Chris Lee & Partners Ltd

Market News 30 March 2020

Lockdown T+5

Our bubble of five includes two essential workers participating in supermarket and coffee industries (yes! I knew it; coffee is essential).

Actually, the FMA says we are essential too, but we can help you from home.

So, our boys are now the greatest health threat to our bubble.

Bubble Management (a CPCP* dictatorship) was very upset with me when she found me erecting our camping shower on the front lawn and hanging sanitiser on the front door with instructions for the process to follow before 'returning home'.

*Churton Park Communist Party

Bubble Management points out to me that the boys also bring home edible produce most days. 

Bubble Management is investigating options for a lock on my study (office) door and appears to be blowing up a single air mattress.

INVESTMENT OPINION

Cash is Good - The last three weeks changed from surreal to real faster than anything I can remember.

The Global Financial Crisis of 2008-2009 felt real right away to me because it was centred in the financial markets, which I have been employed in for a long time.

I could 'see' it.

I could quickly understand its potential and felt skilled in adapting a response for our clients. (Back in the days of 'strong, long and liquid')

Covid19 is different. 

It's invisible.

It is the domain of scientists and medical specialists. The data they present should be highly influential to you. Souxsie Wiles is one of several new heroes. So I'll be listening to them, closely, to understand the physical actions we should take and why.

The financial response, our domain, is to hold excessive amounts of cash in your bank account to ensure you can meet all objectives during the next 6-12 months.

Missing out on trivial amounts of interest income (the difference between no interest and some) is irrelevant alongside the surety of being able to make payments.

Beyond ensuring that you hold a surplus of cash (in the bank) get financial advice. This is no time to guess.

NZ Initiative – If you'd like to read some excellent thinking with respect to potential public policy during the Covid19 pandemic I'd suggest reviewing https://nzinitiative.org.nz/

Ideas I applauded as I read were:

Invite a wider range of people to use the Student Loan scheme. Rules for draw down and repayment are already established;

Change from a blunt employment income subsidy to one successfully used in Germany during the GFC, Short Term Work subsidy that rises and falls with the revenue of the business so employees are retained;

There are a lot of good ideas presented.

Banking – plenty of people have asked about banking risks. Below, Kevin has written a piece for you about the beneficial changes being made.

I think I have already written too many words, but here are a couple of short Q+A items being raised:

Should I be concerned about my money in the bank?

No. Our banks are well governed, well managed and now well supported with liquidity by the central bank.

Should I spread money around various banks?

Diversity is good. All banks will appreciate your support. When the government introduces the proposed deposit guarantee scheme (limited amount) diversity will likely have protected more of your money under the guarantee.

What accounts or deposits would be guaranteed?

Wait for descriptions but it is likely the government will want to protect your first $30-50,000 at that bank regardless of the name on your account.

Should I forget about earning interest and just keep all my money on call for flexibility?

No. Get financial advice. Do hold a larger sum on call in current conditions. Thereafter invest based on a long-term strategy.

Kevin Writes -

In times of uncertainty the stronger your balance sheet the better positioned you are to weather any storm.

While household debt in NZ is unhealthily high at over 90% of GDP our Government's balance sheet is very strong with a net debt to GDP ratio of only 20%, one of the lowest in the developed world.

This provides a great starting point for the Government to increase its debt issuance to fund its Covid19 related bailout initiatives for businesses and households, as the country goes into lockdown and most businesses shut shop and send workers home.

Wage and leave subsidies, mortgage repayment holidays and packages for businesses are all on the table as the Government, the Reserve Bank and retail banks unite to provide support packages across the economy.

To help keep the lid on the Government borrowing costs the Reserve Bank is engaging in quantitative easing and will buy $30b of Government bonds over the next 12 months. 

This figure represents about half the fixed rate Government bonds currently on issue.

Just the announcement of the quantitative easing programme has seen the yield on NZG 10-year bonds drop from 1.78% 10 days ago to 1.07% at time of writing.

Quantitative easing (QE), which is better known in troubled economies like the US, Japan and Europe, brings down long-term interest rates (borrowing costs) and increases liquidity through the banking system. 

QE frees up cash at friendly rates for banks to lend to businesses, although it doesn't always reach its target as was witnessed in the jurisdictions listed above where the easy money ended up in share market and property markets, not in businesses to support growth or improved productivity.

The QE package should also add liquidity and relieve pressure in the NZ corporate bond market where yields have increased sharply in recent weeks with few buyers and those who are participating demanding much higher margins for risk.

Demand for good quality bonds normally increases during times of economic uncertainty and share market disruption, thus driving down yields, but for the current crisis the big move has been to cash not the relative safe haven of bonds.

Of course, as yields go up prices comes down, so it hasn't only been equity investors who have seen their portfolio values decline during the recent rout.

Investors in supposedly low risk fixed interest managed funds, and conservative Kiwisaver funds, would also have seen their balances decline as bond portfolios are revalued to reflect market prices. It has been a difficult time for the wealth of all investors.

The Reserve Bank has introduced other measures to ensure that short-term interest rates trade near the OCR at 0.25% and is providing liquidity in foreign exchange swap markets to keep interest rates down.

Banks also have the option of borrowing from the Reserve Bank under its Term Auction Facility to ensure liquidity continues to be distributed efficiently through the banking system.

So, with the Reserve Bank introducing so many initiatives to drive interest rates down and provide ample liquidity for the banks it's not surprising to see bank term deposits rates reaching new lows. 

Going forward investors face the reality of even lower bank deposit rates, although higher credit (risk) margins on corporate bonds might offer hope of achieving higher returns within fixed interest portfolios.

The era of low and unrealistic credit margins is over for now although benchmark rates (bank wholesale rates) will settle lower helping offset the increased cost of higher risk margins for companies borrowing money.

What does seem inevitable to me is that we will finally see more appropriate risk margins established between bank deposit rates and corporate bond rates, something that is long overdue.

And although interest rates of between 1% and 2% don't sound very appealing for investors at least our interest rates are still positive, for the time being anyway.

Germany is one of many countries where interest rates are negative across all durations.

Last August the German Government issued 50-year bonds with a zero coupon (0% interest rate) and a maturity value of $965 per $1,000 invested; an assured loss of $35 per $1,000.

The €824 billion issue, which provided no return and a guaranteed loss on maturity, was heavily over-subscribed. Something seems amiss doesn't it?

