Chris Lee & Partners Ltd

Market News 20 December 2021

*** MERRY CHRISTMAS ***

This is our final Market News for 2021. Thank you for allocating some of your time each week to digest our investment perspectives.

We close our offices on Wednesday 22 December (midday) for the Christmas break and a subset of staff will return on Monday 10 January. You can reach us via email throughout (albeit with slightly longer response times).

Review 2020

When I re-read last year’s Christmas Market News, I could see I was tired of the all-consuming topic of Covid.

Yet here we are 12 months later still tolerating its presence and occasionally yelling at the television as if the regulators on the screen are running a survey of public opinion about the effectiveness of the latest response plans.

This Christmas I don’t feel the same weight of Covid on the business as much as we did during 2020; with all due respect to those in Auckland who were asked to accept more restriction than others.

2022 will be different. 

Not only do we have the benefit of vaccines but governments of the world have tipped the balance back toward freedom of movement, employment (which needs business running on all cylinders) and unrestricted education.

The businesses I have observed during my recent ‘research’ trips are doing their best to respect the new obligations but frankly they would prefer that the restrictions did not exist. For the most part they are just trying to stay in business and the fear of ‘suffocating’ is palpable for many.

I would literally hear people in the street saying they weren’t going into a store because of the multiple resistors (scan, mask, find passport, sanitise). We need to make rapid strides toward reducing these business restricting routines.

If a business does enjoy a busy period they don’t want to be wasting valuable time scanning people’s vaccine passports (many wisely viewed them and accepted in good faith).

Farmers in the South must be loving production at present though because I don’t recall ever seeing it so green. Even the ‘golden’ hills of the Lindis Pass would support dairy herds at present!

Last year I told you that Covid 19 and central banks would be two of the greatest influences on your investment decisions and that proved to be correct.

In 2022 the central banks will hold their position of influence, as they always do, but I think Covid19 data will have less influence. It will continue to dominate headlines, but not global financial outcomes, in my view.

I think of more importance in 2022, and beyond, will be the ‘Lorax moment’ that the world is in the midst of and the greater impact from regulatory changes in response.

Dr Seuss readers will understand.

The world’s focus on the Truffula trees (environment), the folly of the Once-ler (industry abuse of resources) and the foresight of the Lorax (David Attenborough) is becoming ever sharper and will add expenses to both business and taxpayers simultaneously.

We will either experience this development through lower profit margins, more price inflation, or most likely both.

Essentially, I think those are your two biggest influences for 2022:

Rising interest rates and the removal of the massive financial accommodation provided over recent years; and

The greater costs of environmental respect.

I am still not happy about political leadership, and one of the best has just retired (Merkel), but I don’t see any change happening in 2022. 

It is very difficult to draw links between politics and good economic performance, but bad form shows up rapidly, and aggressively; think Turkey at this point.

Actual market performance during 2021

Here is the table used regularly for displaying annual performance of a few major share indices (at the time of writing, and slightly weaker since):

Index               2015    2018    2019      2020     2021 

NZX50             6,042    8,683  11,241   12,874  12,844  -0.3%

ASX200           4,938    5,565    6,813    6,643   7,341 +10.5%

DJIA (US)       17,375  24,100  28,135  30,052  35,544  +18.3%

Nikkei (Japan)18,712  21,190  24,013  26,672  28,409  +6.5%

Shanghai (Ch) 3,523    2,586    2,967    3,353   3,661 +9.2%

FTSE (UK)       5,946    6,778    7,353    6,503    7,218 +11.0%

EuroStoxx        3,186    3,058    3,731    3,495    4,144 +18.6%

Observations:

I removed a few interim year columns for space reasons.

These huge value increases just can’t continue, especially as the removal of monetary policy accommodations flow through.

Here are the movements in 10-year government bonds:

Country      2015      2018     2019      2020       2021

US             2.21%    2.85%   1.82%   0.89%      1.43%

Canada      1.47%   2.08%    1.58%   0.71%      1.43%

Spain         1.73%   1.47%    0.43%    0.00%      0.35%

France       0.92%    0.70%   0.00%   -0.38%      0.00%

Germany    0.57%    0.25%  -0.29%   -0.62%    -0.36%

Italy            1.64%    3.13%    1.26%    0.51%     0.94%

Greece       8.62%    4.23%    1.40%    0.60%*   1.32%

Swiss         -0.20%  -0.14%   -0.59%   -0.53%    -0.31%

UK               1.84%  1.27%     0.79%    0.22%     0.72%

Japan          0.30%   0.04%   -0.02%     0.01%    0.05%

India             7.82%  7.46%    6.78%     5.95%    6.36%

Hong Kong   3.02%  1.98%    1.71%     0.75%** 1.42%

Australia       2.82%   2.43%    1.18%     0.97%   1.58%

NZ                3.55%    2.41%    1.60%    0.90%    2.30%

Observations:

Even if some central banks are not yet ready to increase short term interest rates, or stop buying long term bonds to hold yields down, free flowing financial markets are now intent on forcing longer term interest rates higher.

