Chris Lee & Partners Ltd

Market News 29 August 2022

New Zealand seems to be gaining a reminder that the ability to pay is a function of the ability to produce.

We have been, temporarily I hope, attempting to increase pay by reducing the supply of workers (scarcity).

A scarcity of producers, and higher pricing, doesn't lead to greater production.

It was nice to see the government begin to acknowledge this fact with recent changes to the allowable immigration numbers.

INVESTMENT OPINION

Inflation – The media channels are competing to publish the ''most'' headlines relating to the ever-increasing inflation forecasts from the many who wish to be heard (read? – Ed)

The ''winner'' so far is Citibank with its 18% inflation forecast for the UK.

The central bankers are hoping it won't come true.

The bond markets aren't buying into this level of hype. The UK yield curve for government bonds is currently:

1 year – 2.48%

5 years – 2.51%

10 years – 2.56%

30 years – 2.89%

You cannot fight 18% inflation with 2.50% interest rates.

Citibank's opinion involved ''pen and paper'' with a buildup of data and opinion, then publication, but the bond market involves constant decision making over billions of dollars.

I prefer to put my trust in the latter; it's real time and real money.

The US bond market has accepted that they were a little too quick to assume the Federal Reserve would ease off monetary tension soon, based on recessions being visible.  In response to this evolved viewpoint longer term US Interest rates (yields) have increased by about 0.50% from the lows.

They now sit at:

1 year – 3.30%

5 years – 3.15%

10 years – 3.03%

30 years – 3.25%

Again, 3.00% interest rates don't fight 9.00% inflation successfully.

Both nations seem to think they are fighting pending inflation of 3-5% which will subsequently settle back toward the 2.00% level. On this point I agree with those commentators grabbing the headlines; it is rather hard to believe inflation will settle back down to 2.00%.

However, don't jump to assume I mean that interest rates will rise above inflation, where they belong, so as to offer a positive real return when lending money. I am not confident about this at all from the major Western economies.

Currently I think interest rates will rarely rise above inflation during the years immediately ahead of us and thus the fixed interest asset class must grapple with the prospect of negative real returns.

This is not a good situation for savers, but it is consistent with how highly indebted nations are behaving; they try to inflate away their obligations.

Yesterday's debts shrink when they become tomorrow's obligations (value).

Yes, fixed interest investing always belongs in a portfolio for its stability but keep an eye on the overall productivity (real returns) of your portfolio across the combination of asset classes.

Jackson Hole – In a very brief speech at Jackson Hole's meeting of central bankers, which media are cheerfully labeling as the ''8 minute speech'', US Federal Reserve Chair Jerome Powell put straight those with illusions about a pending need for interest rate cuts.

Such is the powerful influence of this person and of this central bank that a few choice words were all that markets required to adjust their course to ''magnetic Powell''.

The US share market fell 3.00% and short-term interest rates increased by about 0.50%.

I suspect that almost all those with bullish speculative trading positions were unwound on Friday during the aggressive down day. There may be a little more selling to come but investor optimism had not been as strong as that of traders.

Remember that US inflation is still 8.50% so taking the fight to it with interest rates ''only'' at 3.00% (as they are, across the US curve) is hardly a punishing regime of monetary policy tension.

Also remember the maxim: Never fight the Fed.

Financial markets had convinced themselves that it was time to lead the US Federal Reserve board members to believe recessions were imminent and rate cuts would be required.

How conventional of these thinkers to believe such forecasts.

The problem is that we are not operating conventionally at present and haven't been doing so for several years.

Investors would be wise to maintain their expectations that interest rates will be held a little above current levels, for longer than US commentators believe (read all of 2023). Forecasts beyond the coming 12 months are hazy at best.

If, as I suspect, interest rates are held ''near'' to inflation forecast levels it will be a long period of poor real returns for the fixed interest portions of a portfolio.

I just don't sense that central bankers are brave enough to bring positive real returns back to you, and nothing in the 8 minute speech changed that.

100% Renewable – Genesis controlled electricity supplier, Ecoctricity, has won the contract to supply Microsoft's data centres with electricity.

Within the agreement they assure 100% supply of renewable electricity, to meet Microsoft's neutral (2025) then negative (2030) emissions targets.

The intent of supplier and user are commendable.

However, I was curious to know how one delivers certified 100% renewable electricity without compromising the percentage of renewable electricity reaching other less demanding electricity consumers?

Electrons are not colour coded, so those that reach the grid exit point can't easily be measured.

When the lakes are low, the wind stops and clouds are blocking the sun, it will remain vital that New Zealand delivers electricity to Microsoft's data centres.

The answer is that the likes of Ecotricity will purchase carbon credits under the NZ Emissions Trading Scheme if they measure that they were required to access some fossil fuel generated electricity.

Before you jump to criticize this as a cover up of the 10-15% fossil fuel use in our electricity generation sector, Genesis Energy especially, I think a better perspective is to conclude that Microsoft is displaying a high level of respect for the integrity of the NZ Emissions Trading Scheme (ETS).

It is worth reminding readers that Microsoft is listed as the world's 3rd largest company (by value).

The NZ ETS, and its variable pricing, should be applying sufficient penalty and reward to progressively steer industry (electricity in this case) toward outcomes that are better for the environment.

Clearly Genesis Energy and Microsoft think these improvements will occur, otherwise one loses value (Genesis) and one loses face (Microsoft).

Kiwibank – I could see New Zealanders sitting confused on the couch last week when the politicians proudly announced that the government has taken 100% control of Kiwibank.

Didn't we already own 100%?

The next day someone like Garrick Tremain would have had a field day within a cartoon series.

Yes, Jim Anderton initiated the government owned bank. The National government of the day launched it and to this day it has been 100% government owned.

Initially it was held via NZ Post.

Subsequently NZ Post shared the record of ownership with ACC and Guardians of NZ Superannuation, which was an excellent idea and drew in some far more suitable minds to the governance process for investment in a bank.

I once asked that the government allow Kiwisaver funds to join the share register as part owners and capital providers. I enjoyed my usual level of success in negotiating with the government via this newsletter.

Maybe ACC and NZ Super have made too many commercial demands of the bank, with some of the go-forward proposals requiring participation from more external capital providers.

I read that NZ Super had indeed said it wanted to invest more and push the bank harder, but also allow private investors to become involved.

This makes sense. NZ Super CEO Matt Whineray wants all of their investments to be pursuing and delivering above average performance metrics.

Kiwibank was not doing so.

''Privatisation'' someone screamed in the Beehive.

Well, why not the Mixed Ownership Model (51% retained by the crown) that has been so successful with other businesses?

If the government had owned 100% of Air New Zealand the financial losses over the past three years would have been twice as large. They achieved the level of influence that they sought with only a 51% shareholding.

