Market News 17 January 2022

Yes, for those who are wondering, it takes a moment to re-energise one's focus back onto professional matters after such a lengthy research trip.

Through one lens it is almost disappointing to see how little has changed in the major themes, but through another there are subtle wind shifts occurring and they need to be watched.

Keep trimming the sails.

INVESTMENT OPINION

 

Inflation – One of 2022's central themes was reinforced by the latest US data at +7.00% in December (year on year comparison with December 2020) and this rate of change will have put the US Federal Reserve on the back foot.

I like Bloomberg's description: The most inflation since we were watching The Fonz on Happy Days.

You can bet that central bankers will be hoping that this rate of change is short lived even if they don't call it 'transitional' any longer.

To be fair to them, there have been other swings for inflation of this magnitude in the past and the data has settled back into the 2-4% range, so mean reverting is, at this point, probable.

However, where 2% inflation has been the middle ground for the past 10-15 years it seems an unlikely average for the 3-5 years ahead because I suspect it will take that long for economies to settle into new post Covid routines, prior to claiming control of underlying inflation.

I actually wonder whether borders open (remember that walls were coming down) and population counts rising (percentage of age group pursuing employment) had as much to do with downward pressure on inflation as monetary policy tension from central banks.

How will inflation retreat during the next cycle?

Real estate, food and energy are 'our' three largest household expenses, and these are the items that have increased in price the most. It's very hard for me to imagine any of these items now becoming cheaper.

I can see many drivers that will reduce discretionary spending from the many, and thus reduce consumer tension, but this is hardly a wise political strategy.

The European Central Bank (ECB) said, presumably with a straight face, that they see inflation falling back below the 2% in 2023 and 2024.

That is an implausible prediction to make in my view, unless they are expecting another deep recession across all of Europe; which they really do not need.

It's beginning to feel as though many of the thinkers on the 'bridge' of the good ship HMS Central Bank aren't old enough to have experienced inflation behaviours from previous eras and thus are making up announcements as they go along and then looking across at the political masters for satisfied facial expressions.

If central bank independence has been stealthily undermined by both financial markets and politicians, as they seem to have been, we are in a spot of bother.

Where the central bank interference is more overt, such as in Turkey, the ramifications are immediate and already obvious, but the outcomes may ultimately be the same for 'us' if 'we' are not careful.

By us, I mean the US, Europe and the UK who still have a significant impact on financial pricing in smaller nations such as Australia and New Zealand.

You'll recall that many central banks changed their strategies from pre-empting potential inflation with monetary tension to now saying they'll wait until they actually experience inflation.

Well it's here! Sooner than they thought.

Yet now they don't seem very willing to take on the inflation fight.

The US Federal Reserve is debating with angst the difference between three moves to 0.75% or, cringe, four moves to 1.00% for the Fed Funds rate.

There's something very wrong about the US Fed's anxiety if they don't think the world's largest economy can cope with a margin of 0.25% or a nominal interest cost of 1.00%.

Is this the year where we question central banks and politicians every month until December when we wake up and realise that they actually wanted a little inflation all along to suppress the proportionate scale of the world's massive debt levels? (Nominal debt sums stand still whilst the scale of economies rise in value).

Side Script – nominal debt will not be standing still, and a change in price driven by inflation is not 'value'.

Buckle in and position yourself with a portfolio that suits your needs.

Don't try and out-guess this inflation versus monetary policy debate.

Tax – A tax by any other name.

We all knew that central governments couldn't spend at the rate they were (and still are – Ed) without the piper calling in the dues.

Debt repayment by a government only happens through tax collection (other revenues are small and sector specific), of sufficient scale to leave a fiscal surplus. Typically, governments aren't very good at the surplus part.

Asking the next few generations to repay today's debts, that filled the pockets of the current generation won't go down well; tax collection for debt repayment needs to start soon.

Some of these taxes will not be described to you as a tax though.

The item that prompted this rising tax risk was the state of Quebec breaking the ice on new subject specific charges responding to public behaviours with its plans to introduce an additional financial cost labelled a 'health contribution' for unvaccinated people (who don't have exemption status).

This is not an additional fee when you arrive unwell at a hospital, to assist with the costs of the unnecessary marginal workload for that hospital, it is a fee to all unvaccinated citizens.

It is thus a targeted tax directed at citizens deemed to be adding avoidable costs to the health system, passing those costs across the total population.

Greece has one too; $100 per month (> 60 years of age). Austria plans a one off fine of $3,600 for unvaccinated over 14 years of age.

It rather makes New Zealand vaccine mandates look tame, especially if ours are temporary (2022 only?) as they should be.

Even though such taxes do not meet the preferred principles of an efficient tax system (broad, shallow, fair, efficient to collect) they do in fact broaden the ways in which tax is collected.