The price/cost of money is on the rise again.

A Review of my predictions for 2021

Interest rates – well, they cannot fall much further. They sit very close to 0.00% in NZ and are well below inflation and inflation targets.

The RBNZ wanted our banks to be prepared (legal documentation) for negative interest rates but other than attempts to defend the NZ dollar I don’t see negative interest rates featuring for NZ retail investors.

The positive slope on the NZ yield curve will reward longer term investing. Excessive amounts of short-term fixed interest investing will create a sea anchor-like drag on returns.

This proved to be broadly correct. We didn’t endure negative interest rates in NZ and by late in 2021 our central bank was one of the first trying to remove monetary accommodation. This saw our interest rates rising a little quicker than in some other jurisdictions.

Shares – It is time to be more selective with who you choose for your larger share investments.

Businesses with ‘highly probable revenues and profit margins’ are the closest to being ‘perfectly priced’ using very low interest rates. If the revenues cannot increase much and the interest rates can’t decline much, then the share price must be priced close to its upper decile.

On review this seems reasonably accurate as the share prices on the reliably profitable businesses have been retreating a little under the threat of higher interest rates (not lower profits).

When I consider share indices, it is hard for me to imagine the NZ index finishing 2021 higher than it is now. 

Actual results confirm this with NZ -4.00% (NZX50). 

I can however imagine the US, Chinese and Australian share indices rising during 2021 given the financial and political support being continuously rolled out in those jurisdictions.

The US is +17.60% (Dow Jones) or 25% (S&P500), China +4.50%, Australia +9.70%.

As always with guessing what may happen in the future, some of this success commenting on share market indices carried a healthy dose of luck, but it was true that rising interest rates did cause more harm to NZ share values than in other countries.

NZ has more utility-like businesses (less growth oriented) and the Reserve Bank was quick to move on changing the interest rate story. 

Other nations, with far larger populations and tax rules that reward growth over dividends, were also much slower to acknowledge a need for increasing interest rates, so their indices felt less regulatory weight than New Zealand.

Patience – I think patience will be rewarded via opportunistic investing.

During the past decade getting on with full investment was rewarding for all investors (interest rates were declining, share prices were rising). 

Now, having some cash resting in a short-term deposit at near 0.00% still provides you with option value to be able to act when appealing opportunities emerge (new bond offers, dips in share market pricing etc).

Those who make investment decisions from the basis of good investment rules will cope well regardless of what 2021 brings.

This was absolutely true and will continue to be in 2022 and beyond. The ‘easy’ gains made riding the tidal flow of declining interest rates is over for an extended period now, so profits will come from owning good businesses and from buying well.

‘Buying well’ means being patient and waiting for the moments when markets offer you good investments at better prices.

There are many examples, and you’ll have observed some, but one I like to cite is Vector’s shares (VCT); they have traded between about $4.00 - $4.25 during the year and patient investors have been able to buy or sell near each extremity.

Many shares now commonly trade in price ranges of 5% to 10% so take your time when adjusting your portfolio and patience should be rewarded more often than not.

Remember that selling (partial) is an option too.

2022 Forecasts

As a generalisation, which is all I’ll offer this time, property and shares will outperform fixed interest investing in terms of productivity from the underlying use of capital.

Interest rates rise but remain at, or below, inflation and this is a net negative result.

However, property and share investing comes with a lot more volatility than fixed interest investing (hence the need to always have a fixed interest allocation!) so the pursuit of better returns (likely) must be tempered by the knowledge that you may again experience uncomfortable levels of volatility (plus and minus 25%).

If I am to go out on a limb (yes thanks – Ed), I’ll say that I expect share market indices to be lower by the end of 2022 than late December 2021, across most economies.

Generally good news is factored into markets more easily than bad news and this imbalance gives me more cause for concern when I see less opportunity for ‘surprising’ good news.

