Chris Lee & Partners Ltd

 

UK Chancellor of the Exchequer, Rishi Sunak, has thrown up a label for their proposed digital currency – BRITCOIN.

Is this rather clever, or is it a chance at undermining the integrity of any digital currency that is established by the Bank of England?

INVESTMENT OPINION

 

Exports – I hope you all managed to read Johnny Lee’s piece in Taking Stock last week about trading in the shares of two electricity businesses.

We should be very grateful to BlackRock because it seems likely to me that they became one of New Zealand’s largest export stories for the first quarter of 2021, having transferred hundreds of millions of dollars from international investors into what I hope was predominantly the hands of NZ investors.

I am pleased to be reminded that the financial advice community added to NZ exports during January. (smile)

 

Tsunami? – I enjoyed the simplicity of this reminder, from John Mauldin’s newsletter last week. I hope he won’t mind me borrowing it for you (no response when I emailed to ask) and it’s content isn’t laden with Intellectual Property (IP) just helpful Common Sense.

A tsunami is a wall of water that wipes out everything in its path, typically caused by earthquakes. But first, the water actually disappears from the usual shoreline, leaving land where there should be sea.

If you are on the shore and see that happen, the correct response is to run for high ground. Tragically, though, people often rush toward this new and unusual sight. It’s hard to blame them; we humans are drawn to the unknown. This impulse explains much of our progress, but it has costs, too.

Right now, the stock market is in the land-where-there-should-be-sea phase. What we don’t know is when the wave is coming. Maybe there’s time to venture out and see what treasure was hidden beneath the waves... or maybe not. Prudence would suggest that we go searching for treasure on higher ground.

This is an age-old investor conundrum. How do you balance risk and reward? You have clues, but you can’t be certain of what is coming, or when it will arrive, or what it will look like. You know you need positive returns, but you also need to avoid major losses. The answers are never easy. You take your chances, no matter what you do.

John’s metaphorical forces, creating waves (volatility) in financial markets, are presumably the extraordinary increases in debt use (amplitude of the potential wave) around the world.

Water always finds an equilibrium (and moves downhill – Ed) so John’s potential tidal wave implies an imbalance is being artificially stored somewhere, yet to be released widely upon the world of financial risk.

I think we can all agree that the energy for his tidal wave is being stored by the world’s largest central banks and this is why, in my view, this tidal wave will not be released to create the disequilibrium he fears; central banks won’t allow because they control the lock (think canal boats).

It doesn’t deny John’s point about the false equilibrium, and the amplitude of the problem is real, which applies more pressure to central banker’s roles, but it does remind investors ‘not to fight the Fed’ (don’t trade against the intentions of the central bank) for they can indeed control the flow.

Another important point is emerging, employment data in many jurisdictions is proving surprisingly strong, very soon after the headline grabbing pandemic. Some, such as the UK, are reporting employment back at, or above, pre-pandemic levels and before they have even settled into post-pandemic routines.

Economic growth and employment are now becoming mandated policy targets for central banks so current employment data will be seen as a success of recent policy developments.

High levels of employment result in political popularity, so surely you don’t think the leadership will be changing the rules simply because gross debt data is higher than it was in the past?

Maybe the policy tool of higher interest rates to reduce one’s discretionary spending capacity has been replaced by the financial pressure created by the contemporary very high pricing of homes (shelter)?

As John said, ‘the answers are never easy’ and sometimes the drivers are chameleon-like making the process of investment very difficult regardless of the era.

One solution to your concerns should always be clear though; keep in touch with a financial adviser, because they supply togs and life jackets to prepare for participation and to cope with unseen risks. (and surf boards for the excitable? – Ed)

Housing Regulation – New Zealand has been adding a widening array of tax regulations to try and reduce the demand profile for residential property, without a lot of success, because as we know, an excess of supply is the solution to price stability.

We are yet to see whether greater exposure to capital gains tax and the removal of tax deductibility will alter the property market much. I have my doubts because tax influences are the last part of an investment decision, not the first (the relationship between risk and gross reward scenarios come first).

The tax deduction change in NZ is more a revenue item (tax increase) for the government, not a risk or gross reward influence.

By contrast to NZ’s tax approach, Canada has chosen to increase the interest rate used (compulsory) by regulated lenders when they stress test a person’s ability to service a loan. (NZ banks do this, but I’m not sure if our central bank can dictate the pricing level).

Regardless of currently low interest rates the Canadian central bank is increasing the stress test pricing level by 0.50%.

Whilst central banks could also set different regulations for different users (homeowners and investment owners) this would rather deny the risk element of the stress test because many investors represent far lower risks to the financial stability of the marketplace than highly leveraged first home buyers.

ECON101 – pricing is about supply and demand, not ill-conceived manipulation.

Oh Dear – It always happens, especially during second terms in parliament; probably with double intensity when you are elected with a majority in an MMP environment.

The government, and some of its cabinet ministers, are falling under the spell of believing that can make better management decisions than those to whom government policy applies (i.e. all of us, and organisation leaders).

Rather than trust the skill within our central bank, Grant Robertson wants government to set lending standards that will be imposed upon the banks.

This is a far more serious error by the government than its previous determination to loiter around Greg Foran and tell him how to run Air NZ. The Reserve Bank is a highly important regulatory body, governed and managed by experts. Air NZ is a vital business, but it is publicly owned and does not regulate the skies.

Why have government policies if Grant and Jacinda just want us to call them for a decision?

It reminds me of President Xi’s approach in China, and Erdogan’s approach in Turkey, neither of which are admirable, certainly not by me.