Our government likes the public to save funds and invest them privately (Kiwisaver) but it does not like the concept of ''our bank'' inviting private investment.

Funny old world.

Clearly this situation was a bridge too far for the Minister of Finance and Cabinet.

At the very moment that Kiwibank was about to be challenged by skilled decision makers to improve its performance the government has stepped in to stop that from happening.

Central government has ''found'' yet another $2.1 billion and ''released'' NZ Post, ACC and NZ Super from their investment risks and financial expectations by ''purchasing'' their Kiwibank shares from them.

I don't recall whether ACC and NZ Super paid for their shareholdings, providing capital to NZ Post, or whether the government paid the sums, quietly adding capital to both ACC and NZ Super balance sheets.

Does anywhere out there really know?

Regardless of the perspective about this relatively pointless news item, it's all smoke and mirrors.

Just ask the person on the couch watching the news last week.

My only concern now is that the government which thinks it is good at governing and managing health systems and house building businesses now think they can run a bank well.

Investors must continue to allocate their capital to the likes of Heartland Bank, ANZ and Westpac (listed on the NZX) to compete with Kiwibank, and likely succeed, relatively speaking.

Putin's War – One useful consequence of Vladimir Putin's war in Ukraine is the acceleration of moves to produce more renewable electricity globally.

Germany is boosting its use of solar power, and frankly I think they should revisit their decision to exit nuclear power, as Japan has just done.

Japan plans to build new reactors.

The US has introduced its largest ever subsidy for steering preferred outcomes in the renewable electricity space (Infratil investors should be pleased to already be upon this ''wave'').

Sadly, but presumably with some prescience, Warren Buffett thinks this energy evolution will be slow because he has made aggressive investments into the oil sector.

Ever The Optimist

Unlike Europe, New Zealand should not experience a shortage of electricity generation capacity in the months ahead because the snowpack in the South Island is currently sitting at its upper quartile level, especially in the important Waitaki catchment.

Investment Opportunities

September now looks busy for investors.

Transpower – is ''considering'' an offer of a new 5-year bond next week.

They are a State Owned Enterprise, which own and operate the national electricity grid and thus can be considered as a very low risk entity to lend money to. The bond will have a high level of liquidity.

Based on the current market for their other bonds you should expect an interest rate close to 4.45%. Investors will incur brokerage costs.

We will establish a list. Investors are welcome to join this list now, in preparation for the offer next week.

Westpac Bank – is ''considering'' offering you a new subordinated bond, being Tier 2, with a 10-year term and a possible repayment after 5 years.

Current market conditions should see this investment offer a return near 5.50% for the initial 5-year period.

We will establish a list. Investors are welcome to join this list now, in preparation for the offer next week.

Napier Port (NPH) – has announced that they would like to bring a new bond to market in the week of 12 September.

More details are expected to be announced this week.

Heartland Bank (HGH) – is in the midst of a share placement raising new equity for their expansion into Australia, and next in sequence the bank has a bond maturing on 1 September which a betting man would expect them to offer a reinvestment for.

Manawa Energy bond (MNW190) – Thank you to all who participated in this bond offer last week.

Manawa successfully issued $100 million and set the interest rate at 5.36%.

Now it is the turn of the Exchange investors to consider the offer to reinvest their maturing MNW150 bonds. We encourage you to act immediately if you choose to participate.

Travel

Edward will be in Auckland on 31 August (Ellerslie) and 1 September (City).

In September, he will be in Blenheim on Thursday 8 and Nelson on Friday 9 and in Napier on both Thursday 22 (Mission Estate) and Friday 23 (Crown Hotel)

Chris has two available times in Queenstown on September 9.

David Colman is planning trips to Whanganui and Palmerston North.

Please let us know if you would like an appointment.

Michael Warrington

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Market News 22 August 2022

Herewith, a tale about economic productivity.

Dear government departments,

I understand the desire to make greater use of technology to improve productivity.

However, please refrain from sending me emails or text messages that explicitly tell me I cannot reply but must try to contact a human in the department!

Even though the government employee roll has grown sharply over recent years, the ability to access them has declined.

If the use of technology is only one way (outward), and the humans cannot be reached, then productivity has actually declined whilst the costs have increased which is not the outcome you were seeking.

Addendum:

Dear commercial businesses,

Make an effort to observe the date of birth of your customers and find a way to provide better relative access to staff for those in the higher age brackets because they are less likely to be confidently using technology services.

None of this is rocket science, which is partly why Peter Beck saw no need to offer his services to improving communications divisions for government or commerce.

Get the simple stuff right before you go after the complex or leveraged solutions.

INVESTMENT OPINION

Tiwai – Three cheers for the NZ Electricity Authority (EA).

The EA has made an urgent amendment to the Electricity Industry Participation Code impacting contracts offered by generators for more than 150 megawatts.

The updated code means power companies would not be able to strike a new power-supply deal to allow the Tiwai Point aluminium smelter to stay open beyond the end of 2024, without its approval.

The EA previously noted that households were paying more for their power as a direct result of the prior supply agreements to the Tiwai smelter.

You can read into this that the EA will not approve a major power supply agreement that has a negative influence on power consumers widely.

I hope all the smaller electricity retailers are now joining the demand side and offering to buy fixed term, future supply volumes, to provide assured supply and pricing for their retail customers (think Flick Electric, Electric Kiwi etc) because they were previously squeezed out of expansion strategies by the wholesale market tension.

Again, three cheers for the NZ Electricity Authority.

Reserve Bank of NZ – I'd wager that last Wednesday most readers were more interested in the announcement about the All Blacks coach than the latest monetary policy statement from the central bank.

The rugby decision presented more uncertainty.

Side Note – to Microsoft and Google, who read what I write in real time, and try to correct my spelling and grammar, please don't ask me to hyphenate the pronoun and brand that is the All Blacks.

If Silver Lake is willing to invest NZ$200 million for an 8.58% stake in the All Blacks it is clearly the name of a respected brand (this week – Ed).

It is a lesson to young entrepreneurs. On day one you dress them all in the same uniforms, and one day you will have created a brand if you perform well.

I should return to the price of money discussion, being more relevant to you as investors.

Governor Adrian Orr increased the Official Cash Rate (OCR) by the highly anticipated 0.50% bringing the OCR to 3.00%.

Orr also reinforced the fact that based on current influences and data they intend to continue increasing the OCR until it reaches 4.00%, just in time for Christmas; a gift that keeps giving, if you're an investor.

The monetary policy committee has a little more confidence in inflation settling than I do.

The reality of inflation discovery is that you'll just have to wait and see.

A couple of things that you can be sure of, from folk who will ignore the wishes of the central bank, is that councils will increase Rates faster than inflation and so will insurance companies with their premiums.

The immediate response to the OCR review was little or no change to interest rates across the NZ yield curve (from 90 days to 10 years) because the announcement was almost entirely as predicted.

