Market News – 24 June 2019

I occasionally chat about how folk with far too much money invest some in scarcity assets such as art and rare Ferraris, but the latest mega billionaire (Patric Drahi) decided to buy the auction house (Sotheby’s) instead of the items on its product list.

He’s now a broker to the mega billionaires; not silly as a strategy.

INVESTMENT OPINION

AML – I am making some sweeping generalisations as I ask a rhetorical question of the Financial Markets Authority and Internal Affairs;

Will you be keeping a very close eye on the share register of newly listed cannabis company Cannasouth?

Lower % - This is just another anecdote (of frustration – Ed) for you; last week a NZ registered bank (ICBC with a ‘A’ credit rating) issued a new 5 year bond to the market.

The credit margin was set at 1.25%. The underlying benchmark (swap) rate at the time was 1.36%.

I’ll save you the math; the yield on the bond was 2.61% p.a. (paid semi annually).

Banks will be rather reluctant to pay 3.25% on 5 year term deposits in the face of being able to relatively easily issue bonds for the same term and save 0.64%.

Given that banks strive to exceed a 2.00% profit margin between borrowing and lending money, giving up almost a third of that potential profit margin will quickly prove to be unacceptable to bank management.

Think carefully before you reject current term deposit rates as uncompetitive.

Negative % for NZ?– Some of you will have read the ANZ Bank (Economics team) comments last week (Sharechat article) where they expressed a view that the Reserve Bank of NZ needs to prepare for negative interest rates in New Zealand.

Most of you have been coming around to the view that interest rates are more likely to continue their slide, like melting ice cream on a cone, but for the moment I’m sure you believe you can still extract some value by way of an interest payment.

ANZ, though, is preparing you for the thought that you may still hold the capital (ice cream cone) but the ice cream will be gone and if you’d like to store your cone in the pantry a fee will be charged.

I share the ANZ’s concerns both for your investment returns and for just what actions our central bank will take for its price stability mandate, without compromising financial stability.

I have the luxury of being able to hope the Reserve Bank is on top of their options whereas hope is not an option for them, they must be prepared every day to coordinate the financial foundation of New Zealand’s economy.

Daunting?

Unquestionably.

I have been explaining to any who will listen that our view is for declining nominal interest rates until the point of receiving no real return (above inflation).

ANZ is telling me to stop looking at my toes and to lift my focal point to a time frame that aligns with the period of focus used by our clients, typically 3-5 years, and to reform my view about the Official Cash Rate in NZ; it’s heading lower than you think.

They are already on the right side of their argument, the OCR is already set below the central point of the inflation target (2.00%) and it is not resulting in improved business sentiment, or inflationary pressures (from consumer demand).

I’d love to believe that waning consumer demand relates to acknowledgement that ‘our’ excessive debt levels need to be reduced, but this barely happened post Global Financial Crisis (GFC) so I doubt it’s happening now.

The principle of a lower interest rate is to reduce the ‘price’ of money (someone else’s money! – Ed) and try to drive greater business activity and consumption but that gig is up in my view because the cost of that money has been declining for years, our debts are up alongside our consumption, yet inflation isn’t presenting itself.

A new playbook is required and I think it needs to involve incentives for debt reduction, and by incentives I mean the stick not the carrot.

I agree with global commentaries that conclude the greater the debt ratios the weaker the probability of strong consumption and inflation; the deeper you are in debt the less confidence you’ll have in the oxygen reading on your scuba tank.

If the fresh air of the surface is a low debt nirvana, it’s going to be a long slow journey to equilibrium (or fast and painful – Ed).

The ANZ team say you should, alongside the RBNZ, prepare for an Official Cash Rate of -0.25%.

If we reach that point you can absolutely expect your bank to charge you for storing short term deposits (call accounts) with them, which is presumably what it was like before the Medici’s evolved finance in Europe.

Imagine how you’ll feel with the government, the council, insurers and now banks reaching ever deeper into your pockets?

Central bankers, and bankers often discuss the slow removal of cheques and then cash from an economy.

I understand the removal of cheques because they are cumbersome and thus expensive to process. Their need is fading fast.

A cashless economy would be nirvana for the Anti Money Laundering regulators because every payment would be traceable.

However, if you remove cheques, charge fees for storing cash in a bank and can’t stop computer hackers from stealing digital payment value then you can be assured that even honest law abiding citizens will consider holding more cash.

Deputy Governor of the RBNZ, Christian Hawkesby, acknowledged this recently observing that cash is an ideal contingency for payments when all else fails.

I also find that when I operate with cash I spend it more carefully, which is not going to help boost economic activity but it might help people to reduce debt and their profligate spending. Dreams are free I guess.

If you are curious about the central bank’s views on ‘The Future of Cash’, here is a link to the subject on their website: https://www.rbnz.govt.nz/notes-and-coins/future-of-cash/issues-paper-the-future-of-cash

With negative returns on your short-term bank investments you will feel constant pressure to engage in an active investment strategy with longer term assets, which would be one good outcome from the situation. We always encourage investment by strategy, within a well defined set of investment policies (which we can record on your account).

