Market News 6 December 2021

For anyone who thought using 'funny money' created by the central bank was the answer to all financial woes, you'd do well to read Bryce Wilkinson's explanatory piece on the subject:

https://www.nzinitiative.org.nz/reports-and-media/opinion/new-opinion-138/

There's nothing free about it.

Maybe at the next 1pm government briefing they could deviate from Covid-speak and explain to us how they plan to reduce the country's debt load, including the repayment of bonds held by the central bank.

New Zealand now needs extended periods of fiscal surpluses and financial governance that attracts lenders (real investors) to extricate ourselves from the mythical period we have just traversed.

INVESTMENT OPINION

Crossing the Road – Our parents taught us to look left, look right, then look left again for a quick update.

The potential for a change to the environment came fast.

For the past three to four weeks investors have been convinced that interest rates were heading one way, higher, and hopefully to levels that comfortably exceed short-term and long-term inflation.

There seemed to be no need to assume that interest rates might fall again. It was one way traffic right (look left only).

But no, the predictable, and predicted, emergence of an evolved strain of SARS-CoV-2 rattled the cage vigorously enough for long term interest rates to decline again by 0.15% - 0.25% over a couple of days.

There is always a need to also 'look right', and not only that but to constantly ponder the 'what if' scenarios, because it might not be a 'car' that comes around the corner, it might be a 'tank'.

Conditions are always changing.

As it happens, because the latest strain of SARS-CoV-2 was so predictable the unsettled nature of the market discloses that perhaps participants knew they had pushed too hard with the highly confident views about share prices rising and interest rates moving higher and this minor new threat was enough to have markets pull their heads in a little.

Interest rates may decline a little further yet before analysts logically return to the art of analysing inflation and its probable scale for the quarters and years ahead of us, which still implies a need for higher interest rates.

Now when I say 'higher' I use the noun to describe the direction of travel, not the potential for interest rates to becoming 'highly rewarding', because I am not convinced that fixed interest investing will deliver positive real returns (greater than inflation) let alone acceptable returns.

The very quick decline in the price of oil 10 days ago is of more interest than daily volatility in share market indices.

The recent strength in the price of oil, until last week, is beginning to look as though it was being squeezed higher by those accumulating inventory, or those net suppliers to the global economy because at the first threat of another period of slower economics the price of oil fell 15% in three days.

Beyond the oil market, the other energy markets continue to be seriously disrupted (gas, coal and electricity from all generation types) with price behaviours that are causing businesses that operate on slim margins, such as in the UK, to be forced out of business.

The UK failures talk as much about illogical regulations (when governments try to meddle thinking they can manipulate business management) as they do the serious price tension in all forms of energy at present.

Think about Toyota's Toyoda san's view about the need to evolve our energy use, not flip some magical change switch and yell climate change emergency.

Think about how rushing regulatory change is the least likely way to take the majority of the population along with you and will thus be less effective in achieving the goal.

Various central banks have used the newly disrupted market situation to justify their preference to delay interest rate hikes, disclosing their bias for keeping interest rates very low (at or below inflation) long term.

The regulators don't mind asset values holding up, and the relative value of debt declining (think Loan to Value ratios, where your house price goes up but your mortgage balance remains the same) given the excessive proportions of debt that have been used over the past 13 years since the GFC.

Regarding central banks, there's a very interesting point of difference developing down under with the Reserve Bank of NZ (RBNZ) removing monetary stimulation (no longer buying bonds, and increasing interest rates), which I agree with, relative to the Reserve Bank of Australia (RBA) trying to hold the line of lower interest rates for longer.

In the face of a media led peer review the RBA states the following: The test that we've set is for inflation to be sustainably within the 2 to 3 per cent range and We want to see inflation get sustainably back to 2.5 per cent. (bold highlight is mine)

Underlying inflation, or the trimmed gauge tracked by the RBA, was 2.1 per cent in the third quarter; below the midpoint of its range.

I think you can safely conclude that 'sustainably' means the RBA will be backward looking in its analysis, before considering the need for any interest rate increases.

The RBA governor accepts that inflation could move more quickly than they expect, but they describe it as very unlikely, with this statement: The probability of unwinding the decades-long decline in wages growth in just six months is very low, it's not zero, but close to zero.

Traders in Australia who had been speculating, and hoping, that the RBA would follow the RBNZ lead (which has never happened in my career) have been exiting their bets that interest rates would rise (buying bonds back), and thus interest rates have been declining!

The RBNZ is demonstrably forward looking, albeit modest with the scale of any inflation concern.

The difference of approach to near term interest rate setting between the two central banks (RBNZ and RBA) can be viewed in the rising exchange rate between the NZD and AUD back up to near 96 Australian cents for the NZ dollar.

The strong NZD is unhelpful to exporters but is currently irrelevant to travelers!

New Zealand cannot afford to move its interest rate too far out of sequence with our major trading partners.