A greater change came overnight (interest rates up for longer terms) when the UK reported a higher inflation outcome than markets had expected.

The US yield curve has made its way back up to being just over 3.00% for most terms. It will be nice for investors if this new move higher for interest rates helps returns back above 5.00% in New Zealand for our longer-term bonds.

There's a reasonable chance this happens because I am inclined to agree with the recently retired member of the NY Federal Reserve (William Dudley) who thinks financial markets are misunderstanding the US Federal Reserve's intentions and are looking for easier conditions (lower interest rates) too quickly.

Markets currently think (have priced in) that we have seen, or had described to us, the point of greatest monetary tension, being a Fed Funds rate high of about 3.65% in April 2023 followed by cuts to interest rates thereafter (3.25% by December 2023).

Dudley highlighted the importance of not allowing higher inflation expectations to be embedded into the economy and this will take a more sustained period of monetary tension than just a few months.

He wisely offered this balanced opinion, ''if the Fed chooses to look through some of the transitory nature of an inflation spike, then they must also look through transitory periods of weakness''.

Current increases to wages are well above the long term 2% goal for inflation and this must be confronted with monetary tension for an extended period if inflation is to be settled back into the target range.

Dudley reminded us of New Zealand's folly in asking a central bank to focus on growth and good employment outcomes by literally saying that in the US the Fed must keep monetary tension high until unemployment increases.

That's what monetary independence looks like.

Meanwhile here in New Zealand, we know we are heading for a 4.00% OCR and the market is not yet predicting a need for interest rate cuts.

The latest monetary policy announcement from our Reserve Bank was important but unsurprising and therefore will bring little change to your investment strategies.

Meanwhile in China – The People' Bank of China has cut interest rates.

It appears to be an act of steering economic temperament, not a meaningful change to monetary conditions, because the move was only 0.10% in scale.

I once believed that it would be nice if our central bank reached a point of ''control'' that enabled them to make 0.10% adjustments to the NZ Official Cash Rate (OCR) and to do so frequently. However, at this stage the economic disruption is of such a scale that 0.10% increments will be laughed at.

In China's case, massive Covid related lockdowns and overinvestment in property development have resulted in some pretty stark declines in economic confidence for the country.

The folk who are rebelling against paying their mortgages on undelivered properties don't care if the interest rate is 10% or 0.10%.

It is nice to see more variation in the actions being taken globally by central banks. It represents the truth of less globalisation and differing economic performance.

It became a bit boring when all central banks were doing the same thing.

Gold – One thing that central banks must be happy about is the settling down of liquidity tensions, seeing money move more freely.

I mentioned recently that the decline in gold swaps transactions by the Bank for International Settlements (BIS) appeared to represent good news about global liquidity, given my speculation that gold was being actively used as collateral internationally.

The BIS won't offer any detail about the rise and fall of the use of gold swaps, so I think my conclusion is the most rational one.

Last week the BIS reported that use of gold swaps had fallen from 202 tonnes in June (down from a high above 500 tonnes in 2021) to a new low of 52 tonnes; that's a 90% decline in one year.

Another item I read described that Basel III banking regulations affected the way gold was recognised as an asset (presumably made it worse) and this likely influenced declining use of gold on a bank's balance sheet.

For the gold bugs, no, I cannot see any correlation between the BIS participation in gold markets and the evolving price of gold over the past few years.

I hope the BIS departure from this market is simply a sign that banking risk is declining and liquidity facilitation is improving.

 

Interesting Fact – The Norwegian government's savings ethic is so good, into the sovereign wealth fund, that they own the equivalent of 1.3% of all shares listed globally!

I hope they talk in percentage terms at performance meetings, because for a US$1.3 trillion fund their half year performance would otherwise have been about value loss of US$174 billion since January!

For relativity, the well performing (top 3 in sovereign wealth funds) NZ Super Fund is currently US$35 billion in size.

 

Resignations – How do you know when a company you own isn't doing so well?

Sometimes it is quite difficult to discern whether a business is performing well, especially in between reporting cycles, but sometimes it is not difficult at all.

If most of a company's directors resign and then its external auditor resigns, investors have some very clear information to define the current performance of that company.

NZ Automotive Investments Ltd is the case study to which I refer.

 

Ever The Optimist

The expansion into dairy derivatives with SGX Commodities is bearing more fruit for the NZX with an ongoing increase to market volumes.

In turn, this is adding more tools for dairy farmers to proactively manage their financial risks and thus reduce the volatility of the milk price on their business throughout any calendar year.

ETO II

The US is supporting global efforts (G20) to establish 15% minimum corporate tax rates by legislating such changes in its jurisdiction.

Investment Opportunities

Manawa Energy bond – MNW has confirmed its offer ($125 million, plus $25m oversubscriptions)) of a new 5-year senior bond, maturing on 8 September 2027.

The offer includes $75 million for new investors (open now, closes 15 August) and $50 million for ''Exchange'' by holders of the MNW150 bonds maturing on 15 December 2022 (open 26 August, closes 2 September).

There are $128 million MNW150 maturing, but only $50 million available for Exchange. Scaling will occur if demand exceeds supply. Prompt exchange responses may be rewarded during the process.

The interest rate will be set on Thursday, but the good news is that a minimum interest rate has been set at 5.00%.

With an indicative credit margin of 1.40% to 1.60% the estimated interest rate might be 5.20% based on today's market conditions.

If you wish to invest in the new bond offer please advise us of your firm allocation request by 5pm this Wednesday.

 

Travel

Edward will be in Wellington on Thursday 25 August (Featherston Street); and in Auckland on 31 August (Ellerslie) and 1 September (City).

In September, he will be in Blenheim on Thursday 8 and Nelson on Friday 9 and in Napier on both Thursday 22 (Mission Estate) and Friday 23 (Crown Hotel)

Chris will has two available vacancies in Ashburton on September 7 (a.m.) and one in Timaru (p.m.) on September 7.

David Colman will be in Lower Hutt on Friday 26 August and is planning trips to Whanganui and Palmerston North.

Please let us know if you would like an appointment.

 

 

 

Michael Warrington

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Market News 15 August 2022

I was about to happily record here that even the US, the world's largest economy, is finally on board with legislative support for climate change behaviours.

Try Googling the unusual nickname – Inflation Reduction Act 2022. Have a read; it is an important development for the world (environmental and investment).

I pondered whether this new law, that the market wasn't confident would happen, has energised investment in renewable energy projects and that this is the secondary driver of recent share market's confidence alongside the period of lower interest rates.

Legislative support combined with a lower cost of funds are powerful investment drivers.

However, during the very same weekend China, the world's second largest economy, withdrew from its climate cooperation agreement with the US.

China's poor decision is a reaction to Nancy Pelosi's visit to Taiwan.