It’s why you often see markets following gradual improvement over time, but then sharp immediate slumps when very poor news is disclosed.

Unlike some commentators I don’t worry much about property value declines (a little would be good for wider benefits), but I can imagine ‘wealth’ declining from declines for intangible assets like cryptocurrencies and Non-Fungible Tokens (art??) which have added vast sums to people’s wealth over the past few years.

Wealth gains from these sectors have funded many a Lamborghini lifestyle but if they begin to fail as wealth generators then finding ‘greater fool’ buyers of unproductive assets will be harder and could so easily lead to falling prices in many assets (notably shares for the context of this paragraph) as those found to be swimming without togs rush to control their new ‘exposure’.

Follow your rules and keep it simple

The thing that will make you ready to plan a transaction, and to know why it should occur, is the foundation of having good investment rules.

If you are underinvested in your Fixed Interest asset sector then you won’t ask about a new investment in shares.

If you are then underinvested in year three (2025 maturity) you won’t ask us to find you a 2026 bond/deposit.

You can then patiently seek out a good 2025 option and ‘buy’ it when a good option emerges.

The same logic applies to Property and Shares asset allocations , albeit with more dynamic options to consider once you get down to the actual constituent being selected.

If you are over-invested in shares at present, you should have been feeling it over the past few months.

We are happy to help.

Compliment

On behalf of almost 100% of our client base, as a result of investments (bonds and shares) in Infratil, I’d like to issue a note of thanks to Tim Brown who is retiring from Infratil.

I’ve known Tim since he joined Infratil, which was essentially at the time Lloyd established the business, and thus longer than I have known all of our clients! 

Tim has done a lot to ensure that the public, including our many clients, gained good access to investments in Infratil and that they were always very well informed about the business every year.

Infratil set the standard for high levels of reporting to stakeholders long before it became common practice.

Infratil is unquestionably, and demonstrably, one of New Zealand’s most successful investment businesses and our clients have been huge beneficiaries from their efforts, so we are collectively very grateful.

Go well Tim and look carefully before you step forth.

Thank you

Thank you to all who have sought financial advice and arranged business with Chris Lee & Partners during 2021; we are very grateful.

Have a very Merry Christmas with your family and friends and give yourself permission to enjoy some of the savings you worked so hard to accumulate, and manage.

Kind regards from all at Chris Lee & Partners.

Michael Warrington

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Market News 13 December 2021

Next week's Market News will be the final one for the year and will follow the usual end of year format.

INVESTMENT OPINION

Confession – I am heading off on another research trip, double checking that the South island is ready for the flood gates to open, first to Auckland travelers, then Australian, and finally the world.

Given the presence of vaccinations, I think it's about time we invited the vaccinated to visit our shores.

However, I'd be pleased if following our Covid19 reset New Zealand adopted Bhutan's 'high value, low impact' tourism policy, or something similar.

Travelers are required to book through local agents, so the government can monitor the numbers, and collect the $65 per day Sustainable Development fee and ensure a minimum daily spend by travelers.

This may seem a little too centrally controlled for our 'land of the free' (ahh, health, water … - Ed) but at the very least we should get over our previous criticisms of government attempts to add meaningful arrival tariffs on travelers.

The brief for this research file (holiday – Ed) is to check that Fiordland is still in the pristine state portrayed in the many images used, check that Manapouri power is ready to be sent North, confirm that the Hollyford track promotional material about beauty is not misleading or deceptive, and to spot check that Vudu Café in Queenstown always has its best in class carrot cake available.

If we happen to pass vineyards (or cheese roll production facilities) whilst in transit, with time to conduct mystery shopper tests, we'll work longer days to expand the job sheet.

How about a survey of My Vaccine Pass monitoring? – Ed

Whose asking?

I'll report back.

In my absence the following content is an assembly of three things:

A repeat publication of a piece that drew a lot of client attention during the year, and I think remains just as valuable today (Beware confirmation bias and extrapolation when making investment decisions); and

Market Liquidity – Over the past couple of weeks we witnessed again the lack of depth in the New Zealand bond market, which is especially frustrating for investors who are trying to continuously reinvest maturing sums of money.

During November, investors, and presumably some financial advisers, became very jittery about rising interest rates harming bond valuations and for the first time in years a tidal movement for selling bonds appeared.

The kneejerk reaction was for others to join the trend and sell bonds too.

By contrast, we viewed the new supply at higher returns as a good opportunity for investors to purchase the bonds on offer whilst the menu of products available was full.