This isn't the first behavioural tax. We direct specific taxes at tobacco and alcohol based on the harm and thus incremental impact on our health system.

Taxing an absence of vaccination for a specific health threat feels more difficult to justify and creates a slippery slope toward autocracy, but right now I suspect the 90% (vaccinated) will support such governments attempts to press the minority in this health battle.

Maybe the 90% will one day vote the government out when they try to tax people for wearing unusually bright shoes ('visual pollution they said')?

Don't think it won't happen here. The New Zealand government introduces such taxes too, having recently added a 'visitor tax' (didn't raise much – Ed) and a 'waste tax'.

As I say, it's a slippery and undesirable slope for politicians.

We have danced around adding complications and inconsistencies to taxes in the property sector, when it would have been so simple to broaden the tax base through a small levy on all property plus a deemed return on investment property (taxable) as recommended by the 2009 Tax Working Group.

This would have led to more tax from those who own the most, and lower taxes on the earnings of the many.

Given that governments don't seem to have the confidence to explain broad tax changes you can be sure that more targeted taxes are coming, and the lexicon of tax names will expand and I think your net income will decline.

In linking this to investment thinking, it's an unusual way to keep discretionary spending, and thus inflation pressures down, but I think we can be certain that it will happen.

Discretionary money that was flooded into the economy over the past two years needs to be removed.

Rationality – To a large extent managing investments and financial risks is a mathematical process and thus is logical.

Decision making, for the most part, needs to be rational.

One of our greatest risks is therefore irrational decision makers, of which the world has many and some of them are in highly influential roles.

An example that caught my attention last week was Kazakhstan's decision to shut down the internet (!!) to try and disrupt the mass protests that were occurring.

This feels like a Donald Trump move although Kazakhstan might counter that they wish to block the nonsense that Capitol Hill experienced in Washington with protest movements coordinated via social media.

The protests are centred around sharp increases in energy costs, which won't be helped by Kazakhstan's tolerance of Bitcoin mining (a huge energy user).

With the internet down Bitcoin mining stopped too.

In a world that is struggling to reduce energy consumption yet wants to do so for the benefit of the environment, I remained surprised by 'our' tolerance of Bitcoin mining (with the exception of China who banned them).

The world is struggling both with supplying enough gross energy units for total demand and with increasing renewable energy supply fast enough to replace fossil fuel based energy that we say we want rid of.

Regardless of the side show of stopping Bitcoin mining, shutting down the internet is a hugely irrational move and will badly affect their economy, and some international businesses who deal with them.

What other irrational influences are possible, or probable, during 2022 that would disrupt investment outcomes?

Maybe commercial interests successfully lobby politicians to interfere with the independence of central banks, as far up the food chain as the US? (Turkey is already there – Ed)

The US population votes Donald Trump back into office in 2024?

The US population elects someone even older than Trump and Biden as President in 2024!

Taiwan shoots first? (North Korea follows…)

Some nations give up on democracy?

I think I have begun to dig a hole that is difficult to clamber out of. The list of potential irrational actions in 2022 alone is probably longer than 365 lines.

I'll stop while I am able to.

These moments of irrationality fall into the warning to 'expect the unexpected' with your investment decisions.

Crypto – There's a battle brewing between the regulated 'West' and the 'Rest' again.

Witness Iran's decision to permit the use of crypto currencies for international settlements.

I don't think the move into crypto currencies has gone very well for Venezuela (yet? – Ed) but what seems to be happening is nations who feel suppressed by, or affronted by the likes of the US, Europe etc are rebelling by accepting concepts being rejected by them.

In the same week, the House of Lords warned the Bank of England against even having its own digital currency, declaring 'Britcoin' a threat to the stability of its banks!

The Lords clearly have very little confidence in their own regulations, the Bank of England's governance of monetary matters and looks more than a little anti-competitive.

I think the Lords would find, if they asked, that the public would be quite enthusiastic about competition for the banks.

I think the Lords are a little regressive in their thinking whereas Iran looks progressive.

I'd rather not see a East – West divide open up again.

I'd like our governors to indeed use their experience and be wise with decision making but I'd also like them to look out the windscreen and not the rear-view mirror.

I'd like to pursue a research trip to Iran. I think we are misled by Western headlines.

Inefficient Regulations – This item falls under the 'be careful what you wish for' subject.

The government's recently passed changes to the Credit Contracts and Consumer Finance Act have had the effect of suppressing all lending to the public.

It would seem that the law passes too many new risks on to lenders, including the banks.

As I understand it the government was concerned about the usurious lenders who destroy the finances of society's poorest communities, but the CCCFA changes mean that many with high incomes are now being rejected by the banks for housing mortgages.