Despite the unquestionable strength of German government debt the explosion of the virus in Europe has also seen yields on their bonds increase significantly in recent weeks with the yield on their 10 year bonds blowing out to a mind boggling, but still affordable, minus 0.47%. 

Back at home the Reserve Bank has assisted further by giving more funding flexibility to NZ's banks by reducing their Core Funding Ratios from 75% to 50%, a huge move.

Following the global financial crisis, the Reserve Bank introduced Core Funding Ratio legislation which required banks to hold larger amounts of retail deposits and longer-term wholesale funding and reduced their reliance on short term money markets, which became increasingly inaccessible during the GFC.

Prior to the introduction Core Funding Ratios our major trading banks sourced nearly half of their funding from the 90-day Commercial Paper market in the US. There was a large mismatch between the terms for borrowed money and loans being arranged.

With the focus now clearly on credit availability the Reserve Bank has loosened the reins and is allowing the banks to dip back into these markets, although I doubt the banks are having much difficulty attracting money in the current environment. 

The Reserve Bank has also postponed the introduction of new capital rules, which once fully loaded will require our banks to hold significantly higher levels of Tier 1 capital, although the transition is gradual and spread out over 7 years.

We are pleased to report that subordinated bank bonds, which have been very popular with retail investors, will still be part of the new regulatory framework and provided they are appropriately priced, which now seems more likely, they should provide a welcome future option for income investors. 

It is unlikely we will see any of these new bonds issued during 2020.

The regulator has decided to allow up to 2.5% of the Tier 1 capital requirement to consist of redeemable, perpetual, preference shares (Additional Tier 1 capital) which is up from the 1.5% allowed under current regulations. 

The only Tier 1 bonds currently on issue are capital notes issued by ANZ (ANBHB) and Kiwibank (KCFHA) neither of which qualify as equity under the new capital rules and both of which have their first call dates in May.

With all the current uncertainties and a difficult time ahead for banks in terms of impairments and general lending activity there has been some questions about whether the Notes would be repaid in May as previously expected.

Apart from the fact that the Reserve Bank has made it quite clear that Capital Notes have no place in the new capital framework, which means 'repay at first opportunity,' in the case of the ANZ notes if ANZ doesn't repay them on 25 May it results in mandatory conversion to ANZ Banking Group shares in May 2022. This seems extremely unlikely to me.

The Kiwibank Notes are structured slightly differently than the ANZ Notes and can be repaid in cash on either 27 May 2020 or two years later in May 2022.

If Kiwibank decides to roll the Notes over in May the interest rate will be reset at the 5-year swap rate (currently 0.66%) plus the credit margin of 3.65%.

We observe that after their spat with the Reserve Bank over this capital they raised additional equity from ACC and NZ Super to more than meet their contemporary requirements.

Like ANBHB, we believe that repayment of KCFHA in May is highly probable, and appropriate if they want investors to support their new series of subordinated securities (described above).

Repayment of these two securities in May might provide some valuable liquidity for investors who are looking to stay a little more cashed-up than normal but are reluctant to touch other parts of their portfolio.

Standing Proxies – Remember that you all have the ability to put in place Standing Proxy instructions to have the NZ Shareholders Association represent you at (virtual) meetings.

You should do this to ensure that your votes are effective.

We have the forms if you would like copies of them.

EVER THE OPTIMIST

To our fellow financial advisors across NZ;

It seems unlikely that the FMA will turn up on your doorstep for a spot audit any time soon.

Take the time to get the house in order. (smile)

SERIOUSLY?

In response to the evolving situation Partners Life (insurance provider) withdrew its offer of Redundancy Cover.

Investment Opportunities

Secondary Bonds

Yields on bonds from the secondary market have again lifted to the point of offering returns greater than bank deposits for equivalent terms.

When you ask us for reinvestment ideas, and fixed interest options happen to be the solution expect to see yields of 3.00%+ in the responses.

Some examples can be seen on the Current Investments page of our website: https://www.chrislee.co.nz/current-investments

Please take pricing on the website with a grain of salt as it is changing fast.

New Capital Raising Offers

We expect many businesses to approach the market over coming months seeking investors willing to buy new shares and perhaps new bond offers.

Share offers are likely to have appealing discounts to recent trading prices on the NZX;

Bond offers will need to offer attractive yields.

We think these offers will be fast moving and thus may have been and gone by the time you read the next Market News!

We will broadcast news of these offers by email to our INVESTMENT OPPORTUNITIES group.

If you are not already on this list, and wish to be, please add yourself via this link: https://www.chrislee.co.nz/newsletters

Be sure to check the 'Investment Opportunities' box is ticked.

If company ABC invites new investment we will email the offer to the Investment Opportunities group asking that if they wish to invest please respond promptly with a definite 'Yes'and an 'Amount'.

We will explain other details within each broadcast.

Thank you.

Stay well.

Mike Warrington 

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Market News 23 March 2020

First Thought

We are open for business.

We are sitting in a variety of locations.

You can easily reach us via email – chris@chrislee.co.nz

Our Spark phone service has had its moments of unusual behaviour but please continue to use it.

If you don't get an answer, or get a funny noise please follow up by sending us an email.

If you reach us, we promise we will reach you.

Second Thought

It feels like we have entered a new solar system as we digest the constant flow of community restrictions relating to the Covid19 situation.

The public are responding rather poorly to the threat, sadly, which likely confirms that we, through our health system, are in for a tough period in our history.

I tried really hard to limit my Covid19 references to just this opening paragraph, but it's just not possible; you'll see every single subject below ties back to it.

Our wider community (beyond Canterbury with its earthquake) has already changed more aggressively than anything I have experienced, including the Global Financial Crisis or 1987 share market crash, and it looks like we are still at the top of the second innings (of nine).

Yes, each innings may well take one month to play out. Eight more months is November and I'm not sure that is quite long enough.

Exercising its vast powers the government strives to achieve several things:

Manage the threat by slowing the rate Covid19 spreads through our community to give our health system a better chance of coping with the inevitable escalation of the threat;

Showing the value of good governance – 'for the people'; and

Reminding the people who holds the authority.