Good governance is the skill of setting good policy to lead toward desirable outcomes, not actually making decisions on behalf of others who operate within those policy boundaries.

The foolishness of this ‘we know best’ proposal, if carried through and replicated across other sectors, is that it will ultimately harm New Zealand’s economic performance.

Tongue in cheek – Maybe Grant Robertson’s next move is to cut Adrian Orr’s pay because the minister has agreed to accept some of the Governor’s responsibilities?

Adrian would rebut this suggestion though, citing that his responsibilities have gone up because he is now obliged to ensure that everyone is employed and owns a house!

This political nonsense has drowned out a policy announcement that the public would have been pleased to hear in isolation, that being the introduction of a deposit guarantee scheme for up to $100,000 per person, per bank.

This is another policy I don’t actually support (unnecessary insurance policy that you pay for, in a well-regulated, low risk banking environment) but it is a policy that I accept the government is entitled to introduce and probably gains political support across parliament.

FMA – Jeez, the Financial Markets Authority are taking inspiration from government ministers too and seem determined to take control of our marketing departments and instructing us not to publish references to the ‘good stuff’ if its ‘really good’.

Presumably they think we’ve forgotten our legal obligations not to mislead or deceive.

Isn’t the phrase ‘Past performance is not a reliable indicator of future performance’ one of the most heavily used and well understood within our industry?

It might have been more helpful if the FMA had directed their thoughts to the wider public and encouraged them all to engage with the now well regulated, skillful financial advice community (I think you’ll find they describe you as ‘competent’ – Ed).

European Football – The embarrassing collapse of the push by owners of the world’s largest football ‘clubs’ to become further inflated investment vehicles (cartels according to Boris Johnston) may have discovered a tipping point, disconnecting the business from the consumers.

If the large scale of debt used by these privately owned sports teams now requires an even greater share of sports revenue maybe they are learning that the debt ratios are too large, not that they deserve a larger share of the pie.

Genuine supporters (‘’consumers’’) love their team for the sport (‘’product’’) and the emotion, not the balance sheet.

One day (post vaccination – Ed) I’ll get to the UK to experience the support firsthand, but I have no doubt that supporters of ‘League One’ sides (two below the Premier League), such as Ipswich Town, are just as passionate as those of Manchester United.

Given that the cost of debt is at rock bottom I think other highly leveraged businesses would do well to add a debt ratios discussion to the agenda for the next board meeting and seriously consider just how close to a tipping point they are between success and failure.

For the record, I am not hiding any business names between the lines here, just hoping that company directors and leveraged fund managers are aware of the anecdotes.

Are you looking a Black Swan in the face (beak – Ed) when a Manchester United supporter rejects his/her team based on financial mismanagement?

EVER THE OPTIMIST (the glass appears to be at least 51% full)

Good news, a client confirms that The World Expo in Dubai, rescheduled for October 2022, it will involve NZ (and his daughter!).

https://www.nzatexpo.govt.nz/

ETO II – not a news item that environmentalists will enjoy, but it is a truth of economic progress post Covid19 all the same:

Stored oil reserves have now receded from ’unprecedented highs’ back to near the 5-year average levels.

ETO III – The price of milk (Whole Milk Powder) has held above $4,000 per tonne for a month now, and the futures contract pricing out through the balance of 2021 indicate confidence that this pricing will hold for much longer.

Farmers can use futures contracts to pre-sell at these prices, assuring themselves of such outcomes for their businesses.

Analysts are debating whether farmers will receive a season price that exceeds $8.00 per Kg/MS. Fonterra described a range of $7.30-$7.90 in early March but surely they’ll be increasing this range soon based on current pricing data.

This information is as important for NZ as the Trans-Tasman travel bubble (revenue perspective).

Let’s not cut the livestock numbers in NZ, let the scientists help them resolve negative influences from our highly successful primary industries.

ETO IV - Kiwi Property Group, they who felt the impact of Covid19 pressure the most, have displayed impressive long-term confidence and announced they will proceed (October 2021) with the second office development in Sylvia Park and that a third is also being proposed.

Sylvia Park is fast becoming a satellite of Auckland City and the many retailers in the facility will be very pleased if the landlord attracts more business to operate in the airspace above.

I look forward to the day when they reveal that the Drury project needs to progress to the next stage to meet community demand.

ETO V – Vaccinations

Global Data:

Vaccinations delivered – Hooray, we have passed 1 billion

Total (recorded) Corona Virus cases – 148 million

Active Cases – 19.4 million

Daily rate of new cases – 700,000

People in serious condition – 110,000

Daily Deaths – about 10,000

Proactive nations/locations, who have jabbed >40% of their population with the 1st injection:

Gibraltar – 100%

Falkland Islands – 87%

Maldives – 87% (remember their offer to live there for 12 months for US$32,000?)

Seychelles – 69%

Bhutan – 64%

Isle of Man – 63%

St Helena – 60%

Israel – 59% (up to 55% with 2nd injection too)

UK – 50%

San Marino – 51%

Bahrain – 44%

Anguilla – 41%

Chile – 41%

US – 41%

This group deserve applause.

New Zealand is a disappointing 2.9% and is not taking advantage of the position of strength that we hold from our actions over the past year.

Investment Opportunities

Strangely quiet, but we will need some new bond offers soon because you all have a lot of money being repaid over coming months.

We’ll need some new bond issues, soon, giving the volume of bonds maturing over coming months.

TRAVEL

Edward will be in Auckland on April 29 (Albany) & April 30 (Remuera).  He also plans to be in Auckland on June 10 & June 11, Napier on June 24 & June 25 and in Nelson in July.