Sadly, this continues to confirm that egotistical and political influences rank ahead of good long-term decision making.

It's yet another example of poor leadership from those in the most powerful positions.

INVESTMENT OPINION

MPS – You may be tiring of the incessant flow of ''monetary policy'' meetings but it is wise to take a breath and maintain the focus because central bank decisions are one of the greatest influences on your investment portfolio.

This week (Wednesday) our central bank monetary policy committee meets again to deliver a full Monetary Policy Statement (not just a review of the Official Cash Rate).

The market seems ready for a +0.50% increase to the OCR and then a future of +0.25% increases until the RBNZ is satisfied that controllable inflation is subsiding (currently 4.00% is the expected terminal OCR point).

The US yield curve currently thinks that interest rates with a high point of 3.00% are the appropriate level for the current US economy, with most terms offering a return close to that point.

The US yield curve is beginning to predict a decline in interest rates beginning in a couple of years; interest rates rise up until the 2-year term but then fall 0.50% out to the 10-year term (negative slope). This is a reasonably steep rate of change (decline) for the US yield curve, so some strong views are being formed.

Last week's US inflation data was a little lower than forecast. US inflation expectations are falling, with 12 months hence being +6.00% and 36 months hence being 3.00%.

Even if these optimistic Americans are correct, the journey from 2% inflation, to 6% and back to 3% over three years will have added about 9% to general pricing in the economy over that period, relative to the 2% central inflation target. No bond returns will have kept up with this damaging period.

I think you should still factor in an expectation for monetary conditions to continue tightening until 2023; this fight isn't over yet.

Small gains, such as the modest decline in the price of oil, won't alter a monetary policy course. Neither should they; I don't want OPEC or Russia to have any direct influence over our monetary policy decisions.

What I would like to see though is meaningful progress in the reduction of the RBNZ balance sheet (inflated during the money printing days).

This means that the NZ government needs to show capacity for surpluses, to repay bonds as they mature (NZ$16 billion mature on 15 April 2023) and, more importantly, to show that the funds can be re-borrowed from investors at real market pricing.

If I was governor of the Reserve Bank, I would already be preparing to sell some of the central bank's bonds during future bond tenders, used to raise fresh cash for our government.

I would broadcast to the market that the government wished to borrow, say, $3 billion of new money and that the central bank would be selling, say, $1 billion bonds from its portfolio.

We are such a small nation, with a good governance reputation, that I don't think raising the demand would be a problem.

If it was a problem, it would be a huge signal to the NZ government to steer the finances in a more conservative direction.

The governor has been getting a tough time lately, so I'll spare him my Dear Adrian letter.

Post Script – Would you like to know what an aggressive monetary policy looks like?

Argentina has increased its official 28-day rate to 69.50% in its fight against 70% inflation!

Bluff – As a Stuff article highlighted recently, Bluff is an ironic title for the next round of electricity price negotiations between Rio Tinto (aluminium smelter) and Meridian Energy.

No corporate negotiations are easy but this one should be easier than many before it.

One thing is certain, the government should stay out of the pricing negotiations, other than to insist on seeing action with Rio Tinto's site cleanup obligations.

Transpower has now completed the capacity upgrades between the Clutha District and the Waitaki District (think Benmore, zero node point and its HVDC link to the North Island). I rode past to check progress in March (Dansey's Pass) and took a few photos.

You and I paid for this upgrade, so now we want some return from the investment.

That return can come through better returns from the 51% taxpayer-owned Meridian Energy plus more reliable electricity supply to the North Island.

The starting point for electricity pricing to the smelter should be to recapture the prior discount that bothered me so much. I understand the current supply agreement is about $35 MWh, $20 below the $55 MWh cap in the old agreement, so a few years at $75 MWh is a neutral outcome.

As you can sense, I am demanding a positive outcome for New Zealand given the past behaviour of Rio Tinto, so I want a higher price!

For your observation, the wholesale price on the spot market has ranged between $80-$300 MWh (spikes excluded) over the past two years.

The silver lining to the constant rainfall recently (full lakes) and strong winds means that the price of electricity is lower at present ($30-50 MWh). As I write, our renewables generation is delivering 92% of the country's electricity consumption.

Rio Tinto won't be making payments to the public to increase ''our'' returns, so either ''we'' gain access to lower electricity pricing (share in the electricity supply from Manapouri), or the pricing that Rio Tinto pays encourages electricity generators to develop new renewable generation capacity to help with lower, and more stable pricing for the nation's electricity supply.

In an ESG trending world, Rio Tinto benefits from being able to show production based on 100% renewable electricity supplies. This good ESG assistance should begin to show up in its aluminium sales and thus pass through to this nation for providing that renewable electricity.

If a higher price results in Rio Tinto running fewer of the smelter's pots (until higher aluminium pricing occurs) then so be it; I'll be pleased to send some of the electricity supply North and reduce the use of coal and gas in the generation mix to avoid brown out risks, which we have gone close to twice over the past year.

The longer we can store coal and gas reserves, the better. They are an essential battery item for our electricity supply and thus managing our economic success.

As a note to Noel Barclay, CEO of Meridian Energy, may I suggest that you put an enormous poster on your boardroom wall, where negotiations with Rio occur, displaying hundreds of thousands of New Zealanders watching over the meetings.

Rio Tinto's cancellation of its prior electricity supply agreement (capped at $55/MWh until 2030) is beginning to look short sighted, or an error during previous negotiations. Maybe it was the only success gained by Meridian and the NZ government at that point?

One equity analyst suggested that Meridian could agree to an electricity price that adjusts based on the strength of the aluminium price for Rio. I wouldn't be keen on transferring such an equity risk from Rio to Meridian (51% taxpayers) without a suitably high electricity price to generate additional equity returns from such an exposure.

I assume that Meridian Energy now knows as much about the aluminium market as Rio Tinto and thus is well positioned to call their ''Bluff'' during the upcoming negotiations.

ETF – From time to time I gather information about the NZX Smart Shares funds, both to understand the ongoing success of this portion of the NZX business, but also to try and identify any investment behaviour trends.

The following are some simple anecdotes that can be seen:

ETF use continues to grow in NZ (units held). Even though many values in the market (shares and bonds) are lower now, the gross sum of funds under management today is back close to the high point in January when contributing investment values were much higher.

An ETF is not New Zealand's preferred method for managing fixed interest risks. Fixed Interest ETFs only represent about 23% of total funds and have been between 20-25% for the entire history of the data that I see. This makes sense to me as I think investors should try to avoid or minimise the impost of annual fees on fixed interest investing which is simpler to self-manage.

The jurisdiction of assets is 45% in New Zealand risks (drifting lower) and 55% international (drifting higher). This makes sense to me also, given the comfort of local leaning investment and having local liabilities (spending requirements), even though the New Zealand economy is tiny on the global stage.