I say 'inevitable escalation' because I had the privilege of talking to a person tasked in 2009 with contributing to the NZ Influenza Pandemic Action Plan (Authored by Steve Brazier) during the Swine flu and H1N1 periods; it is the playbook being gradually followed by NZ right now.

This person said that of the three stages – keep it out, stamp it out and manage it – the first is essentially impossible and the second is scientifically improbable so aggression is needed on managing the health outbreak.

We are already at that management point and this is why you are feeling rather draconian impacts on your social life and your financial circumstances.

During the swine flu phase Tony Ryall (then Health Minister) said we would be better prepared for the next threat; I wonder if he feels we are responding well this time?

If, in your state of self isolation you are running out of reading material, and sleep, here is a link to the updated plan (2017):

https://www.health.govt.nz/system/files/documents/publications/influenza-pandemic-plan-framework-action-2nd-edn-aug17.pdf

As a result of the virus situation the current government, and the population at large, is gaining more clarity about what is truly important for leaders to focus on.

I'll be pleased if enforcement action is limited to health officials and the NZ Police. I'd rather not see the Army called in, but I want them to be if the population behaves poorly.

Regardless of how many stars you think you can see after the share market mauling, try not to make new decisions based on a short focal length.

Use your financial advisors to ensure that you access a long-sighted strategy.

Use the government's financial package as a plan for yourself:

Ensure your own solvency for the next 6-12 months;

Look around you to see who else may need your support;

Make good long-term decisions with the balance of your financial capacity.

The one thing you mustn't do is copy the Hon. Grant Robertson on increased use of debt. You do not have a tax base and frankly New Zealand's private debts are already far too high.

High private debt level is our greatest economic weakness and it seems likely to me that Covid19 will remove the thin veneer of financial safety that existed over the past decade.

Cantabrians might become quite good investors on the current playing field of dramatic change; as might adults from the 1970's who experienced import/export controls, limited flight options and an oil price crisis (car-less days).

INVESTMENT OPINION

Market Conditions – The price of money (interest rates) has been slashed aggressively. The spigot for supplying money is wide open, both from central banks (monetary policy) and government (fiscal policy).

Recent regulatory tension being introduced to banks (higher equity settings) is being eased in NZ and in Europe.

NZ has delayed introduction of the new equity settings by 12 months.

European bank equity targets are weaker than in NZ, but they can now remove their conservation buffer of 2.50% from equity targets, which is ironic given that financial risks are increasing sharply.

The US Federal Reserve cut 0.50% on March 3 and then another 1.00% on March 15 to reach 0.00% - 0.25% as the target for overnight interest rates.

For perspective, US interest rates were last cut to 0.00% on 16 December 2008, during the white heat of the Global Financial Crisis.

US overnight interest rates have moved in a range of 0.00% - 2.25% for the past 11 years and now slumped back to 0.00%.

There seems almost no chance of short-term interest rates moving outside this yield range (0% - 2.00%) for the balance of my career; an important consideration for your long term investment decisions. (You being replaced soon? – Ed)

It's a shame we have lost the wisdom of Paul Volker, Chair of the US Federal Reserve in the early 1980's during the heat of the inflation battle. I'd love the opportunity to ask him for his perspective of today's central banking battlefield.

I must say though, that today's monetary and fiscal reactions are the latest reminder for me that the taxpayer and savers of money (lower interest rate returns) pay again, towards business, in every crisis, cushioning the downside for equity investment risks.

These are past and present truths and don't look as if they'll change in the foreseeable investment future.

Government Guarantee – Once the government's 'Covid19 war office' reduces its meetings from hourly to daily I think the Cabinet will move to install the government guarantee on the first $30-50,000 of bank deposits.

It is a policy that the government clearly wants.

The purists, which I was one of, will remain quiet in the current community setting.

It's a cheap, but effective, option for the government to exercise right now, so in my view they will (and should – Ed).

Public conditions – I asked a person recently for a member of the public's perspective of the current situation.

I had hoped to share their thoughts with you but frankly the playing field is moving too fast for the thoughts to remain current, but suffice to say they are more concerned about family, friends, NZ communities and small businesses than their investment portfolio at this point.

On the point of supporting families - in our recent newsletter we encouraged you all to increase the amount of cash that you hold and to check for financial stress amongst your wider family.

If family members do require financial support may I respectfully suggest that at first you don't offer large financial gifts to address the likes of debt where someone has lost employment; consider bridging finance and your wealth will help them for longer.

Consider meeting interest payments instead and you are likely to achieve the following:

Time for a meeting between the borrower and the bank during which they'll get a better understanding of each other's position;

Your wealth, generously shared as a bridging loan, will be more effective spread over a longer period and less of your money may be required than you think, relative to a large gift. Interest on a $500,000 mortgage may soon only be $15,000 per annum or $1,250 per month.

Do not supply personal guarantees. These have long term ramifications. Credible finance businesses will not ask for guarantees during this period of distress if interest payments are being made.

On the point of supporting your local community financially, If you have sufficient financial resources think about the options for 'paying it forward'.

If a business sees some revenue they can calculate business survival time frames, share them with staff who are asked to reduce hours and days, but try to define how they will come out the other side of this slump in activity;

Could you buy pre-paid vouchers from your favourite café, cinema or salon for use in the months ahead? (note you will be an unsecured creditor if the business fails and the money would likely be lost).

In past years too many people used debt to bring forward their spending. Now we need those will real equity to try and bring forward some spending.

At this point, all ideas are good ideas if they help transfer a little equity (savings) from those who have, to those who do not (live month to month on cash flow).

As a last thought, frustratingly, be more alert for scams. The worst behaved on the planet will come out to take advatange during this period of disruption.

If you did not seek out a service then it is likely best that you ignore communications that reach you. Secondly, and equally important, ask another person about it. Ask your friends, your kids, ask us, just do not take action without asking.

You are not alone. If you find discretionary ways to spend real money (not debt), please continue to do so.

Close the Market? – I see the Philippines has closed its financial markets in an attempt to 'stop the scariness' (exert regulatory control).

This is not a great idea.

Grey markets will immediately form in the void so transactions can be arranged but the new markets will be more lawless (is there a lawlessness scale in financial markets? – Ed) and corrupt relative to official markets.

Disclosure is vital to maintain a high level of market efficiency. Even with reasonably good disclosure, such as that in NZ, you can see how difficult market operation can become at times.