Johnny will be in Christchurch on April 28 and again each month in May and June.  He plans to visit Tauranga in May (dates to be advised).

David will be in Kerikeri May 6 and Whangarei May 7.

If you would like to make an appointment, please contact our office.

Mike Warrington 

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Market News 19 April 2021

Here's a 'glass full' perspective for you:

Barron's magazine thinks we are approaching a 'golden age of travel', reinforced by Wall Street pricing which expects air traffic in 2022 to exceed 2019!

Barron's cite past events (pandemics and wars) where the population's movements were restricted, and they were followed by explosive growth in travel.

The principle makes sense to me. Life is short, we are a migratory species that enjoys discovery and variety so once restrictions are lifted, we will move.

Here's another anecdote expecting success for the travel industry; Cruise ship company Carnival had to pay 11.50% to borrow money in 2020 but today the market is willing to lend to them at 4.00% such is the lift in confidence of a return to profit.

However, I think Wall Street's focal length is too short by pricing in 2022 volumes as a new high, exceeding 2019. If there is a vaccine hesitancy (witness Israel data) there will surely be some travel hesitancy and border controls.

INVESTMENT OPINION

 

Scientists – will be the ones to carry the world forward with genuine advances both in business and in health.

Vaccine experts are the ones currently basking in the light of glory.

Actually, that's not a fair statement because in my experience scientists don't seek glory, they seek evidence and progress. Rather than having their egos stroked they would prefer to be offered more funding.

The latest information I received was from a friend working in the fossil fuel industry.

After a wide-ranging discussion about how the world cannot, and thus will not, progress without liquid fuels for many decades ('the death of liquid fuels is highly exaggerated'). He explained that oil industry businesses are shifting the objectives and strategies too, putting serious minds and sums of money to work to improve environmental outcomes.

Their deep understanding of global energy system fundamentals underpins their future funding decisions, including work by many scientists, and they will be more effective at establishing change than populist politicians declaring Climate Emergencies.

Interestingly one of their future strategies is the increased use of gas due to its lower carbon dioxide emission levels if coal, and to a modest extent oil, are to be removed from the energy supply side.

So much electricity is generated using coal at present that unless increases to gas and nuclear are pursued then the world will not meet its 2050 targets for carbon neutrality (Intergovernmental Panel on Climate Change).

Remember that the NZ government decided to ban mining for new gas supplies and the fact that we banned coal mining means we are currently importing more (helping Australian employment – Ed).

The rate of change matters in these decisions.

The company I refer to is 'working to develop breakthrough solutions in areas such as carbon capture, biofuels, hydrogen and energy-efficient process technology. And is focused on society's highest-emitting sectors of industrial, power generation and commercial transportation, which together account for 80 percent of global energy-related CO2 emissions, and for which the current solution set is insufficient.'

Focusing change where 'we' can have the most effect is logical, and the only way we'll reach aspirational goals.

So, part of what I heard was that we need to be careful how fast we remove coal and oil from the energy supply mix but the item that kept me reading was the forward looking 'energy-efficient process technology' and a very interesting article about more efficient battery development, which is happening now.

When we can generate electricity from the most desirable sources (renewable) let's ensure it is not wasted and can reach consumers at the most suitable time of the day.

For the curious have a read about the NAWA technology company, in France:

http://www.nawatechnologies.com/en/home-english/

They are developing battery technology that is described as a significant step forward from current battery technology by using carbon nanotube electrodes to store the energy, that can achieve an 80% recharge in five minutes! (time that is needed to grab a flat white whilst parked).

They also say that the energy stored in such a battery is capable of delivering a 1,000 kilometre range to mass market scale vehicles.

For those of you who are electrically minded, carbon nanotube electrodes high electrical and thermal conductivity (easy for ions to move around, and less distance to move).

Three cheers for the scientists, who will save us from ourselves as long as our governments lead well.

AML – By the Law of Unintended Consequences Act, dated since the beginning of time.

You will all have been emersed in the obligations set by the Anti Money Laundering and Countering Finance of Terrorism Act, some of you more deeply than you'd wish.

Well, you're not alone; we, the organisations tasked with meting out this new treacle to the business process, share your discontent (to some extent) and some businesses are now taking very strong positions on how they'll adjust their business services.

The regulators have been taking an aggressive stance on monitoring 'us' and issuing some enormous financial penalties to those who transgress, no matter how difficult it was to avoid a breach.

Last year I highlighted for you that Rabobank in NZ was no longer accepting new investment customers who use a trust as an investment vehicle, and they have been asking current trustee clients to close their accounts.

Performing AML obligations on a trust is far more onerous than a natural person both at the point of client account set up and for ongoing due diligence.

Rabobank's strategy (policy) is entirely understandable.

Whilst we think some aspects of the AML law have resulted in improved accuracy of client records the overbearing regulatory threat does mean our industry assesses every new client record for AML outcomes, including regulatory risks, before agreeing to a new relationship (entities from overseas are a challenging prospect!).

The AML obligations for local banks providing settlement services to businesses in the foreign exchange market, helping people to make payments from one jurisdiction to another, has become a risk that is too high so local banks are refusing to provide such services.

It's hard to blame them; this is one area where the banks have been heavily fined for not monitoring all the risks of the money movements under their ongoing due diligence obligations.

The banks aren't making hundreds of millions from this business flow so there's little point in being exposed to the threat of fines in the hundreds of millions.