Reserve Bank data discloses that 90% of money held in the banks is placed there for terms of 12 months or less; this is a focal length that needs to change for the benefit of our economy and negative short-term interest rates should be enough to force such a change.

I view ultra-low interest rates as the perfect opportunity for the indebted to accelerate their repayment profile. Frustratingly most Kiwis view ultra-low interest rates as reason to increase their debt – ‘a $1 million mortgage only costs $37,500 to service’.

Servicing debt does not expand your wealth in the way paying it off does.

I have spent about 15 minutes staring at my keyboard (hoping for automation? – Ed). No, I wish. Actually I have discovered an application that allows me to talk to my keyboard (computer) as if it was ‘Alexa’ and ‘she’ will do the typing for me. I guess in today’s light I should be saying he/she/they.

During my pause I was extrapolating; where is this set of circumstances taking investors next?

The problem with extrapolating for investment is that you are usually standing in the middle of the compass with no magnetic pole nor modest variation. Then even if you locate a reliable direction you have a wide open cone in front of you, and it repositions every time you take a step forward.

It gives reason to pause every day, if you are in our position of providing financial advice to others.

However, if we are even close to the truth with our view of declining interest rates to the point of negative real returns and then, dread the thought, negative nominal interest rates, you have to ask – why would an investor sell any real or productive asset?

I have a reason for you, in my next paragraph.

Trump – I may need to tackle this thought another day with more content but his recent reactions to Iran seems to be confirming a new strategy for exerting global force.

President Trump has thus far not decided to send in missiles to destroy some Iranian assets in the way that the Bush administration would have done, and perhaps Obama administration by accepting advice from his warriors.

US self sufficiency in oil is important here, as we suspected.

What if Donald Trump chooses to engage in business with more of the North Sea oil suppliers (so as to store US reserves) and reduces US interest in the Middle East supplies?

Trump has stated that he prefers to withdraw from fighting in the region. Maybe he understands that the US has gained little from trying to govern areas of the planet where they have not been invited to do so?

Meanwhile, Trump is very clearly turning up the heat on the battle via economic weapons.

I can jab my son in the ribs (no you can’t - Ed), OK, I can yell at him, but he will yell right back. However, it’s a long walk to school if I don’t put money on his bus card,

If US missiles have been put away (for the most part) then the current trade war is very definitely only in the first innings.

Aus vs NZ– The RBA has developed a dissatisfaction with the Australia’s competitive outcomes against New Zealand and has launched a full assault on which central bank will be first to 0% for the Official Cash Rate.

The RBNZ said they hope to be sitting on the fence ‘reviewing conditions’ after the latest interest rate cut in this country.

The RBA cuts its interest rate and upped the ante by declaring that they expect to cut their overnight interest rate again in August and maybe even again in November. (Take that – Ed).

‘I dare you to cut NZ below 1.00% by Xmas!’

We are not in that much of a hurry, thank goodness, but it will mean the NZ dollar is likely to increase relative to the AUD, which isn’t great for our exporters.

For retired travellers earning very little interest a cheap AUD is OK.

Electricity Failures – The widespread failure of electricity supply in South America made me think of two things:

How comforting it is to have a network and generators as reliable as those in New Zealand; and

The failures in South America look suspiciously like interference by third parties.

RBNZ Board Appointment – The Minister of Finance has appointed Susan Paterson to the board of the Reserve Bank.

Hon. Grant Roberston cited the bank’s success with respect to gender diversity on the board. That gains one tick, but I’d also be keen to know we have the best possible people on the board.

Did the Minister contemplate trying to encourage an outsider, such as the retired governor of the Reserve Bank of Australia (Glen Stevens) to accept an appointment to the board of the RBNZ?

With all due respect to Susan Paterson she is also the Chairperson of Steel & Tube which is struggling under the weight of poor form following on from poor form. I’d like to believe she was too busy at present proving their bold STU statements to be able to fit the RBNZ role into her calendar.

EVER THE OPTIMIST – Gold price hits a high price for the past 5 years. The Dow Jones hits a new all-time high.

Wait, is this because of good news or bad news?

The owners of each will be happy – Ed.

INVESTMENT OPPORTUNITIES

Mercury Energy bond – the new MCY020 bond arranged firm allocations last week and set its minimum interest rate at 3.60% p.a.

Those of you who sought and received a firm allocation should now complete and return the application for to us please, delivered by Tuesday 2 July.

Thank you in advance and thank you for participating in this offer with Chris Lee & Partners.

TRAVEL

 

Chris will be in Auckland (Mt Wellington) June 24, and Albany June 26.

David Colman will be in Palmerston North on 2 July.

Edward will be in Auckland (Remuera) July 9, Albany July 10 and in Wellington  July 12.

 

Mike Warrington