I expect to see use of international funds drift higher over time partly because I think they will outperform NZ but also because the scale of Kiwisaver balances will become so large that international diversity increases by necessity.

Demand for the ESG stable of funds rose quickly once they were introduced but demand has now plateaued at about 5% of total funds handled by Smart Shares.

This surprised me a little; I thought the movement had more capacity than this. I expect it to grow further but it seems that investment performance matters too, as it should, and evidence will be required to display any advantage that regulations provide to ESG oriented businesses.*

*Examples of such regulatory advantage exist. Witness the US subsidies being introduced by President Biden to encourage more development and better consumer behaviours in the renewable electricity sector. (No wonder Infratil likes the space.)

This is slow moving tidal information, but I find it interesting and helpful.

Volatility – The anecdote that is the Volatility Index (VIX) has been declining since high points in May and June (34%) and it is now approaching what I'd describe as the post-Covid average of 18% (19.50% as I write).

Long periods between 15%-18% occur when capital markets feel confident with financial control and hence stability across the economy.

Consistent with the VIX pricing is the declining price of shipping around the world; the Baltic Dry Shipping index is returning to its longer-term pricing level.

Clearly the political indices are not settled, so all we need now is for the likes of Xi, Biden, Putin, Erdogan etc to pull their heads in and govern for the greater good instead of their egotistical games.

They can play Risk, Hegemony III or Global Domination online without doing real damage during their short lives on the planet!

Inflation Hedging – It is hard to truly protect yourself against the financial impact of inflation, but it is important to keep looking for ways to do so.

Living in a retirement village and investing in banking shares seems likely to contribute to an inflation hedging strategy.

I certainly think it is true that if a retired person is concerned about rising accommodation costs they will benefit from fixing those costs and passing the property price risk to an investor; this is the model used for residents by most retirement villages.

Then, I observe that the rising cost of living is increasing the use of home equity release lending to cope with life's costs (data from NZ specialist Heartland Bank) upon which a bank tries to expand its business scale (and thus profits).

No, it's not ideal to borrow for meeting life's expenses but there will always be a proportion of society forced to do so. It's nice to know that such facilities exist, especially given the enormous increases in equity stored in a home and capital spending is one appropriate method of meeting financial obligations.

Both the retirement villages and banks are enabling people to extract value from the equity in their residential properties, for a price, and it seems to me that the pricing offers some inflation protection to residents and investors.

If that ''price'' charged by investors rankles, then consider the strategy I referred to above: move into a retirement village but then invest in the shares of the villages and the banks!

Ever The Optimist

I am going to run with the counterintuitive here.

ASB Bank's profits (announced last week) should be celebrated.

You can't run the pale, male, stale and out of date argument either because ASB is run by a young lady (as is ANZ and TSB).

The radio was filled with upset about a bank making billions, but when you run a business that is NZ$120 billion in size, with huge risks to manage, a net profit margin of about 1% isn't excessive.

1% annual margins is what most of ''you'' are paying your Kiwisaver providers, who have far less business capital at risk.

The fact that ASB expanded lending volumes (private and commercial) during a period of dreadful legislation (Credit Contracts and Consumer Finance Act) deserves applause and confirms competitiveness.

From a financial stability perspective, the opposite (declining or negligible profits) would be a far greater concern.

Congratulations ASB and Vittoria Short.

Investment Opportunities

Manawa Energy – (previously known as Trustpower) has announced its intention to offer a new 5-year bond, opening next week.

It will invite investment from new investors and will offer an Exchange programme for investors holding the bond maturing in December (MNW150).

Using a yield curve plotted through the other Manawa Energy bonds on issue, investors should expect an interest rate on the new bond offer between 4.50% - 4.70% based on current market conditions.

On previous transactions the company has paid the brokerage costs (yet to be confirmed for this issue).

The secondary markets are always available for arranging new investments.

Travel

Johnny Lee will be in Christchurch on Wednesday 24 August (Russley Golf Club).

Edward will be in Wellington on Thursday 25 August (Featherston Street); and in Auckland on 31 August (Ellerslie), 1 September (North Shore) and 2 September (City).

In September, he will be in Blenheim on Thursday 8 and Nelson on Friday 9 and in Napier on Thursday 22.

Chris will be in Takapuna on August 16 (p.m.), in Ellerslie on August 17 (a.m.) and in Ellerslie on August 19 (a.m.). He has two available vacancies in Ashburton on September 7 (a.m.) and one in Timaru (p.m.) on September 7.

David Colman will be in Lower Hutt on Friday 26 August and is planning trips to Whanganui and Palmerston North.

Please let us know if you would like an appointment.

Michael Warrington

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Market News 8 August 2022

The financial media is describing Nancy Pelosi's trip to Taiwan as being one step closer to war with China.

If that turns out to be true it would be further evidence of very poor leadership on the part of China, the US and any others who choose to escalate the conversation publicly.

The public have become very absolute in the way they yell at each other across communication channels, but I expect more from leaders.

Good diplomacy involves very few absolute positions.

Financial market pricing will tell you more about the state of political tension over coming months than the media, so you don't need to read too many headlines to keep yourself updated.

INVESTMENT OPINION

RBA – The Australian central bank increased their official cash rate by the anticipated amount being +0.50% to 1.85% and they issued a supporting statement that could have been cut and paste from any of the western central banks of the world.

The RBA threw in some sailing parlance (even keel) and mixed it up a little by alternating between some fractions and some decimals. This aspect would have messed with my English teacher's head.

The only thing missing, just like the statements from the western peers, was an emoji of a human hand with crossed fingers.

The song sheet being passed around says: Inflation will pass through the pain point during 2022, then drift lower during 2023 and return to the targeted range (of stability) during 2024.

It's never that simple and it's never that well controlled; witness 2022 if you're after some evidence of central bank effectiveness.

BOE – The latest Bank of England monetary policy statement revealed more separation across jurisdictions relating to monetary risks as it increased the official cash rate by 0.50% to 1.75% last week but was starker than most with its future inflation warning.

Rather than paint a nice picture that consumers wish to hear, of calm control over inflation threats, the BOE forecasts that UK inflation will peak at 13.30% and then remain at that level throughout 2023.

I don't know that they'll be any more accurate than the other central banks, but it feels a little more honest.

US – The negative slope across the US yield curve is increasing in gradient.

Yes, short term interest rates are being increased, but weaker manufacturing data last week has endorsed the fears of the recession forecasters so longer-term interest rates are declining.

As you know, day (New Zealand) follows night (US) and we are enduring a similar evolution of interest rates locally.

I am very pleased for those of you who collected up bonds for your portfolio during the busy three months of issuance between May and July; the ASB 5-year senior bond at 5.52% was a particularly nice piece of timing for investors (these bonds now trade at a market yield of 4.25% barely one month later).