This strategic change has become such a problem that the banking regulator, the Reserve Bank of New Zealand has stepped in (again):

The Reserve Bank has again asked banks not to impose a blanket ban on taking money remittance service providers and virtual asset service providers on as customers in the name of de-risking themselves from money laundering and terrorism financing risks.

They pressed the banks in 2015 not to deprive businesses of access to banking services but in 2016 the High Court supported bank freedom to choose who they agree to do business with.

The Reserve Bank wants banks to take a risk-based approach and improve their understanding of the risk variations (read grey zone) and to mitigate those risks whilst continuing to provide the services.

That might be acceptable if regulators assessed AML compliance as a grey zone, but they don't; it's black and white, compliant or in breach. No exceptions, and very large fines are issued for breaches.

It's the regulators who defined the playing field risk setting, both with the law and their enforcement actions. Their mothers must have taught them what happens once they've made your bed…

Interestingly the Bank of International Settlements said last year that AML laws and processes seem well designed but they are proving to be ineffective with respect to catching criminals (for the most part), so is anyone now debating the value relative to the economic drag?

If you are a regulator, be careful what you wish for.

Important AI news – The news that Microsoft has purchased Nuance, a dominant provider in the healthcare sector using artificial intelligence, reminds us that AI use will continue to accelerate across the world's economies, especially post Covid19.

AI adds leverage to a process, but it is also supporting remote servicing options and there's no going back for the health sector.

Hopefully this means health costs will decline and services will be accessed more widely.

It also reminds me that it is likely that the world's most dominant businesses will become even more dominant in the year ahead.

If you want to be an excellent small business, you'd better hope that the dominant would rather buy your business than compete with you.

I think the NZX team made a very good, forward looking decision, when they introduced a thematic smart share directed at Automation & Robotics sector risks (BOT).

Not so Green – The efforts to redirect the global population's behaviour toward better outcomes for the planet are having more impact now than any other efforts that I can recall through my lifetime.

However, the world's lunge toward better form on climate related influences is still a bit messed up when you learn that Bitcoin mining in China uses more (coal fired) electricity than a whole European nation!

Yet here in NZ some think we should reduce our livestock numbers by 15%!

Let's reduce the world's access to food so a very small group can try and access a cryptocurrency that enables payments across criminal networks.

It's more than a little ironic that the command economy of China agrees to such excessive use of energy to mine for something that supports anonymity.

EVER THE OPTIMIST

The World Expo in Dubai has been rescheduled for October 2022; another sign that the world is ready to move forward.

I sincerely hope that New Zealand is planning to attend and tell the world we are open for business.

 

ETO II

It may finally be the time when the governments of the world tackle the unfairness of corporate tax collection, where the largest global firms used by a majority of consumers only pay the lowest tax ratio to the countries selling their souls via tax policy.

Paying less corporate tax benefits the small subset who own such companies, and this surely contributes to the financial imbalance in the world.

The governments of the world have forced all taxpayers to contribute to many enormous financial underwrites (paying for Covid19) so they should make more effort to collect taxes too.

If the US insist that you and I in NZ fill in the silly forms* that demand a declaration that we are not US Tax Residents then surely they can tackle the concept of paying tax in the jurisdiction revenue is generated.

*It is absurd that a registry asks for this declaration upon every new investment rather than sharing our declaration with all whom they act for as registrar.

ETO III – Vaccinations

Global Data:

Vaccinations delivered – 894 million (reaching 1 billion by month's end looks simple)

Total (recorded) Corona Virus cases – 142 million

Active Cases – 18.4 million (not clear why this has been cut so far! Data fatigue??)

Daily rate of new cases – 800,000+ (rising, with Brazil and India dominating data)

People in serious condition – 107,000

Daily Deaths – 12,000+

Investment Opportunities

Strangely quiet, but we will need some new bond offers soon because you all have a lot of money being repaid over coming months.

TRAVEL

Edward will be in Auckland on April 29 (Albany) & April 30 (Remuera). He also plans to be in Auckland on June 10 & June 11, Napier on June 24 & June 25 and in Nelson in July.

Johnny will be in Christchurch on April 28 and again each month in May and June. He will be in Tauranga on May 12.

David will be in Palmerston North on Wednesday 21 April, Kerikeri on May 6 and Whangarei on May 7.

Kevin will be in Timaru on April 27.

If you would like to make an appointment, please contact our office.

Mike Warrington 

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Market News 12 April 2021

Last week I drew your attention to the failure of Archegos Capital management, how the losses occured and that it would affect the employment of some people but is unlikely to have an impact your investment portfolio.

This week Credit Suisse (one of the lenders) confirmed that seven senior executives related to the matter are no longer employed.

This is how it works when very well-paid people make oversized errors with risk taking.

Sadly, as Archegos shows, the same humans turn up elsewhere and often make the same mistakes; this is not the first time the owner of Archegos and the banks lending to him have made this trading mistake.

INVESTMENT OPINION

Air NZ – The increase (+$600 million) to the government loan to Air NZ was immediately pounced on by journalists and the twittersphere population as an ongoing subsidy by the taxpayer.

Wrong.

It is a shrewd move by the government, shrewder than much of their financial decision making and aligns with the offer Warren Buffett would have made, save for one missing element.

The 9.00% interest rate on the loan assures the government of a return on this emergency liquidity whilst other shareholders (49% of the business) receive no return.

This, in part, will be the reason for the delay to the equity capital raise programme. The opening of the Trans-Tasman bubble has given AIR directors confidence that they may be able to achieve a cash flow neutral outcome for the airline with domestic plus Australia flight paths.