The article I read headlined – 'Philippines the first to close markets'. It had better be the last or we are in more trouble.

Control Change – In recent years Chief Financial Officers have been able to come to the market and issue bonds (borrow money) and generally dictate terms to the lead managers and investors.

Until now they might have said – 'I see that a similar company to us managed to raise $200 million at an interest rate of 4.00% being a credit margin of 1.70%. Well, I expect you to raise my $200 million at 3.95% being a credit margin of 1.65%'; get it done.

The investors and lead managers were so eager to find new investment opportunities that they agreed to the new higher pricing demanded by the CFO.

Sometimes egos got in the way too.

Well, the situation has changed significantly. You, the investors, have regained control of pricing power.

Based on my example above the very same CFO might have a conversation with the lead manager that goes something like this:

Do you think you could raise $200 million for us?

Yes, we can.

How confident are you?

Very confident, if you pay an appropriate price.

How will you discover that price?

We will ask the investors, not tell them and hope.

What might the price be?

Well not 'swap rates plus very little' as in the past; it will be a higher nominal interest rate that the investors find tolerable given their alternatives.

So, does that mean something like 3.00%, 0.50% above bank term deposit rates for our good credit? Surely that is too high.

            No, it probably means 4.00%.

OK, I strayed into humour a little there, but you get my point, investors offering use of their money (debt and equity) have regained control over setting acceptable pricing on new investment opportunities.

Take a look at the secondary market (under Investment Opportunities below). Several bonds, that until recently traded with yields closer to 2.00%, are now available at yields of 3.00% and above.

Dividends – are being cancelled by some already, including Air NZ (AIR) and Auckland Airport (AIA) so far, but surely others will follow as businesses assure themselves of strong cash management during the next 12-18 months.

AIR's decision is easy to understand. Other's may not be so easy so I hope directors are open with their descriptions of the situation and minimise the use of corporate speak.

AIA's late cancellation of the interim dividend was interesting; doing so three days from the record date for payment so it might disclose a business that was running a carefully balanced cash flow management but it was tipped out of equilibrium immediately after the significant change to travel movements.

We have all been tipped out of equilibrium over the past month.

During an AIA presentation in 2019 the speaker was 'confident' that AIA would not need additional capital from shareholders for its development programme (second runway, property developments etc).

Even then it felt to me like the stars would need to align just as they were designed to do in the presentation for their cash situation to play out nicely.

Things have not played out nicely at all (understatement – Ed) and it seems inevitable that other businesses will be forced to cut or cancel dividends, at least in the 12 months ahead.

Post Script: Others to announce suspension of dividends now include THL, SEK, VGL, STU.

Offsite world – Everyone is sampling their ability to deliver service from alternative locations, including us.

If you can't tell, we will be pleased.

It is one of the benefits delivered to us by Covid19.

We are a lucky industry in that regard. Phone and email dominate our client communications and we have now asked that these methods be used 100% of the time (no face to face visits; home or away).

Plenty of businesses were well down the path of asking you to access their service via the internet (think banking, meeting regulatory obligations, booking leisure activities).

The motivation for online services was a mix of reduced costs (staff and real estate) plus ease of access from all locations; Wellington and Akaroa has the same level of service.

You will now gain many more opportunities to improve your technology portal skills on; the latest items to hit my computer are companies inviting you not to attend their Annual Meetings! (odd invitation format – Ed)

They are instead setting up virtual online meetings, which have been trialled by many in recent years. Now is the time for them to perfect the facility, including authority to be connected, well functioning live video stream access, live questioning from 'the audience' and live voting (as opposed to voting ahead or via proxy).

You can even mute the microphone on your computer and yell at the person you don't like, without disrupting the meeting; something you cannot do onsite.

I don't wish to watch the directors being served a cup of tea with chocolate biscuits but I think it would be agreeable that I make my own.

Give an offsite Annual Meeting a go, we want the service to expand and this will only happen if directors know it is of value, measured by use.

Bitcoin – this scarcity asset with the benefit of payment services that many wanted to believe was an 'alternative' asset risk type has failed miserably at rising in value as people sell other assets to raise cash out of fear.

Bitcoin's price has fallen roughly by half over the past two weeks; being further and faster than the share market.

Not one single dime from interest rate reductions, endless funding supply and increased fiscal spending will reach the Bitcoin financial community.

I know central banks aren't looking for silver linings but the recessionary pressures from Covid19 reactions will take the heat out of any market excitement for crypto currency use and this will buy the central banks time to continue their debate about launching their own centrally controlled digital currencies.

AML – Just when you thought frustration had peaked with respect to meeting Anti Money Laundering obligations, now you'll have a great deal of difficulty finding a person willing to sign off on certified true copies of documents because most JP's etc are now closing their doors to meetings in person.

EVER THE OPTIMIST

$12 billion government spending will go a reasonable distance for helping NZ through the 6-12 months economic slump ahead of us.

SERIOUSLY?

I don't know how long this sub-section will last but, it started today with this headline:

In the US, the NRA's response is to use corona virus fears to promote gun sales.

Investment Opportunities

Let's address them as they actually emerge.

Some businesses may emerge needing equity and debt as part of their plans to remain stable during the next 12-24 months.

The 12-month delay to RBNZ demands for increased equity from banks will delay their issuance of new tranches of subordinated securities (bonds and preference shares) until later in 2021.

The heavily disrupted financial markets, although functioning rather well in my opinion (money markets and share markets), will cause Chief Financial Officers to defer any bond issues they were contemplating (think Oceania Healthcare) because disrupted markets result in higher costs to reflect the elevated risk situation.

Secondary Bonds

Excellent news!

Yields on bonds in the secondary market have again lifted to the point of offering returns greater than bank deposits for equivalent terms.

Finally.

When you ask us for reinvestment ideas, and fixed interest options happen to be the solution expect to see yields of 3.00% and above in the responses.

TRAVEL

Cancelled for the time being (months) to assist with health authority preferences to delay the wider spread of the Corona virus.

Have a good week,

Mike Warrington

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Market News 16 March 2020

Financial market pricing has moved from pricing for perfection to being imperfectly priced.

This is good news for investors.

Traders love these conditions. In extracting profits from volatility, they remove value from other market participants (investors).

We expect the elevated volatility to continue for weeks.

Do not let traders disrupt your investment rules, for these shall be your GPS throughout this market disruption.