I hope you over-invested so you can now sit back and watch markets wander through what looks like a period of 'no man's land' wondering where the next surprise with financial impetus will emerge from.

Negative Yield Curve – Another thing that a negative yield might achieve in New Zealand could be to drive borrowers into longer mortgage terms as they identify the 'new' lowest interest rates available.

This is how borrowers behaved when the interest rate low point was 12-24 months.

Why wouldn't borrowers behave this way if floating mortgage rates were 5.75% but 3-years was 5.00% and 5-years was 4.75%?

I think this situation would be a very good development for financial stability.

Maybe the Reserve Bank could steer the use of its Funding for Lending Programme (FLP) to only offer terms of 3-5 years at a fixed rate to encourage banks to market this proposition to borrowers?

It seems that the majority (>90%) of NZ depositors refuse to extend their investing beyond 12 months, so this cash isn't ideal for long term mortgage lending.

China Property – The world's largest property developer, Evergrande, has failed to meet its own proposed debt restructuring deadline for its US$300 billion in debt obligations.

I might add that this number likely excludes the value (deficits) on any derivates used by Evergrande, with banks as counterparties. Derivatives are commonly used to manage large debt portfolios and these exposures are revalued daily and collateral is moved in the direction required by these revaluations.

In my experience users of capital, such as Evergrande, are always pushing to receive money inward when revaluations are in their favour so as to enhance the cash available within their business.

When the business is healthy, and revaluations require payment outward, such payments are made otherwise the bank counterparty clamps down hard, immediately.

As Evergrande lost financial health, they would have struggled to meet payment (or collateral) obligations. Banks who would have preferred cash will have begun to accept liquid collateral (such as any government bonds held), then illiquid collateral (such as equity in subsidiaries.

When these common forms of collateral run out the likes of Evergrande begin to offer the banks unusual collateral such as forward construction commitments from property buyers who have placed non-refundable deposits, and presumably this is followed by passwords to Bitcoin wallets (disclosure, that last one is a joke).

I watched at close quarters, as this sequence happened in 1998 with Long Term Capital Management's failure. Without new equity it becomes an inescapable death spiral.

Eventually the collateral cupboard is bare and by that point the banks, quickly followed by the markets, know that the business (such as Evergrande) is in trouble.

The banks have not yet told the markets about the scale of the derivative valuation problem and hope some mean reversion event will rescue them all from the edge of the abyss.

Eventually the banks must report to the central banks and risk to bank capital becomes a serious concern (losses for the banks).

Then….

The Chinese public, who had agreed to buy a property from Evergrande do one of the following:

Refuse to settle the new property (hurting Evergrande) because they see that cutting their losses at the deposit will be cheaper than buying the property; or

They refuse to service their mortgage as they blame the banks for forcing a collapse in the value of their property!

This part is really happening and is not made up by me.

You can see that this situation is not good for banks, or Evergrande.

It's hardly surprising that Evergrande missed its own deadline for restructuring its debts. Financiers know too much about any unreported lost value.

This is one of the ''excessive debt'' situations that we, and other commentators, refer to from time to time as a core concern for capital markets.

The Evergrande situation is a private sector debt problem, unlike the public sector item that is Sri Lanka (or many other countries) but given the way China functions it seems likely that the Evergrande situation will migrate from being a private problem to a public one.

Turkey – Again, not Sri Lanka, but it's related and here's some evidence.

Back when President Erdogan was flexing his unearned power (2015), and rejecting the displeasure of his one-time western friends, he ordered the return of Turkey's physical gold from the Federal Reserve Bank of New York and the Bank of England to the Central Bank of Turkey.

By 2018 almost all the physical gold had been returned to Turkey and the vaults of Borsa Istanbul.

Erdogan presumably knew he was going to ramp up tensions and didn't want access to their gold restricted.

However, in the political blink of the eye (5 years) Turkey realized they were in financial trouble and began moving the gold back to London to use it as collateral for borrowing foreign currency to meet its financial obligations with trading partners.

Remember that Sri Lanka ran out of foreign reserves, and gold it would seem.

When you look at a 10-year chart of the Turkish Lira to the US dollar it has always been deteriorating in value, however this accelerated in 2015, then jumped in 2018 as Erdogan became unhinged.

This situation was clearly suffocating Turkey and thus the gold was returned to London so it could be used as collateral.

Secured lending (gold as collateral via swap agreements) supports solvency but not financial success and the value of the Turkish Lira has fallen by two thirds since 2021.

This is yet another strand of evidence for those of you who read Bryce Wilkinson's piece about the dangers of the very high global debt levels. Sri Lanka has failed financially. Turkey is failing.

Oh, how I bet that Erdogan's opponents wish they had removed him from power and taken more steps to officially join the European Union and start using the Euro as their currency unit.

I'll finish this item on a positive note.

Given that gold is used as collateral for loans internationally (USD will be the dominant currency) and the Bank for International Settlements plays a central role in this collateralized lending (Gold Swaps), it is nice to report that the gross volume of these gold swaps is declining.

Use of gold swaps (collateralized loans) rose sharply from a 2019 low of 175 tonnes to around 500 million during and post Covid but are now on a gradual decline, now at 270 million (May 2022).

I apologise if this became a bit geeky but focus on the truth of financial mismanagement coming home to roost (Turkey) and that even though gold sits in a vault somewhere it can be, and is, used to secure loans of real cash around the world

APRA – In an example of being careful what you wish for, the Australian Prudential Regulatory Authority (APRA) is back-pedaling a little from the pressure it is applying to performance in the superannuation sector.

The Superannuation sector has responded by cutting fees to ensure they meet the performance test.

APRA doesn't want to start a 'race to the bottom' and rather strangely says that it doesn't see cost cutting as an acceptable approach!

APRA then goes to great lengths to try and re-explain the behaviour that they want to see, but this falls into the category of ''failed policy if it requires such lengthy explanation''.

Meanwhile in New Zealand, the Financial Markets Authority is in attack mode wanting fees lower. (smile)

As it happens, I agree that fees are a very important part of the long term net performance of investing, but I prefer detailed disclosure obligations and competition to gradually solve any problems, not constant missile launches from the regulators.

CBDC – I read an interesting perspective on the emergence of central bank digital currencies (CBDC) where the writer concluded they will undermine democracy because they introduce the potential for more regulated control of a person's spending choices.

The theory is that CBDC will be issued by a central bank, and that a citizen will have a credit balance and an ability to receive and spend CBDC.

This facility would remove commercial banks from the process and thus reduce the overall cost of banking to an economy.

However, this is where my optimistic view about CBDC departs from the writer who is concerned about democracy.

I don't think the central bank will want to offer banking services directly to the public. They already have too many obligations on their regulatory remit. Commercial banks will still provide me with an interface for banking services.

The central bank, and perhaps government, could define the service behaviour expected across CBDC use, making it clear that the public and trade should experience lower costs of banking.