If I was an AIR director I would now ask the government to actually sign an underwrite for their 51% of any equity capital raise, if it proceeds, and then I'd feel confident about our financial position for the next 6-12 months, subject to scenarios (actual travel, vaccination rollout speed, international border management etc).

The trick that the government appears to have missed by not consulting with Buffett is not insisting that the 9.00% loan can be converted (at government's option) to ordinary shares at, say, a 35% discount to the market price of AIR shares.

It would have seemed harsh to all other AIR shareholders at the time but what choice do you have in May 2020 in the dark shadow of Covid19 without a single plane in the air?

Compliments to Chorus – Chorus recently set the share price for its Dividend Reinvestment Plan at $7.6395 per share, but then even more recently they were obliged to report a reduction to their forward-looking revenue range.

This revenue adjustment resulted in the CNU share price declining below $7.00 (a 'material change').

The Chorus board has done the admirable thing and suspended the DRP scheme for this dividend cycle, so will not issue anybody with new shares with an immediate $1.00 loss, deciding instead to pay everyone cash, regardless of prior preference.

Had they not done this ''I'' would have received my cash CNU dividend and then received an unfair allocation of capital from shareholders using the DRP scheme (they would have been adding new equity at a $1.00 premium to the current market value for the business, from which I could benefit.

Mathematically if I had used my cash CNU dividend and immediately bought more shares at $6.60 I would have made a gain in value relative to DRP investors.

This is a microscopic argument so maybe I'd better not dig too deeply into the theory; the main purpose of this note was to compliment the CNU directors on their decision to suspend this particular DRP event for fairness to all.

Of more importance to CNU investors is to read the release about why the revenue forecast was lowered (two assumption changes and one error).

The error is poor form, but the assumption changes will continue to evolve through time to the benefit or damage of, the 'Maximum Allowable Revenue' (MAR) for this regulated business. (Commerce Commission is watching)

The evolving assumptions include Inflation forecasts and Risk Free Rate assessments.

When you consider the role of these factors within the MAR for CNU you should gain comfort with the investment, and not disappointment at the recent revenue reductions, because you'll have been reminded that CNU is an investment with the potential to consistently provide a positive real return (greater than inflation) long into the future.

And, if the current settings for inflation and the risk free interest rate (related concepts) increase, then CNU investors theoretically have some upside protection (better rewards) if inflation is to rise more than the market currently expects.

The near certainty of a real return means they are not lucrative, which is a truism of the risk/reward spectrum; you can't have the best of both at the same time.

A relatively boring investment, but in this case boring is good.

Employment – There is some very optimistic data being released about employment and pay in many jurisdictions, which will likely bolster central banks and governments with their belief that the policy of thrusting enormous sums of cheap money into the economy has been effective.

It has not happened slowly either.

Where the US once discussed monthly employment (non-farm payrolls) changes of +2-300,000 per month recent numbers have been more like 700-900,000 and the headlines are loosely describing the latest as +1 million employees.

Fair enough because the previous month was adjusted up by an additional 150,000 employees, which is impressive in itself (and adjustment nearly as big as the prior monthly totals!).

A logical guess based on emerging from economic distress might be that on average people are earning less as they compete for access to work with the rebuilding of available employment but a US chart that I saw last week from the Labour Department shows that aggregate private payrolls are higher now than immediately prior to the beginning of the Covid19 pandemic.

The same outcomes seem likely in NZ as we open our borders and increase the nation's minimum wage.

If the market fear of imminent inflation doesn't now play out, and I sit in the camp that is not expecting much, then our politicians and central bankers will surely anoint themselves as the latest MARVEL superheroes and start selling movie rights to Hollywood.

Employment growing faster than a social media led protest movement, pay rates rising faster than a Rocket Lab launch and inflation that is more settled than Lake Mathieson….

I introduce to you 'Super Regulator', impervious to economic criticism. (snap out of it – Ed)

OK, but surely one needs to be a supreme pessimist and looking into an unclean rear vision mirror to believe that policy makers will change the current financial settings if this optimistic and stable data continues?

What I see as we emerge from the Covid19 slowdown is reinforcing my view that you'll experience low interest rates for the balance of my career, which implies little or no decline in the value of real assets like property and productive businesses.

Housing – Yet again we are pursuing a different path on government policy relative to Australia. They are looking outward to solve problems whilst we are looking inward to try and limit potential for gains because they are not shared evenly across the 'team of five million'.

We have decided we can tax our way into additional supply of housing (an error of judgment), and try to discourage investment, whilst in Queensland one of their MP's (the vocal Pauline Hanson) is trying to encourage the public investment (buy/build homes) in certain areas to support a necessary increase in the rental stock.

Hanson is lobbying for areas where employment is growing again after a quiet period, but the message is clear, she wants investors to be part of the solution for providing accommodation to people who choose not to own or cannot yet afford to do so.

She aspires to open 'roadways' not put up 'road blocks'.

The removal of tax deductions on the debt of investment properties in NZ will increase government revenue but the policy has established an unwanted inconsistency in tax policy, which seems likely to create opportunity for financial arbitrage which only the wealthiest and best advised will exploit.

ASB put it nicely when Nick Tuffley described this financial manipulation as like the 'whack a mole' game; the government won't win and they'll be distracted from more important issues whilst they play the game, earnestly believing they can win.

Good tax policy is simple, broad and shallow so as to be fair, and thus happily paid. Such policy also means that capital and labour are employed well across the economy.

I doubt that our latest property related tax policy will deliver more houses or lower house prices.