INVESTMENT OPINION

Reserve Bank – I have re-written this paragraph twice in five days!

I was pleased that Adrian Orr was trying to wait until the normal meeting cycle for review and intended to propose (again) that he introduce 0.10% increments for OCR changes.

These thoughts became rather redundant over the weekend.

The 0.75% interest rate cut confirms that central banks around the world are finding they cannot avoid moving in lockstep (rightly or wrongly).

I don't think the ever-lower cost of finance will generate as much confidence as regulators hope.

Of more influence is the increased fiscal spending by governments and central banks assuring the market that there will be no shortage of cash movement (liquidity) if required. Extra billions – consider it done. Trillions? Sure, when do you need them?

The biggest development from the central banks in my view is the move to begin easing the capital demands placed on banks. Some regulators have removed certain equity requirements (conservation buffers) and the RBNZ has offered to delay the increased equity demands.

In my view today's market conditions demonstrate clearly what Adrian Orr was concerned about and why the banking framework should hold higher levels of equity.

Market Conditions – As recently as September last year US financial markets were expecting economic improvements that would require increased interest rates to avoid overheating and unwanted inflationary forces.

I never under-estimate the potential for the market to surprise me, but sometimes the scale of the surprise is far greater than expected; such was the case over the past few weeks.

Last year (October 2019) 10-year US Treasuries (government issued bonds) yielded 1.75% and 30 year US Treasuries yielded 2.40%.

Today those bonds offer yields of:

10 year – 0.95% having traded as low as 0.49%; and

30 year – 1.53% having traded as low as 0.88%.

Note the significant volatility over the short period of time.

Investors who chose to buy 30-year Treasuries at 2.40% late last year have wildly outperformed all other investment opportunities for the lowest default risk on the planet (although I could present a case of NZ government joining this lowest risk category).

Rough math for you – the temporary rally (decline) in the yield of a 30-year bond (when 0.88%) equaled present value gains of approximately 45%!

Who says bonds don't pay.

Your own long-term bonds and bank deposits have delivered value in the same way, albeit with smaller gains because most NZ investors choose shorter terms, and locally 30 year bonds are not an option.

Now though, with 30-year US Treasuries paying less, given the start point of 1.53% market yield, bond investors are moving ever closer to the 'corner' of the room (0%).

Yes, yields can fall further and deliver more capital gains on bonds (if you sell prior to maturity) but the playing field available to us is shortening.

As I touched on last week by copying Warren Buffett's references, having 30 year interest rates approaching 1.00%, and below, spells out very clearly what returns to expect from the fixed interest portion of a portfolio and this is why Buffett finds it hard to imagine an investment in productive enterprises underperforming the alternatives.

It will seem perverse to many but Warren Buffett will be cheering on the current slide in share market pricing because he has been patiently waiting for years to find better value investment opportunities.

Please do not read between the lines to find this as some sort of buy recommendation; the only thing I can assure you of over coming weeks is elevated volatility (witness -2,000 then +1,000 then -2,000, then +2,000 on the Dow Jones last week).

Volatility is one element of defining the term risk; the adjective 'elevated' sits alongside both terms simultaneously.

Please re-read the opening paragraph of this newsletter.

A supplementary thought relating to plummeting US interest rates:

The largest holders of US Treasuries are the Chinese and from memory the Japanese also.

They have enjoyed huge financial gains from the sharp lurches lower in the market yields of the US bond market.

If yields on US Treasuries move too close to 0.00% will China and Japan decide that this money is now better used within their own economies than funding the US government?

I am not suggesting that the US government couldn't borrow money. The US government and the US dollar are still considered the global benchmark and thus will attract investors, but the cohort of lenders might change significantly.

Oil – In the same way that President Trump elected to flex US economic muscles with his tariff-based trade war Saudi Arabia has taken its dominant position in the oil market and is using it as a weapon against other economies.

Unlike Trump's strategy Saudi Arabia's was immediately effective, displayed through a 30% fall in the price of oil.

Economies dependent on oil revenue will be feeling intense pressure from financial adjustments that they must confront. (Interestingly Saudi Arabia sits at the top of this list!).

Consumers of oil will ponder just how much they might benefit from this high-stakes political scrap. Those with storage capacity (presumably this includes China and Japan) will unquestionably increase their purchase orders.

I suspect the US may now be a neutral observer (until Trump logs in to Twitter – Ed), pondering whether it helps them on the political playing field, or not.

The US recently reached the point of being self-sufficient with oil and has presumably now filled its storage tanks (not quite according to weekend news – Ed). If not, they can now buy additional oil at US$30 to ensure they remain full, even if the more expensive local fracking enterprises halt production until pricing increases.

There is now no need for the US to be drawn into the messy Middle Eastern wars the way it was during the past four decades. Mind you, this probably means war is more likely in the Middle East just with different players.

This period of lower oil pricing may well buy more time for nations to expand renewable generation resources (aka delay) to further reduce their dependence on energy from fossil fuels and higher pricing in future.

Applying my usual strategy of thinking as I write, which fortunately happens at a quicker pace than I can type, I am beginning to see the US, China and Japan as winners from this oil war and ponder whether Russia or Saudi Arabia are shooting themselves in the foot?

Cheaper oil and lower interest rates provide some hope for lifting economic activity in the face of the current distress.

Environmentalists and leaders who were trying to urge the planet away from fossil fuel use, toward renewable energy generation, will be very disappointed about the new situation; cheaper oil pricing will attract energy consumers to this market and compromise (delay? – Ed) the viability of various renewable energy projects.

It will be a period when realists wrestle back a little control from idealists.

New shareholders in Saudi Aramco will be less than pleased with Mohammed bin Salman's attack on the price of oil.

Oil (petrol) consumers in NZ will be disappointed, again, when they realise that a 30% fall in the price of oil does not translate to an equivalent cut to the price we pay per litre.

The effectiveness of political criticism aimed at the sector will also be made clear, again; The largest portion of the price we pay for fuel is tax, not profit margin to the retail distributor.

We have no influence over the price of oil, the volatility of foreign exchange pricing for the NZ dollar or the tax ratios set. Our government increased taxes, not the opposite.

At present I could argue that Mohammed bin Salman has done more to save me money on fuel than Jacinda Ardern or our Commerce Commission.