Now I am curious about whether or not the select committee listened to submissions from lenders with open ears.

Maybe this government would benefit from a tutorial session with their one-time leader, Prime Minister and legislative expert Sir Geoffrey Palmer.

What's That About – stores full of vinyl (records) and printed books are reporting sales are at their highest level in a decade even though they cost a lot more than digital files available under your thumb on a smart device.

The ageing empire strikes back.

Cool.

Irrational or Rational?

Real.

Ever The Optimist

NZ diagnostic biotech company Pictor has developed a world-leading antibody test for Covid19.

The Pictor test simultaneously detects the presence of both anti-Spike Antigen (SP) antibody and anti-Nucleocapsid antigen (NP) antibody in a single test.

https://pictordx.com/

One, other or both NP and SP can contribute to immunity between 82-96% and this knowledge will be helpful (necessary) crossing borders in future.

Novak Djokovic should have called Pictor.

I'll place a buy order for my future travel plans.

Awesome to see NZ business at the forefront of Covid19 responses.

Investment Opportunities

Nothing announced so far.

Travel

Michael has an opportunity to be in Christchurch on Tuesday 15 February. Please sing out promptly if you'd like to meet and he'll arrange flights to suit.

Michael will make trips to Auckland in late February and then Tauranga and Hamilton in early March. Again, please let us know if you'd like to arrange a meeting and we'll get back to you once dates and places are booked.

Edward will be in Auckland on Thursday 3 February (Mount Richmond Hotel, Mt Wellington) and on Friday 4 February (Fairview Events Centre, Wairau Valley).

Edward will be in Napier on Thursday 17 February (Crown Hotel, Ahuriri) and on Friday 18 February (Porters, Havelock North).

Please contact us by email if you would like to arrange an appointment for any of these dates

Michael Warrington


Market News 10 January 2022

Happy New Year.

I have news for the new year.

I shall be finishing up at Chris Lee & Partners in September.

As a reminder of just how fast time travels, I have been here 14 years, which is creeping up toward the length of time that I spent in wholesale financial markets from where I drew my experiences to share with you.

It has been a pleasure helping the public to understand the 'playing field' that they confront when investing their savings, the rules to try and follow, investment product risks, market risks and how the other 'players' operate.

The highlight of my time has been how open clients have been with me, literally involving me in their personal stories and making me feel like a member of their family or close community.

Of all the things that I'll miss, this will be biggest influence. It made each relationship very real, and thus very important to me.

I feel more than a little bit of guilt as a result of these 'dis'connections because such relationships are not simple 'East – West' associations that one can simply switch on and off; they have more dimensions than that.

I intend to hand the gyroscope carefully to others to try and minimise the change that you experience.

Immediately after joining Chris Lee, the Global Financial Crisis (GFC) of 2008-2009 arrived; it was a very challenging time for all, but I recall being very comfortable with that period because I had seen large financial disruptions previously and I felt well prepared for explaining the situation to our clients.

Some of you, with robust memories, will remember a refrain from that period: Strong, Long and Liquid.

Nonetheless, the GFC removed value from investor portfolios, which is always a difficult experience for both investors and advisers, so it wasn't the starting point one would plan for a 'new' career but that is typical of the way of financial markets function; expect the unexpected.

From that point onward (post GFC) I feel as fortunate as our investors must, to have ridden the longest sustained period of investment optimism and value gains in a lifetime.

It is an easy and pleasant experience to watch client wealth rising.

It would serve my ego well to think I played a role in some of the value gains but the reality is that I was merely helping clients to understand whether they should swim in the shallows or the deep end; I had no impact on the temperature of the pool.

As I have said a couple of times recently, we must be due for another difficult period when portfolio values decline or rewards are lower, or both, but you'll not convince me to predict when, why and by how much. I think the only assurance I can give is that it will be different to your previous experiences and the trigger will be a surprise to the majority.

Please don't jump to conclusions that this potentially more difficult period for investment has anything to do with the timing of my departure. I genuinely wish you another luxurious decade of good investment returns; I just don't think it is likely!

Like you, I'll need to navigate the period of lower returns that I expect, but the investment principles remain the same so don't hunt for any new magic beans or accept offers of snake oil from passing salesmen. (people – Ed)

The main driver for my change is a hope to add more leisure time to my diary, a euphemism for more travel, (research trips – Ed). I don't think it is appropriate for me to serve such a wide audience, requiring a constant service level, through part time attendance.

The counter argument may be that the whole world has become part time over the past two years, and we have coped. True enough, but at this point I think investors deserve full time service from their professional advisers.

I am confident that clients receiving a financial advice service from us have been learning the investment process well enough, which aids independence, that armed with advice from the others here you will maintain good investment portfolios.