I wonder if ''Super Regulator's'' kryptonite will turn out to be poor hearing?

Banned! – This is turning into an edition of ''The Regulatory News''.

The Australian Securities and Investments Commission has made a 'product intervention order' and banned the sale of binary options (financial instruments) to retail investors.

Options give an investor (buyer) the right, but not the obligation, to complete a transaction at a defined price, on a defined date.

Two industry reviews by ASIC in 2017 and 2019 discovered that about 80% of retail investors lost money when using options as part of their investment strategy.

At face value this does make it look like ASIC is saving the public from themselves, but it also discloses to other possible problems:

The financial advice community is very poor at serving the public; or

The public are very poor at asking for professional financial advice.

ASIC should definitely exert their influence over the first point but there is very little they can, or should do about the second point.

We don't ban casinos so why are we banning speculative financial risk taking in investment markets?

I think the bigger problem lies in the integrity of the financial advice sector and maybe the deep-seated 'sell, sell, sell' strategy so clearly exposed by the Royal Commission into Misconduct in Banking hasn't yet stopped across non-bank financial businesses?

Technically when you use Z Energy's SHARE TANK service to buy a certain volume of fuel, at a certain price you are buying a call option.

If the price goes down, you leave the SHARE TANK full and buy today's fuel at the lower price but if the price of fuel goes up you collect your fuel from the SHARE TANK at the old lower price.

SHARE TANK provides some upside protection against rising fuel prices during a certain time window.

Shall we ban this in NZ because people might make poor decisions? (don't speak so loudly – Ed)

I know, it's for much smaller sums, but the financial risk scenarios are very similar.

Regulators are far more emboldened now than they were 10-20 years ago and their actions are moving beyond the confident setting of robust, effective policy and into the realm of telling decision makers what they’ll do next, which ironically discloses a weakness in their policy confidence.

For the record – I do not think retail investors should be using financial options either, but I'd rather ASIC asked the public to pay our industry a fee to understand participation, or not.

Science – Thank goodness scientists remind us that not everything is ''known'' by the population of the Twittersphere.

Scientists are accumulating more evidence that they don't yet understand all the laws of physics and matter; Muon's are not behaving as expert minds predicted.

I will not try to explain what a Muon is. I'd be as compelling at that as explaining the rules on Venus. 

Here's a link to the Wikipedia definition: https://en.wikipedia.org/wiki/Muon

It's a complex thought for a student, like me, to discover the importance of a particle with a lifetime of just one 2.2 millionth of a second!

Given the ever-increasing scale and speed of computing it's fun to learn that even 84 years after the discovery of the Muon we still aren't certain about its influence within the universe.

Covid19 is just a spec in time on this continuum (as are you – Ed).

Green – a small, but green, development occurred in Wellington recently when Wellington Electricity changed the way it charges for delivery of electricity to a home.

They now charge a different price per half hour time slot based on the evolving use across the network. The price is higher during peak demand, and lower at other times of the day.

The hope is that these price signals will encourage consumers to move optional use (dishwasher, laundry, EV charging, etc) to times like midnight, and not whilst they are cooking dinner.

Electricity generation and supply/demand are measured and priced in 30-minute Time Of Use blocks so presenting these signals to the public to manage demand profiles should be more effective at delivering some environmental benefit than waving placards at parliamentarians or declarations of emergency.

I hope economics teachers discuss such content with their students as they debate their concerns about human influence on the environment.

EVER THE OPTIMIST

The opening of travel between New Zealand and Australia will unquestionably help economic activity for both countries. People have already been travelling but freedom from MIQ will amplify the numbers significantly.

I think I read that Air NZ was operating eight flights per week currently, but in reaction to the bubble opening they will offer up to 82 flights and their competitors have announced they will increase to 122 return flights per week.

Massey University's GDP Live is already showing a likely +3.8% annual rate of change for GDP in the latest quarter.

The wild gyrations in GDP data seem likely to continue throughout 2021 before we settle to more stable economic numbers, hopefully by 2022.

ETO III – Vaccinations

Global Data:

Vaccinations delivered – 777 million with daily rate at than implies it will reach 1 billion prior to the end of April.

Total (recorded) Corona Virus cases – 136 million

Active Cases – 23.8 million

Daily rate of new cases – 600,000+ (rising, with Brazil and India dominating data)

People in serious condition – 102,000

Daily Deaths – about 12,000

UK 1st jab is 48% of the population and they look a chance to surpass Israel for coverage who are stalling in the high 50's (%).

Investment Opportunities

Strangely quiet.

TRAVEL

Edward will be in Blenheim on April 15, in Auckland on April 29 (Albany) & April 30 (Remuera). He also plans to be in Auckland on June 10 & June 11, Napier on June 24 & June 25 and in Nelson in July.

Johnny will be in Christchurch on April 28 and again each month in May and June. He plans to visit Tauranga in May (dates to be advised).

David will be in Palmerston North on April 21, Kerikeri May 6 and Whangarei May 7.

Kevin will be in Timaru on April 27.

Michael will be in Auckland on Tuesday 4 May (Milford).

If you would like to make an appointment, please contact our office.

Mike Warrington 

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Market News 5 April 2021

HAPPY EASTER

You know it's been a good holiday when you return to work and it takes more than couple of days to tune back into the rhythm of the business.

Thank goodness Easter arrived so soon after my return.

Central Otago is always a great place to visit.

This time I did more than a little of my usual nosiness by asking businesses for anecdotal evidence about how they were getting on (past and present). There's no question the area is currently over-resourced, but the attractions remain the same and I could spot the survivors already.