The micro debate about the profit margins of the retail fuel distributors is a red herring in the debate about the major influences on the price we pay at the pump.

The new fisticuffs between Saudi Arabia, Russia and then on through to Turkey (via Syria) are of far greater concern to me than a 10-20 cent swing in my fuel price or industry profit margins. (disclosure – I own a few ZEL shares)

Airlines – Have suffered huge changes to the numbers of people willing to travel.

US airlines should be well positioned to manage their way through this current event because they experienced similar sharp declines to patronage after the September 2011 attacks.

Other airlines around the world could do worse than study how the US managed its air fleet in late 2011 and early 2012.

The global nature of this health-related travel reduction is remarkable to observe but travel will build again, probably starting with Chinese data as they are proving that virus management is possible (as is Japan, and Singapore from what I read).

Mortgage Rates –Heartland Bank has launched a new low mortgage interest rate of 2.89%, a level that I doubt homeowners ever expected to see (below 3.00%).

If mortgage interest rates fall below inflation, what financial advice will the public receive? (both from mortgage brokers and investment advisers).

Warren Buffett is too busy to become a financial adviser in NZ but he would surely argue that carrying debt at a cost below inflation, and investing in reliably productive businesses was an openMisère (played from a visible hand, such is the confidence of success).

I'm not promoting the idea of youngsters mortgaging up to launch themselves into share market investment, but, mortgage interest rates with negative real returns will alter the dynamics across the NZ financial landscape.

Capital repayments on mortgages might be minimised;

Contributions to Kiwisaver might be increased;

Personal investment portfolios might expand faster than in the past;

Bank profits might increase as the average term of a mortgage extends;

Grandparents might become even more frustrated at their children and grandchildren not repaying their debts!

Readers, with better long-term memories than mine, may remember that the Netherlands have what at first glance appears an unusual situation of very high mortgages and very high savings rates.

It is the result of tax-deductible debt on property and tax-free outcomes on savings pools (presumably mortgages are repaid in large portions at retirement).

Now we may be encouraged (by pricing and risk) to increase our debts from already high levels.

Strange, but quite possibly coming true.

Vital Healthcare – a few people have asked for thoughts about voting in the upcoming Special Meeting for VHP investors relating to the proposed listing on the ASX.

I have two thoughts:

One – Provide a Standing Proxy vote authority to the NZ Shareholders Association (and join them for other benefits);

Two – The following words from VHP highlight that your risks are not changing if the proposal progresses:

The Proposal would involve separating Vital's New Zealand properties and Australian properties into separate trusts:

“Vital NZ” which would remain a New Zealand managed investment scheme and PIE, and “Vital Australia” which would be an Australian managed investment scheme.

Units in those two trusts would be “Stapled” together to form a stapled

group, which would continue to own the same assets as Vital does today.

The stapled group would remain listed on the NZX main board and add a foreign exempt listing on the ASX

EVER THE OPTIMIST

At least people still find ways to have fun; one trade idea that I liked in the mainstream international media:

Buy (go long) hand sanitiser;

Sell (go short) oil.

Investment Opportunities

Oceania Healthcare Bond – There's been no further sign of the proposed new bond from Oceania, yet.

If you would like to be added to our list of interested persons please contact us.

TRAVEL

We will align ourselves with the preferences of health officials to slow the potential spread of the Covid19 virus and have now suspended our city and regional visits.

We also prefer that you do not visit our offices if your needs can be met by phone and email.

Serving customer needs by phone and email has the same effectiveness, albeit without the additional value of facial expressions and seeing pauses in conversation etc.

We will keep you updated in newsletters as things change.

We will issue a detailed update directly to clients.

Have a good week,

Mike Warrington

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Market News 9 March 2020

Turkey is currently reported as hosting 3.7 million Syrian refugees.

I think it's safe to say that the health risks for these people is very high and the mortality rate well above average.

Consider that situation alongside the Covid-19 numbers and the resources being mobilised by the world in response.

INVESTMENT OPINION

Air NZ – I reiterate how lucky New Zealand, and Air NZ, is to have Greg Foran return to NZ and accept a role as CEO.

Greg doesn't need any of his salary. Cutting it during the current duress for Air NZ as travel numbers slump is simply a display of good leadership.

Staff and customers will see and respect such a lead.

Oil – Some aggressive new positions are being formed in the oil supply market, which have led to sharp falls for the oil price.

This is another of the fast-changing influences being considered by investors at present.

I'll comment more next week.

Reserve Bank – The next review of the Official Cash Rate (OCR) occurs on 25 March 2020, unless you accept the recent lobbying from markets that they should act early.

It will be very interesting to see whether, or not, our central bank believes that cuts to interest rates from current levels will help confidence.

I doubt it.

I think a Bloomberg journalist summarised the situation well last week when he said 'monetary policy is the wrong hammer for the virus nail'.

One or two economists in our industry are expecting cuts, possibly large cuts, and possibly prior to 25 March; I'd rather the central bank didn't attempt to validate the inflated discussions around the impacts of Covid-19 by acting early with their review.

Too late; 24 hours after I wrote that previous paragraph both the Reserve Bank of Australia and US Federal Reserve cut overnight interest rates (0.25% and 0.50% respectively).

Unless your name is Trump, it is not a central bank obligation to sustain investor confidence in asset pricing by cutting interest rates.

If the US Fed was using the US share market as its measure for response to the 'positive surprise' of a 0.50% interest rate cut two things will have happened;

1)    They will have confirmed themselves to be President Trump's puppet; and

2)    They learnt within minutes that their actions had no effect on market confidence.

Given my opening lines from above, written prior to these interest rate cuts being announced, you'll understand that I was unsurprised by the market's response.

Central bank governors, for the most part, are failing to recognise the now steep decline in their effectiveness over short-term cycles of the economy. They should stop trying to guide short term behaviours and turn more of their attention to influential, long term, macro prudential regulations.

The price of money is so low that it is not hindering business activity.

The current volatility in confidence and the disruption to normal service for business are risks that business faces every day. It is part of the reason that business owners pursue higher returns to cope with such threats.

It is not the central bank's role to remove risk from being in business.

Will you spend more as a consumer if interest rates are cut from 1.00% to zero?

Will your employer (if employed) increase staff numbers?