Cash handling fees would immediately be introduced by the banks once CBDC is widely accessible!

The exception to my benevolent view, and evidence of the Canadian writer's concern, will be displayed if the first countries to get CBDC up and functioning widely across an economy are the world's communist and autocratic states!

You know the governments of the world will engage in increased control opportunities. Some of you may recall India's overnight removal of it's largest notes as legal tender in an effort to reduce tax evasion and crime and in hope that it would kick-start a digital payments environment (it didn't go very well).

Having said all of this, I still see a beneficial role for paper cash (anonymous and portable).

Ever The Optimist

Some of the massive financial gains being enjoyed by the oil industry are being enjoyed by their workers. Shell announced a one-off bonus at 8% of the person's salary to the vast majority of its staff.

Investment Opportunities

No news.

The secondary markets are always available for arranging new investments.

Travel

Johnny Lee will be in Christchurch on Wednesday 24 August (Russley Golf Club).

Edward will be in Wellington on Thursday 25 August (Featherston Street); and in Auckland on 31 August (Ellerslie), 1 September (North Shore) and 2 September (City).

In September, he will be in Blenheim on Thursday 8 and Nelson on Friday 9 and in Napier on Thursday 22.

Chris will be in Takapuna on August 16 (p.m.) and has several vacant times in Ellerslie on August 17 (a.m.) and in Ellerslie on August 19 (a.m.). He has two available vacancies in Ashburton on September 7 (a.m.) and one in Timaru (p.m.) on September 7.

David Colman will be in Lower Hutt on Friday 26 August and is planning trips to Whanganui and Palmerston North.

Please let us know if you would like an appointment.

Michael Warrington

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Market News 1 August 2022

Here's a sign that sanity is returning to commercial decision making.

Elon Musk and Tesla have sold their Bitcoin and now return to using regulated currencies to pay for cars.

INVESTMENT OPINION

US Federal Reserve (Fed) – The fifth meeting of the year for the Federal Open Market Committee to consider changes to the interest rate (Fed Funds) is complete and the Fed decided to increase the interest rate by 0.75% to 2.50%.

The Fed has now increased their overnight rate four times in five meetings and are forecast to do it again at their next meeting in late September, encouraging us to assess the potential for another +0.75% then, but they'll be realistic about data as it emerges.

The decisions made by the Fed have carried additional weight in the market both to confirm (again) how aggressive the US central bank wishes to become with tightening monetary policy and because it was the last review before the ''summer break'' timing for US markets (and workers).

This rate of increase was highly anticipated and thoroughly debated and so it brought only modest change to levels of long-term interest rates and the share market's pricing (index).

However, it is useful to highlight that long term interest declined a little after the announcement (10-year US Treasuries are well below 3.00%), approaching 2.70% yield following weak GDP data (-0.90% for the 2nd quarter).

Yes, long term interest rates can go down when short term interest rates are going up.

Also of interest to investors, the US share market indices rose after the FED meeting because the Fed Chair uttered a few soothing words; we are aware of the negative impact of the rate hikes on the economy.

The share market interpreted this as we won't suffocate the economy. So, the market now thinks that a lower cost of funds (nominal and real) is now locked in long term and the scale of the potential recession is modest (at this point in the available information).

As always, time will tell, and the story will keep evolving.

The views from the most credible analysts differ by virtue of their focal length, in my opinion.

Larry Summers, one time US Secretary of the Treasury, argues that the Fed is not tackling inflation with the force required.

Janet Yellen, one time Fed Chair and the current US Secretary of the Treasury, thinks settings are being handled well and doesn't see excessive economic risks in the forecasts.

Investors, responsible for making decisions with trillions of dollars are leaning slightly toward the Yellen conclusions (long bond yields are down a bit, share prices are up a bit); this may just be due to the natural optimism displayed by the human species.

I recently wrote a note about the high relativity between the price of oil and inflation data and that tentatively economic anecdotes implied that the price of oil should be stable or declining soon (by 2023). Oil producers don't benefit for long if they suffocate oil consumers.

The oil price has declined a little, which will be settling the nerves of the most inflation aware.

However, I do not think the central banks should ease off from this moment of monetary tightening in response to the oil price. There is so much more to the pricing of capital in an economy than a relativity to the price of oil and it is well past time that ''we'' remove the artificial settings for interest rates.

Consistent with this thinking, Europe is confronting a recession, driven by energy shortages (Russian supply behaviour) yet the European Central Bank (ECB) is increasing interest rates. To link these two things would perversely provide Vladimir Putin with a lever to influence ECB interest rates!

This is another link that needs to be kept distanced.

Financial markets have accepted the need for the changed monetary strategy, and it would be an error by central banks if they don't take advantage of this setting (acceptance) and continue to press forward with maneuvering interest rates back up to the point that they offer a positive real return/cost again.

I won't suggest that you now tilt the blinds, but markets may well enjoy a period of more calm (less volatility) as the Northern hemisphere summer breaks get underway.

The next meeting of the US Federal Reserve is due to be held on September 20-21.

NZ Dependence – We need to be careful with respect to our dependence on the world and always have local and personal strategies for reacting to undesirable risks and outcomes forced upon our economy.

In another anecdote of how small a country we are, and thus penalized by our lack of scale, Z Energy has confirmed that it will now close its biofuel production plant.

ZEL had been trialing its ability to produce biofuel to add to diesel and meet the upcoming government regulations for minimum bio content (from April 2023). However, they have discovered that it is uneconomic to produce their own relative to importing from the global market and access to supplies of tallow was unreliable (and volatile in pricing).

For your interest, the international price of tallow has increased from 20 cents per pound in 2020 to 80 cents/Lb now. A political cynic would be unsurprised by the price rise following governments regulating for compulsory use in fuels!

I'll re-word ZEL's announcement: It is too expensive to build our own plant and equipment to the necessary scale for supplying a small market like New Zealand and the input pricing brings too much risk for the capital being invested.

It won't be because the 'returns' are too low; it will be due to the high probability of losses now and for the foreseeable future.

Fuel regulations will allow the likes of ZEL to factor into fuel pricing the proportionate costs of imported biofuel and to do so at the international pricing level, and thus not involve the use of any ZEL capital placed at unnecessary pricing risk.

Remember too, that anything that is now ''Mike Bennetts said'' should also be interpreted as ''AMPOL insists'' and in the face of rising costs, and declining sales, now is not a time for the ''nice to have'' business strategies.

Part of the spike in local inflation relates to our trade and finance links to the rest of the world. The price of oil is the clearest example to all New Zealanders.