Yes, some businesses have already closed, but this is because they were not needed under current conditions and many of the immediate closures will have been poorly managed. I suspect some had failed to accumulate any equity during good times or develop goodwill with staff, so the minute customer numbers fell and became unpredictable they experienced financial suffocation.

Other businesses will close, partly through not acting quickly enough to cope with the changes, but sadly some who have been trying hard to survive by spending equity and underpaying themselves will also close.

It's harsh, but weak conditions are typical of normal business cycles; the luxury enjoyed for more than a decade has blinded many to this fact.

A tiny number of people were in the group yelling at the government to 'give them money' but this is a band-aid without healing qualities, so it won't deliver meaningful success stories.

I didn't observe many businesses where I felt they deserved loss cushioning equity provided by the taxpayer any more than other business, so I am not a fan of this survival option.

The huge, and hugely admirable, majority hold their own equity and have long figured out the need to re-size and/or re-focus their businesses and get on with the job.

The single lady managing the St Bathans Vulcan Hotel displayed an attitude of I will cope, I have to, I want to, there's no alternative'. (A recent change of ownership may help)

The manager (possibly part owner) of The Harvest Hotel in Cromwell – 'We've closed under-used areas for now, offered to run the i-site for the town to increase foot traffic, consolidated food venues and are saying yes to everything'.

Her main frustrations were the Trans-Tasman Bubble delays and the constant threat of lockdowns meaning travelers don't book anything until about 72 hours ahead, making it very hard for her to plan.

She was plain honest about the difficult situation, no marketing speak, and she told everyone arriving at reception how grateful she was that we were staying.

I understand large towns like Te Anau really are struggling (good on Real Journeys for burning some equity to attract people to Milford Sound with discounts), but then we'd visit Dansey's Pass hotel mid-week (in the middle of nowhere if you've never been) and it was fully booked!

The pub in Waikaia was too full to serve us (helped by a Wedding) so the lady in the store across the road, who serves food, smiled and stayed open late to make sure our whole group was fed.

Queenstown will cope, they have the luxury of a constant flow of local tourists, but as a generalisation they could learn a lot from the service levels we saw in the smaller towns.

I love small town NZ.

I admire the determination and service with a smile attitude displayed by the survivors.

Lifting our minimum wage to $20 is something I agree with, but frankly opening our borders to Australia, accelerating vaccinations and showing that we can manage small Covid19 clusters will be more effective for boosting incomes in Central Otago.

Keep it up down there, we'll be back.

INVESTMENT OPINION

Precinct – Is the latest of the NZX listed property companies to agree to buy back its external management contract and appoint staff to manage the business internally.

I prefer this principle but do wonder what prompts the owner of such a manager to agree to sell, other than a high sale price that factors in the majority of their financial hopes for extracting value over the next decade or so anyway.

The Precinct Chairman is ''delighted'' with the outcome so we'll take him at his word. Mind you, he defended the external manager a decade ago when ACC challenged their poor performance and high fee levels (fees were subsequently cut).

ACC was also concerned that the 2010 restructure (from a trust to a company that was externally managed) would lock in permanency of the external manager, but this has been proved incorrect by today's situation. I wonder how ACC views this opposite scenario.

The exiting manager (AMP Haumi) holds 17.2% of Precinct's shares, so the next thought is what will happen to this stock?

They say they will retain the shares, but they no longer need them to exercise voter control for blocking unwanted proposals, so it is more likely to me that these shares will be available for sale in future.

If I'm right, then the PCT share price shouldn't stray too high relative to the actual valuations of the buildings owned. Perhaps in this world of very low real interest rates a small premium would be warranted if PCT continue to negotiate longer average leases?

Maybe the sale of the management contract has been prompted by AMP's huge strategic changes, much like that occurring at major banks who are selling businesses that are deemed to no longer align with the business?

That being the case holding PCT shares won't fit the AMP agenda either, but if they are lucky their business partner, the Abu Dhabi Investment Authority, might be happy to buy their portion of PCT shares and the market will remain steady (supply/demand terms).

There are a few scenarios for how this plays out with respect to the PCT share price, but other than the marginal price (relative to asset values) I don't think any will be disruptive to the other owners.

The main 'dent' is the immediate need to find $215 million of new funding required to make the payment (capitalising future annual costs) but thereafter annual performance will be marginally higher (+6.00%) relative to the alternative.

Overall, it seems to me that investors in Precinct should be comfortable with the proposal because the assets they own, the tenants and the leases remain the same, so the investment thesis holds as true now as it did at the time of the original investment.

Infratil – Just like Warren Buffett, if no other better investment opportunities present themselves, then buy back some of your own stock ($20 million).

It's encouraging to see some of the management increasing their own investments in the company too.

This only leaves $1.91 billion of the $1.93 billion raised from the Tilt Renewables sale to 'apply' in some way (new investment? Capital return?)

Financial Disruption – Those of you who surf the international financial media as you self-manage your investment risks (well done) will likely have tripped over a story about the failure of another leveraged investor: Archegos Capital Management.

The headlines were various, but almost all had the common theme of 'Billions lost…'.

By way of example: Subject to the type of risk taken a leveraged fund may only have $10 (10%) of its own money involved and then borrows $90 (90%) to purchase its $100 portfolio.

The $100 of assets are passed as collateral to those who lend the $90. The lenders have demanded a 10% 'haircut' (equity protection for the loan), a little like the Loan to Value Ratios often discussed in NZ for home loans.

Leveraged Fund investors don't buy homes! They invest in things with far more volatility (risk) in the hope of extracting far higher returns.