The Global Financial Crisis in 2008 was an extra-ordinary event and central banks reacted accordingly (interest rate cuts, wide funding provisions, backed up with government guarantees).

The current virus is not extra-ordinary, but the world's reaction is becoming so.

Do not look to central banks for the solutions.

Look to your own investment strategies (with financial advice), which now include a greater requirement to invest in productive parts of the economy and not simply lending at returns that sit below inflation.

Warren Buffett Letter – Warren's latest letter couldn't have been better timed.

It's a short, well written piece, filled with understandable terms - not new phrases and warped definitions so often found within financial markets (and teenage conversations – Ed).

The letter offers a dose of long-term advice for investors delivered right in the middle of a short-term period of worry for financial markets.

It reminds investors that when they hold shares they are the owner of a business, not a securities trader.

It also reminds investors that their task is one of pursuing return for risk and comparing all of the options.

Being a retired bond guy, now offering financial advice, I particularly like this sub-section from the Buffett letter (which I hope Warren will not mind me sharing with you):

What we see in our holdings, rather, is an assembly of companies that we partly own and that, on a weighted basis, are earning more than 20% on the net tangible equity capital required to run their businesses.

These companies, also, earn their profits without employing excessive levels of debt.

Returns of that order by large, established and understandable businesses are remarkable under any circumstances. They are truly mind-blowing when compared to the returns that many investors have accepted on bonds over the last decade – 2.5% or even less on 30-year U.S. Treasury bonds, for example.

(Mike says – to update Warren, 30 year US Treasury yields are now at 1.68% a mere two weeks after the publication of his letter)

Forecasting interest rates has never been our game, and Charlie and I have no idea what rates will average over the next year, or ten or thirty years. Our perhaps jaundiced view is that the pundits who opine on these subjects reveal, by that very behavior, far more about themselves than they reveal about the future.

What we can say is that if something close to current rates should prevail over the coming decades and if corporate tax rates also remain near the low level that businesses now enjoy, it is almost certain that equities will over time perform far better than long-term, fixed-rate debt instruments.

(Mike says - bold added by me)

That rosy prediction comes with a warning: Anything can happen to stock prices tomorrow. Occasionally, there will be major drops in the market, perhaps of 50% magnitude or even greater.

But the combination of The American Tailwind, about which I wrote last year, and the compounding wonders described by Mr. Smith, will make equities the much better long-term choice for the individual who does not use borrowed money and who can control his or her emotions. Others? Beware!

If a business cannot generate sufficient profits to service debts at today's levels they should not be in that line of business.

You cannot go back in time to buy Berkshire Hathaway shares at lower prices, but you can extract future value from the business by learning from its leaders about the art of investing.

I'd encourage investors to read this year's letter.

Link to the letter: https://www.berkshirehathaway.com/letters/2019ltr.pdf

Demographics – are an important driver of economic activity.

Japan's declining population has been a significant element of downward pressure for its economy for many years now.

Last week, thanks to a Bloomberg article, I was reminded that Japan is not alone with this problem; Italy's population is now declining too.

Deaths exceeded births by 212,000 in 2019, the fifth year of decline, and immigration is now not making up the difference (or more than).

Given the economic pressures (recessionary) within Italy, it will need to address accepting more immigrants, of which many are on the move and would gladly target Italy, given the opportunity.

Europe so often presents itself as intolerant of immigration (Germany tried and its population rebelled) but when I looked at a chart of Italy’s annual flow of migrants it has only achieved population growth because of migration since 1994 (deaths have exceeded births since 1994).

One of the European Union's responses to the UK, and its Brexit preference, was that together we are stronger. Now, the EU has a perfect opportunity to display that togetherness by encouraging net movement of people toward Italy, or others with declining populations, to spread the economic load more widely.

With no oceans or seas between Italy and many of its neighbours, immigration will be far easier to manage than it is for Japan, which has never displayed much willingness for long term immigration strategies anyway.

Italy now just needs the political will to allow more immigration and use it to retain some vibrancy within its economy.

New Zealand currently has the opposite problem. Our birth rate is not high (well below 2x per couple from memory – 1.67x?) but our immigration is.

If cheap accommodation is available in Italy, say on the Amalfi Coast, maybe they could put out the welcome mat for a few more people from NZ?

Alongside current low airfares it would be a cheap option for me to supply one 26-year-old male to their economy.

Living Wage – ASB Bank is the latest organisation that I have read about paying the Living Wage (currently $21.15 per hour) as the lowest income level for all staff of the bank, now including some of its contractors.

The more the economy's largest employers adopt this position, the more pressure it will put on others to do the same or run the risk of losing good staff.

Employment – If travel restrictions reduce access to temporary international staff numbers for harvest in the horticulture sector, maybe other employers will allow idle staff to go and help?

Cost cutting – I am now constantly reading about businesses asking staff to cut non-essential travel from their plans whilst the Coronavirus remains a point of concern for the medical community.

At face value these businesses are doing their part to slow the potential spread of the virus.

However, I suspect those businesses are also happy to make these temporary cuts to save money because they will be a little concerned about sales over coming months, and it gives them an opportunity to test for ineffective travel over recent years (and thus spot unnecessary costs being incurred).

EVER THE OPTIMIST

Lewis Road Creamery has successfully negotiated a position on Whole Foods supermarket shelves across the US (271 stores) because the market wants 'our' butter from grass fed, free roaming, not genetically modified, dairy cattle products.

Competitive advantage meets market demand (at a premium price).

Oceania Healthcare Bond – There's been no further sign of the proposed new bond from Oceania, yet, but you can wager your lunch money it will appear soon if interest rates fall much further!

If you would like to be added to our list of interested persons please contact us.

TRAVEL

Johnny will be in Christchurch on 25 March.

Have a good week,

Mike Warrington

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Market News – 2 March 2020

Mmmmm…

Let me see, what is topical for discussion this week?

INVESTMENT OPINION

Markets – It's official; virus talk is now having more influence on the economy and investment pricing than the virus itself (aka Covid19).

During the unusually long period of rising share prices we (the thousands) who offer opinions about what is happening, what might happen next and when it will happen, began to offer recurring commentary about the trigger to burst the bubble.

The practical response was – you don't know what happens next, otherwise you would have already prepared for the outcome.

Uncertainty only becomes certainty after the event.

Commentators worried about excessive use of debt, intolerable business valuations based on old models and inappropriate allocation of income and assets across populations.