Those who read a little more deeply into financial matters may also have observed the global rush to hold US Dollars relative to all others, when financial and economic risks increase. The suppressed value of, in our case, the NZ dollar further increases the price we pay for imported goods and services. (Witness NZ's widening trade deficit)

These views from me, by oblique but relevant connection, are reinforced by a view expressed by Dr Bryce Wilkinson and Leonard Hong for the NZ Initiative in their report 'Walking the path to the next global financial crisis' (an excellent read for the economically curious who seek expert opinion).

Bryce and Leonard are very concerned (as the title alludes) about the excessive level of financial risk being carried in the major economies and the flow through risks this represents to New Zealand.

The anecdote in China where property owners are refusing to meet their debt servicing obligations, fearing that the value of their property is about to fall below the scale of their debt, is a real-life example of what Bryce and Leonard are concerned about.

Chinese property developers are already being bankrupted, but more money is going to be lost and the property owners are yelling that they don't want it to be them alone. Bankers and taxpayers are the only other two who can contribute, but if the banks share in the losses it places the Chinese banking system at greater risk and is a very similar scenario to the US triggered Global Financial Crisis.

Given that it is election time and wannabe demigod Xi Jinping wants to stay in the job I am betting that the taxpayers are going to support the communal good.

Bryce and Leonard conclude:

For small economies, prudent defensive measures are the only option. The New Zealand government should plan to restore Crown net worth and public net debt to prudent levels before the next crisis hits.

You'll note that the expectation of a next crisis isn't a probability, but a certainty for them.

If NZ does not pursue such a careful economic strategy, their subsequent recommendation to you is:

The less prudent the government, the more prudent individual New Zealanders will need to be. Borrowing heavily to buy property or shares at current prices is like playing Russian roulette with one's financial future. Portfolios should be diversified. There are risks of both deflation and inflation.

Regular readers will know I occasionally point out that hope is not a good investment strategy.

A strategy of hope today involves believing the world's largest economies will successfully navigate their way back from the point of excessive debt, and that the NZ government will follow a strategy to insulate us from global failure to perform.

There are some clever minds at work globally, but in my observation the political preferences overrule the analytical tilting outcomes toward risk, not reward.

So, at the risk of sounding a little biased; control what you can, make financial decisions according to a strategy linked to your personal situation and get some financial advice.

Green – Regardless of your perspective about climate influences it is important that ''we'' keep walking forward with the improvements (as investors and consumers) because reading global data generously provided by BP we have a long way to go.

Some interesting global statistics:

Renewable energy (ex hydro and nuclear) has increased to … (only) 13% of global generation, rising at about 0.8% per annum;

Wind and solar are the fastest rising (subsidised) now at 10% of generation, but are not reliable as base load generators;

Coal is drifting lower, but still contributes 36%;

Gas was increasing as a percentage (23%) although Russia's behaviour may impact this trend;

Without a reduction in energy consumption (Europe's next winter will be interesting) the world needs to increase nuclear energy again (currently about 10% of generation) if we are to reduce coal and gas use;

Given the importance of irrigation in food production, I'd like to believe the world will take more steps to increase water retention (dams, with generators) and thus increase the input of hydro;

Data like this will help Infratil investors to understand the director's investment focus in renewable energy supply.

Argentina – is not a 'Sri Lanka', but they are struggling financially all the same.

The Argentinian peso (ARS) continues to decline, as the desired US dollar simultaneously strengthens.

When you look at pricing charts it has been an almost one-way track from 5 ARS per USD 10 years ago, to 15 ARS 5 years ago, to now being ARS130 (officially).

The black market confirms the difficulty in actually accessing USD (paper notes) because the reported price in the black market (not via US banking system) is ARS350.

No wonder the retailers always preferred to receive USD cash from us when we were travelling there 5 years ago. Even with an expensive airfare it would be much cheaper to travel to Argentina again now.

Currency movement, and sustained price trends relative to the USD, are very important signals that governments of the day should reflect upon as they make decisions that influence the economic performance and potential of the country.

The market thinks that Argentina has been making poor decisions for the past decade.

Argentinian government bonds now trade at yields of 40% and are signaling a high probability of default (again) and they are not yet showing signs of fighting inflation.

The neighbouring Chilean peso has also lost value over time, but at a far slower rate (minus 40% over the decade).

Chilean government bond yields are about 6.80% and they are engaging in tighter monetary policy to take the fight to inflation.

The New Zealand dollar has lost about 33% over the same time frame.

Some of this currency weakness for the NZD relates to interest rate differentials, but some is also due to weaker economic performance and frankly I'd quite like to see NZ focus on improving this latter issue and not ignore the financial signal.

Ever The Optimist

Samsung reports up to 45% reduction in energy consumption for its latest semiconductor chip design, reported as being a nearly invisible 3 nanometers in size.

I looked up a relativity reference – human hair is 60,000 nanometers.

Infratil – Continues to 'show' investors good form, in a market that drags its heels with acknowledging their investment performance (by discounting the share price).

The recent capital raise for Longroad Energy (part of the portfolio) was completed at a valuation at 3.6x that offered by independent valuers for 31 March 2022, and 1.16x the 30 June 2022 value (in the midst of negotiations).

I don't blame investors for placing reliance on third party valuations, but those valuers should be taking a good look at their processes and investors should contemplate the relativity between building future value and the immediacy of their demands for value to be delivered before accepting it as a truth.

Infratil CEO, Jason Boyes, rightly too the opportunity to say:

This transaction, alongside the sale of Vodafone New Zealand's passive mobile towers announced in July, continues the trend of private market valuations of infrastructure assets for like-minded, long-term investors exceeding listed market consensus.

On behalf of our clients, I'll take the opportunity to thank Paul Gaynor (Longroad CEO) and the Infratil (Morrison & Co) team for the recurrence of their outstanding performance.

ETO II

A Finnish business (Vatajankoski) has developed a ''battery'' of sand to store heat (from renewable generation) for redistribution over periods as long as months.

The stored heat can be used for both home heating and electricity generation (no description about energy loss during storage or conversion).

Ultimately the scientists will rescue us.

Investment Opportunities

Nothing has yet been announced but businesses are always planning for new debt and capital activity, so keep your eyes on our newsletters, or emails to All New Issues group (all are welcome to join this group via our website).

The secondary markets are always available for arranging new investments.

Travel

Johnny Lee will be in Christchurch on Wednesday 24 August (Russley Golf Club).

Edward will be in Wellington on Thursday 25 August (Featherston Street); and in Auckland again on 31 August (Ellerslie), 1 September (North Shore) and 2 September (City).

In September, he will be in Blenheim on Thursday 8 and Nelson on Friday 9 and in Napier on Thursday 22.

Chris will be in Christchurch on September 5 and 6 (morning), in Ashburton on September 6 (pm) and in Timaru on September 7, keen to meet clients to discuss investment portfolios. 

David Colman will be in Lower Hutt on Friday 26 August and is planning trips to Whanganui and Palmerston North.

Please let us know if you would like an appointment.

Michael Warrington

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