Sometimes fortune favours the brave, and those investors who had been in a prepared state, knowing what their next investment action was to be, benefited as they mopped up the bonds that became available.

3.00% returns became common place, 4.00% was triggered a couple of times and people pondered whether 5.00% was an appropriate wish on the horizon.

Guess what actually happened?

Another market risk emerged (the latest, but entirely predictable, strain of SARS-CoV-2) and share markets fell and interest rates declined.

Almost immediately the bonds that had been available for sale between 3% and 4% yields vanished, and it instantly became difficult for the enthusiastic fixed interest investors to complete their strategies.

It was another reminder of just how shallow the NZ bond market can be.

It also reminds me of a David Lange quote about the 'reef fish' of financial markets; ever present when in play but gone in a nano-second when the game changes (except for Dory from finding Nemo, left wondering where everyone went – Ed).

These are the facts.

The lesson – be prepared, and act when the opportunity presents itself (on all investment types).

Investment Threats (Reprise) – I often find myself staring into space wondering about issues that influence investment markets and ways to navigate them in future, because everything about our pending returns will happen in the future.

Last week I was pondering what some of the greatest threats are to that investment performance and I concluded that ''extrapolation'' and ''confirmation bias'' were two of them.

I removed fraud and incompetence from the mix hoping that all licensed financial advisers would help clients avoid these two threats.

Some of you will be familiar with the risks associated with confirmation bias, being the behaviour of finding it easiest to spot evidence that supports your primary belief and to be clouded from recognising the importance of contrary evidence.

We all do this, and typically we all feel good about doing it because it suits our selfish needs to justify our strongest views. We clearly hope to be right, which unhelpfully plays into our egos and not into actual outcomes.

When we are correct, even though the chances of success may well have only been 50:50, it reinforces our brilliance and we become even more confident that we are on the right track. After one moment of success we think we are now a 75% chance of being correct even though at best the odds still lie between 50:50 (try flipping a coin) and maybe 60:40.

If the odds of accuracy are any higher, such as 80:20 then the scenario has already been priced into financial markets because it is visible to more than half the observers.

How many of you own shares in Meridian Energy, or Contact Energy and convinced yourselves in April that BlackRock was definitely going to pressure the share price lower when they sold down much of their holding from the Renewable Energy fund?

Many believers sold shares ahead of this date in the belief they would buy them back cheaper. The share price fell in the lead up and those calculating the index agreed change was coming, providing ''confirmation bias'' to the early movers.

Yet when the time came the share price began to increase. Rather than fall to $5.00 Contact Energy's share price rose to $7.

The share prices were clearly considered fair, or cheap, and large investors stepped in to the market to buy all of the shares (demand increased), removing the threat of a piece-meal assault on the share prices, which we had seen in January when the funds originally purchased the shareholdings.

In 2019 the NZX itself was one of the most unloved companies in the market. Some companies were moving their listing to Australia (ASX), some were being taken over and removed from the bourse and nobody seemed to be listing new companies.

Analysts and critics issued a rolling maul of assessments that implied the business was a dead man walking. This formed a repetitive sequence of confirmation bias for those who disliked the NZX as a business.

The share price felt very heavy at about $1.00.

Yet, if you looked at all the facts you discovered the following:

Their managed fund business (SuperLife and Smart Shares), with its recurring fees, was growing at nearly $100 million per month;

Their bond market activity was constantly expanding under the new ease created within the Financial Markets Conduct Act;

New people were employed to convince some of New Zealand's impressive but scarcely known businesses, such as DGL (recently listed), to consider listing on the NZX to improve their access to capital for growth;

Covid 19 removed value for many businesses but it reinforced the value of NZX to companies for raising capital (even though the NZX share price fell again at this time);

The new CEO to the NZX (Mark Peterson) cut some costs that weren't driving growth in the business, and removed some items that he felt didn't belong in the strategy (capital efficiency);

The global trend by investors to migrate from active management to passive management through Exchange Traded Funds (Smart Shares locally) was now a dominant theme; and

Sharesies was launched and opened the door to hundreds of thousands of genuinely new investors to market participation.

Share market investors had been blinded by confirmation bias that the NZX had few redeeming features, but by early 2020 their error was being uncovered. Covid19 provided a temporary respite (in error) but since then the NZX share price has well and truly changed (increased) to reflect the points above, and the ongoing profits the business is making.

Looking backwards, through the share price chart, it's actually now a surprise that the market took so long to clean the confirmation bias off its glasses and see the facts.