Now imagine what happens if the $100 invested in 'something volatile' declines in value to say $75; the lenders immediately demand that the borrower passes over $15 (possibly $12.50 if they only retain the 10% haircut but given the disturbance they might even ask for more).

Next, the $75 investment declines to $50.

Mmmm…. Now we get to discover if the leveraged investment fund ever had $50 of equity so as to defend the retaining of the investment. This is seldom the case.

Archegos clearly didn't have $50 (for the sake of fun, the actual margin call on Archegos was US$20 billion!), or the families investing through this leveraged fund weren't prepared to throw good money after bad, so, the lenders 'shut them down'; meaning they sold all the assets held as collateral to recover as much of their loan balance as possible.

The various banks reporting losses of billions discloses the shortage between the collateral and the loan.

I started writing this paragraph pondering whether or not this disruption would reach you, and your wealth, via market disruption but I don't see this as happening. In a world that now deals in trillions I don't see how billions will ripple out of the pond, let alone reach the global oceans.

When I worked at Credit Suisse 'we' endured a $2 billion loss when a leveraged fund called Long Term Capital Management was wrong about what 'must happen' with investing (foolishly misinterpreted Russia's willingness to repay loans). This story lasted a few months, but this didn't really reach personal investment funds in a meaningful way.

Credit Suisse, and other banks, signaling losses of $2 billion today will harm the employment of a variety of people, but it won't disrupt your savings.

Of more concern is how many other such private, leveraged, investment funds are close to the brink of negative equity in a market with higher volatility?

Westpac to 501 the whole of NZ? – Westpac Group (Australia led) is considering whether or not to exit NZ banking and sell the Westpac NZ business.

This is surprising news for a business that has been operating here since the days when they were branded the Bank of New South Wales (think gold mining era - 1861).

Remember, Westpac is the bank that bought up our community banks under the Trust Bank branding.

Maybe they just don't like us, like Scott Morrison?

Banks are good at riding the political waves, so NZ politics won't be the motivation.

Banks are expert at trying to access reward on capital, for risk taken.

Maybe Westpac has decided that our central bank's regulatory demands have tipped the scales to a point of imbalance and pushed reward too far from a reasonable equilibrium and they don't expect this to change back for an extended period (think decades)?

Maybe the banks see sustained increases in risks that rewards have little show of keeping up with?

Maybe Westpac sees the onset of digital currencies and online financial services as meaning they can serve me from Martin Place in Sydney, not need NZ branches, nor a New Zealand dollar clearing account with the Reserve Bank of NZ?

(That's enough maybes for one paragraph – Ed)

Fair enough, but it is a pivotal moment in NZ banking to have one of our oldest and largest declare that it may not be worthwhile participating in this country any longer.

It's a safe assumption that Westpac will not be the government's banker once the current agreement lapses!

Confidence in Banking systems - Contrary to one of my 'maybes' above, about disliking the increased regulatory tension across NZ banking, our central bank is entitled to some pride in its work, recently winning the 'Payments and Market Infrastructure (Wholesale) Award' at the Central Banking Publications annual awards.

The RBNZ had only just finished a major upgrade shortly before Covid19 tested the way we all function when forced to do so differently.

I hope the new systems are ready for a 'plug and play' settlement portal to a variety of digital currency options that seem to be emerging across the world's central banks.

I'll be more than pleased if the day comes when I can make a payment in another country by tapping a card, or phone, and know that with very modest transaction costs my local (travel) payment will be made and the final debit will turn up in my currency of choice (NZ dollars whilst working here).

Foreign exchange the old way, with its huge profit margins to the banks, needs to be superseded and its technology that will get us there.

EVER THE OPTIMIST

In a good sign about banking stability and perceived economic improvement banking regulators are beginning to approve increases to dividends paid out by banks.

ETO II – Vaccinations

With all due respect to our handling of the Covid19 risk to our population, we haven't been all that impressive at vaccine time.

In the 24 hours between Friday and Saturday the 'world' vaccinated 3x our total population!

Global Data:

Vaccinations delivered – 652 million

Total (recorded) Corona Virus cases – 131 million

Active Cases – 22.7 million

Daily rate of new cases – 700,000 (rising, with Brazil the main problem)

People in serious condition – 97,000

Daily Deaths – about 11,500

UK and Israel deserve applause for their vaccine rollout data and make it very clear that health and economic progress will be a function of vaccination delivery.

UK daily infections once in the tens of thousands are now just below 4,000, active cases once at 2 million are now 350,000 and daily deaths once at 2,000 are now well below 100.

The same data for Israel: daily infections 500 (was 5-10,000), active cases 9,000 (was 70-80,000) and daily deaths 10-20 (was 75-100).

Israel's data continues to confirm that vaccination of the population becomes hard once you reach 50-60% (they are stalling at about 58%).

Investment Opportunities

Listening…. – Who shall be next to invite investors to a new opportunity?

TRAVEL

Edward will be in Blenheim on April 15, in Auckland on April 29 (Albany) & April 30 (Remuera). He also plans to be in Auckland on June 10 & June 11, Napier on June 24 & June 25 and in Nelson in July.

Johnny will be in Christchurch on April 28 and again each month in May and June. He plans to visit Tauranga in May (dates to be advised).

David will be in Palmerston North on April 21, Kerikeri May 6 and Whangarei May 7.

Kevin will be in Timaru on April 27.

Michael will be in Auckland on Tuesday 4 May (Milford).

If you would like to make an appointment, please contact our office.

Mike Warrington 

Chris Lee & Partners

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