The overall message, again, is not to expect interest rates to move as high as you may have hoped.

My hope for you is that you again receive a positive real return from fixed interest investing, but I wouldn't describe myself as confident of that outcome.

RTGS 24/7 – The Bank of England has stated that its new Real Time Gross Settlement (RTGS) for payments between banks has the potential to run 24 hours a day, 7 days per week under its renewal of the service.

In my view it's about jolly time.

It's certainly necessary if countries wish to have their FIAT currencies compete with the cryptocurrency attempts to claim market share in the payment space (barter space really).

The Real-Time Gross Settlement (RTGS) service is the infrastructure that holds accounts for banks, building societies and other institutions. The balances in these accounts can be used to move money in real time between these account holders, and delivers final and risk-free settlement.

The BoE will need to move more quickly from 'potential' to reality given the pace that other payment systems are moving. The BoE timeline for their new go-live system is 2024!

I hope other major central banks are moving toward the same 24/7 goal to ensure that international operability exists for the improved integrity of trade and travel payments.

Then imagine if central banks found a way to connect the payments system with asset registers where collateral could be used to support payments too (credit).

With the time and expense of a mortgage against your home, $25,000 worth of shares in, say Meridian Energy, could be 'held' as collateral on the platform to support a $15,000 payment to your grandchild in London (via your bank, with an interest expense).

The shares would be released once the bank confirmed the loan had been repaid.

ANZ customers will have experienced immediate payment (RTGS) when paying funds to another ANZ customer. It is slick and provides a lot of confidence between counterparties.

Governments and central bankers need RTGS functioning 24/7, and functioning soon, if they are serious about confronting the unregulated payments space that is mushrooming before their eyes.

Turkey – I don't intend to be mean to Turkey, at Christmas, but their situation is an important case study for the nations that think 'it can't happen to them'.

President (for life?) Erdogan would have undoubtedly thought the problems they are beginning to experience couldn't happen to them too, but they are.

Erdogan's political interference in central bank decisions, by pressuring them to cut interest rates, when inflation is getting out of control (+20% and rising) has resulted in aggressive falls for the value of the Turkish Lira (TRY).

In late November the TRY (unfortunate code) fell by 30% over a few days. Its value has fallen by 50% this year and by 85% since it became obvious that Erdogan no longer endorsed democracy for electing government.

Whilst national debt levels are apparently not high, foreign reserves are now in an uncomfortable negative position (-$30 billion) after erroneous attempts to defend the currency value (buying TRY) and to fight deteriorating financial opinions about the state of the country.

Like most egotistical political leaders Erdogan rejects opposing views and has doubled down on his opposition to high interest rates saying he rejects policies that would 'condemn our people to unemployment, hunger and poverty'.

The reality is that his interfering actions are condemning Turkey's people to unemployment, hunger and poverty.

Locals are losing faith too; 55% of deposits made in Turkish banks are made in US dollars.

EVER THE OPTIMIST

Xero is quickly becoming a portal of enormous economic data.

The one I read last week was promising; days to pay invoices is declining again.

After reaching back up to 27 days (NZ average) amidst the latest bout of Covid lockdowns it is declining again to between 22-25 depending on the region (NZ is 24).

ETO II

No wonder the young seem to have the choice of many jobs, it is beginning to look like many more folk who are 65+ years of age, who were working, are beginning to stop at a much faster rate than in the past.

Many nations are reporting record job vacancies, but declining levels of unemployment.

I agree with the commentary that speculates it is a combination of Covid disruption disclosing new preferences and the much higher wealth levels resulting from the price of almost every asset rising.

I hope they have reduced the risk profile of their portfolios by converting some of those assets into cash, and that they pass on their wisdom and support to the next generation.

ETO III – Vaccinations

This will be the last vaccination data update.

New variants remind us that the health threat will continue whilst the world delivers vaccinations to under-developed countries, the vast majority know about the effectiveness of the vaccinations for people and economic activity.

2022 will have different major influences to focus on (I hope).

Sometimes a little German clarity is useful to cut through the noise: Health Minister Jens Spahn summarised the Covid situation – 'by the end of the European winter pretty much everyone in Germany will have been vaccinated, recovered or died'.

The preferred choice seems obvious.

NZ 1st Jab: 3,826,572 = 79% (total population) 93% (>12 years of age)

NZ 2nd Jab: 3,688,689 = 74% (total population) 88% (>12 years of age)

Vaccination doses delivered – 8.18 billion jabs

Active Cases – 21.1 million (increase)

Daily rate of new cases – 530,000 (static)

People in serious condition – 86,800 (increase)

Daily Deaths (Covid related) – 6,000 (decrease)

TRAVEL

Johnny Lee will be in Christchurch on Tuesday 7 December and has two appointments left.

Any client (or non-client) wishing to arrange a meeting with Johnny is welcome to contact the office.

Michael Warrington