid corrupt results, is beyond me. To see our own government cowering in the face of a visit from Moodys and S&P was cringe-making in the extreme.
To me it’s the same thing that we see with the mainstream economists/politicians/bankers – none of them saw anything untoward coming but now deserve to be listened to – absolute rubbish.
Globally the people who got the analysis right have been either ignored or vilified, while the mainstream continues to pat each others’ bottoms like happy cricketers.

Special offer to Sharechat readers: Read last week’s column for more detail if you need it – I’ve discovered something about markets you deserve to know. You can check out my discovery for FREE – for the cost and trouble of sending me a self-addressed envelope. I’ll send you back a simple grid that will change the way you see the markets and the world around you. Do it!
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You should all have your grid in a few days. Happy learning!

Wayne Lochore

If the movies are to be believed, gold bullion is reserved for super wealthy villains such as Goldfinger, but bullion trader Marianne Findlay from New Zealand Mint (NZ Mint) paints a very different picture.

Marianne says “Really there is no “type” for gold investors. I deal with everyone from high net worth international clients to average kiwi families and young entrepreneurs. I spend my day talking to people from all walks of life.”

Buyers have all sorts of motives too; Mike O’Kane head bullion trader for NZ Mint explains “We have clients who want to diversify, those who have been burned in the past by share markets and others who only trust something they can get their hands on.

There is no shortage of reasons that clients buy gold either, including:

• Hedging against inflation
• Balancing an investment portfolio
• Investing in something that can be passed down through generations
• Taking advantage of capital gains

“Clients’ motivations for buying gold and their total holdings will determine how much they buy. The general recommendation is that investors hold 5-10% of their total portfolio in physical gold.”

Entering the gold market can be daunting for some. Knowing whether the price is high or low at any given time and whether it is going up or down is the biggest barrier.

“New buyers are always asking me where the price is going. While I can’t predict which way it is going from one day to the next, we do have some strategies for beginners” explains Mike.

“Price averaging is one popular strategy for buying gold. This is where people buy incremental amounts on a regular basis. The theory is that their price will reflect a good average, rather than taking the risk on one big purchase. While this isn’t guaranteed to give them the lowest possible price, it does remove some of the risk of buying too high.”

“More than anything else, we recommend that people do their own research. There are lots of charts available showing historical and live data, including the ones on our website. Just watching the gold price every day can give buyer a good idea of when to buy.”

There are lots of options for getting exposure to gold. There are gold funds, mining shares, and bullion. NZ Mint specialises in physical bullion coins and bars.

Gold and Silver coins made by the Mint are 99.99% pure gold, making them GST exempt. Some international bullion products are not pure enough to be GST exempt in New Zealand, so it is important to check what you are buying is 99.5% or higher for gold and 99.9% pure or better for silver.

Selling only certified and internationally recognised bars, NZ Mint are the exclusive NZ distributor for PAMP Suisse, who is the world’s leading independent refiner of precious metals.

If keeping your gold under a mattress doesn’t quite suit, NZ Mint offers storage options tailored to your needs. You can rent your own safety deposit box or use one of their insured storage options (hyperlink to http://www.nzmint.com/bullion/products/storage).

Marianne says “New clients are always surprised how easy it is to buy gold, they call us and secure a price, confirm payment and we arrange for pick up or delivery. It is really that simple.”

Buying gold is as easy as picking up the phone during working hours and calling 0800 NZ MINT (696468). So what are you waiting for?