'Your' generation has typically been very good at saving and budgeting, so combined with reasonable investment practices I am confident that you will enjoy good financial control.

To help I'll write an evergreen item reminding people about the importance of asset allocation, investment rules and some steps to follow, a flowchart of sorts, and publish it on the Private Client login page of our website.

One thing I shall not miss about this industry is the elevated level of regulatory imposition.

I am a supporter of the recent (2012) legal requirement to have a license to provide financial advice to the public, which raised the standard across the industry, but not some of the subsequent over-reach by the Financial Markets Authority.

If the FMA had sufficient budget, I'm sure they would install an observer in every business such is the level of influence they seem to aspire to now.

Rather than regularly issuing public criticisms I'd prefer that the FMA developed a more cooperative model with the financial community, so the regulator gained more confidence to steer the public toward use of the financial advice industry.

The advised public are unquestionably better served than the unadvised.

I'll also not miss other resistors introduced by central government, such as FATCA (foreign tax declaration), Common Reporting Standards and the many obligations attached to Anti Money Laundering law (AML).

At its most basic AML has improved knowledge of clients, which is good for servicing, but its depth of obligation has added countless unproductive hours of work and thus more unrewarding expense to the public.

But I digress. Nothing I say about regulatory matters will alter them, neither my situation nor your future investment activities!

If you'd like something from me, you have plenty of time.

Thank you for involving me in your affairs during the past.

Invitation - Who would like my chair?

If you are a financial adviser with a focus on investment, and you would like the opportunity to work at Chris Lee & Partners, then you are encouraged to make contact with us.

I'll not define conditions for applicants, just put your hand up as being interested and we'll respond in more detail.

INVESTMENT OPINION

 

Markets – I have done my best to avoid news over summer, especially the constant chatter about Covid and the rehashed stories about financial threads whilst the media waits for genuinely new information to analyse.

My first impression having re-opened the 'window to the world' is the more that things change, the more they stay the same.

My starter pack is made up of:

The US Federal Reserve may tighten monetary conditions a little faster than last year's rhetoric, but change will still be glacial (measurable but insignificant);

The evolved Covid situation is not damaging economic confidence. The world is moving on;

Share markets (some of) are setting new index highs, which is often a reason for confidence in the immediate future, but I'm less confident about this item;

Shipping and freight logistics remain extremely expensive, but are showing signs of normalising (increased effectiveness, pricing decline) later in 2022;

Employment seems to be very strong, but I haven't seen any reports on Full Time Equivalency and I ponder if the same work is being shared more widely and the population is becoming more aligned with the mix part time and remote working solutions;

Too many politicians around the globe are behaving in selfish and centralised ways which cannot succeed relative to the devolved alternative for large populations (NZ is guilty of this too); and

A lot more tax needs to be collected to at least stop the trend of rapidly escalating public debts.

As I said, same same, but different.

Difficult – You know how difficult investment decision making is, so you'll be relieved to read that one of America's recent investment 'heroines' (Cathie Wood and her ARK fund) forecast gains of 20% for her investors in 2021, but she delivered losses of 21%.

Remember these stories as you read tomorrow's investment marketing material.

Fiordland – my December research trip saw me taking notes in Te Anau, Doubtful Sound and the Hollyford Valley.

I know New Zealand has outstanding natural spaces, but it is always excellent to get out into those spaces. They are truly outstanding. I need to get back to Dusky Sound and Resolution Inlet one day, and do another couple of the great walks down there.

Te Anau is a very nice place, in such a beautiful location, but there is a moment of reckoning coming for them, especially the accommodation sector given the low number of travellers. I hope most of the owners have plenty of equity. Councils may need to consider rates relief because they can be sure that the bankers will run as soon as they become too scared about financial risks.

If you are a Te Anau business person finding it a little difficult, get in touch with Chris Adams, the new owner of Fiordland Jet, he is your passionate local and is clearly determined to make sure that the area succeeds.

If you acknowledge that you're all in this together, and function together, then you'll come out the other side together.

Maybe the local businesses should find a way to establish a 'Heli Uber' from Queenstown airport to ease the connection issues?

Wishing you all the best to Te Anau, as you are surrounded by some of New Zealand's best features.

Ever The Optimist

I don't wish this to become a 'book club' section but I read Chris Finlayson's book (He Kupu Taurangi) over summer and if you are interested in the Treaty settlement process it gives an excellent foundation for understanding.

There are some reasons for optimism in Finlayson's hopes that various iwi now become some of New Zealand's most successful regional businesses (and environmental guardians) something that several early settlers (pun intended) have already achieved.

Here's an interesting question: how would you all feel about bonds issued by Ngai Tahu Holdings Corporation Ltd?

All the best for the new year.

Michael Warrington


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