Long termers will remember that many good aspects of the current NZX business were driven by the previous CEO, Tim Bennett.

You don't have to look far to spot confirmation bias, it is all around us.

Stop for a minute and think of a few things that you are certain will be true that are affecting your investment decisions today.

Interest rates are definitely going to rise, right?

The planet will not be using fossil fuels for energy by … say 2030?

New Zealand will be using 100% renewable electricity by 2035?

Driverless cars will dominant NZ taxi/Uber service by 2030?

Global population will continue to expand at the current rate?

At least help yourself by trying to think of possible rebuttals to such beliefs, such as:

If interest rates must rise, why are long term interest rates falling again in the US?

Did you realise that the world does not have sufficient alternative energy sources to remove fossil fuels from the energy mix?

100% renewable electricity in NZ is not possible, without grossly over capitalising and building more resources than we permanently require (massive enlargement of Lake Onslow!) when for a small pile of coal (although it's a large pile of imported coal at present – Ed), or a tank of gas, we can switch electricity supply on and off within a few minutes.

Work Safe obligations in NZ would undermine my confidence in owning a business where I wasn't in control of the vehicle (driverless), but I was responsible for all outcomes;

Why would a rational couple have more than two children given the financial imbalances in place at present globally, seen immediately through the cost of accommodation?

The Chinese have been encouraged now to have three, but they seem to be sticking with plans for one.

The US birth rate has fallen six years in a row, now at 55.8 births per 1,000 women between 15-44 years of age, to the lowest ratio since 1909. Why would this increase given current financial, health and environmental settings?

This leads on rather nicely to the second major threat I thought about for investment returns; the folly of extrapolation.

The Oxford Concise Dictionary (Google? – Ed) defines Extrapolation as:

The action of estimating or concluding something by assuming that existing trends will continue or a current method will remain applicable.

I don't mind the term 'estimating' at all. This is a very relevant behaviour for investors, looking into the future and trying to make decisions, now.

The trouble I have is with the 'assumption' part.

Assuming that existing trends will continue or a current method will remain applicable is where the trouble is to be found.

Wanting to believe in patterns is understandable, if you start with 1, and you gain another one each day, it seems logical to assume you'll have 365 by year's end.

However, risk and reward don't follow such patterns, yet a huge proportion of the forecasts presented to you as investors are based in relatively simple extrapolation and the reliability of the factor used degrades with time, sometimes by the day.

Think about what you were told about housing prices in 2019 (up, up, up)… then during Covid19 (down, down, down)… and now (up, up, up).

Financial markets have methods and trends, until they don't.

I am certain I have spoken previously about Long Term Capital Management, which became one of the world's largest hedge funds (leveraged investors) in the 1990's with enormous investment positions based on methodical financial deductions.

In 1998 methods changed and by 1999 LTCM was gone (if you're a reader – When Genius Failed – Roger Lowenstein)

While I think you should respect some short term extrapolation because it is based on reasonably reliable data; Resene paint sales for 2022 will likely follow a similar pattern to 2021, but each algebraic move into the future (n+2, n+3, n+4…) makes the extrapolated forecasts less and less reliable (harmed by volatility and inaccuracies).

The NZ Initiative had a tongue in cheek look at the explosion of orange cone use in NZ. They took an estimated growth rate, extrapolated this into the future and predicted that all roads in NZ will be covered by orange cones by January 2025, and we will thereby all be safer on the roads! (and the death toll will decline? – Ed)

So, too much simple extrapolation is a threat to good investment decision making for you.

If you find yourself believing long term extrapolation and then only attaching supportive analysis and headlines to that belief, it is time to be more wary about your investment decisions.

TRAVEL

Next travel dates will occur in the New Year.

Michael Warrington 

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Market News 6 December 2021

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

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

There's nothing free about it.

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

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

INVESTMENT OPINION

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

The potential for a change to the environment came fast.

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

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

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

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

Conditions are always changing.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In my view it's about jolly time.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

EVER THE OPTIMIST

Xero is quickly becoming a portal of enormous economic data.

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

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

ETO II

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

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

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

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

ETO III – Vaccinations

This will be the last vaccination data update.

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

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

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

The preferred choice seems obvious.

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

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

Vaccination doses delivered – 8.18 billion jabs

Active Cases – 21.1 million (increase)

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

People in serious condition – 86,800 (increase)

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

TRAVEL

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

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

Michael Warrington 

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