None of these spreadsheet monitored financial pressure points delivered the current share market disruption; a health matter did.

Now, a different set of spreadsheets are frantically speculating on financial outcomes based on the responses to the health risk.

Statistically we know that the health risk is similar to other such threats in the past, and up to this point has a lower mortality rate than many other threats to our existence.

The media seem to spend a lot of time worrying about their declining effectiveness, witnessed by difficulties making money via offline channels (TV3 closure, NZME merger plans etc), but combined with online services the wider media has been very effective at escalating the conclusions that should be reached by the public with respect to the Covid19 health scare.

Confidence is an important part of making progress, remove it and progress slows.

In a NZ context our business confidence was weaker during the past 18 months for various reasons, predominantly locally inspired and often linked to our regulatory changes. Today, confidence is taking another knock based on logistics relating to business operations and because consumers are changing their behaviours.

The global response to Covid19 has very clearly slowed the channels of commerce.

It is why I pondered a couple of weeks ago whether a recession in China was possible, the first since 1989 when Deng Xiao Ping released this mighty economy from Mao's shackles.

I remain confident that scientists will deliver the vaccines required to confront this particular virus.

I have the same confidence that health threats are a certainty in our future.

The public response to Covid19 has assured us of weaker economic outcomes for the balance of 2020.

It's becoming possible that slowed business will be the receivership trigger for businesses with excessive debt levels; not because the interest rate is high but because cash flow is low.

Some Chinese businesses are reaching out to their government for financial assistance. Presumably the same pressure will be felt elsewhere.

None of this should change your approach to investing. (I sense a lecture kids – Ed)

Investors must have rules (an investment policy) to guide their investment decisions;

Those rules should have contemplated 15-25% swings in asset prices (because analysts were predicting all manner of market crashes!);

Investors with portfolios invested according to those rules will not have been disrupted by the past week's share prices;

The decline in share prices has not disrupted the cash position for such a person, nor the control over their financial future;

The value of the fixed interest sub portfolio has increased over the past week (long term bond yields are falling);

The return for risk has widened (in investors favour) between low risk assets such as fixed interest items and ownership assets such as property and company shares.

The yields on US Treasuries are setting new lows (10 years now 1.15% and declining as I type!). The world will follow the US and central banks have made it very clear they will keep the price of money (interest rates) very low when confronted by economic weakness.

Step back from the playing field and assess the overall game.

The share price retreat is offering you good businesses at better prices again. I don't see this happening on the residential property front (although I'd like to) even though this asset rests within the same economic circumstances.

My eldest son would be more than a little excited if Covid19 delivered him a house 15% cheaper this week than last.

I am pleased to report that investment activity from our clients was rather quiet last week. Some of this was a function of the playing field moving too fast (lower) but mostly it was because our clients are very comfortable with their investment portfolios.

Well done you.

NZ Super – Investor types within our readership would enjoy reading the statement about the 2019 performance of the fund.

Yes, it is backward looking, and based on today's financial markets also looks positioned 100 metres behind us, however, it is valuable reading from an organisation filled with experts who are not trying to sell you anything.

Here’s a link: https://nzsuperfund.nz/news-media/nz-super-fund-reports-strong-performance-2019-sees-constrained-investment-environment

Economics and Health – Here is a paragraph I wrote last Monday, before the market tripped over itself:

It will take a while, being months, before the economic impact of China's clamp down (restricted movement) on its population is known.

I recently pondered if it would be enough to deliver a recession for China, which would be a long way to fall from its recent growth rates of 6-7%.

Using a single anecdote is reckless of me, but here it is all the same:

Adidas reported an 85% decline in business activity during the past month. Short duration problems only have modest long-term impacts, but one twelfth of 85% is approximately 7%, which is coincidentally the annual growth rate China enjoyed until recently.

The reasons for the Adidas slow down are shared widely by most businesses operating in China, and for others trying to sell and deliver products to China, which mitigates the recklessness of my anecdote.

The Chinese central bank, like all central banks it seems, thinks free money (very low interest rates) and over-supply of it, will assist in solving the problem but I am beginning to think the effectiveness of this strategy is following an inward spiral of Fibonacci proportions.

Free money will not help health management matters.

While I am on the subject of impacts from free money;

Free money is no longer helping with access to shelter for the wider population.

Free money is not helping productivity and subsequent employment.

Free money is resulting in higher risk uses of debt, which rather implies that bad debts must rise at some point in the future for lenders.

Central banks seem to think free money is rescuing the world, but it looks more likely to me that it is backing us into a difficult corner.

My definition of 'free money' is an interest cost that matches, or sits below, inflation. Whilst this number sits at such a low nominal level (0-2%) it also has a negligible cost on actual cash flow for a business.

Post Script: We are about to learn whether central banks can provide another burst of effective financial support.

HNA Group – Do you remember, just over your left shoulder, when the large Chinese conglomerate offered to buy UDC finance from ANZ Bank?

The initials HNA stood for Hainan Airline.

We thought the symbiosis between the two entities was nil.

The offer was rejected by our Overseas Investment Office (OIO); thank goodness, because HNA is now suffocating on its expansion ambitions, financed by debt.

It now looks likely that the Chinese government will take over control of HNA Group. In a dictatorship nation I guess that means take over the financial management of the company because they presumably exercise control over management whenever they wish.

The Chinese are linking the HNA problem to Coronavirus matters but this is a smoke screen for poor management and excessive debt use.

New Zealand, and the ANZ, should be very grateful that this potential sale of UDC did not proceed because if it had, many small NZ businesses would now be confronted by financial suffocation.

Right at the time UDC might have been retreating from offering finance (or demanding repayment) our banking community is also reducing the scale of its willingness to lend.

HNA, through UDC, would be blaming the virus (for its mismanagement – Ed).

Fortunately, UDC has retained robust support from the ANZ bank and the bank has had many more months to consider a better future for UDC if ownership is to change.

Post Script: China's latest financial lever is to allow banks to delay recognising bad debts in response to the impacts of the virus. Good grief.

Davos Influences – According to current headlines the central banks of the world, who once rejected the concept of digital currencies, are now in a headlong rush to see who can create one first.

From a superficial perspective the central banks saw no threat from Bitcoin, other than via the criminal world, but Facebook's enormous client base and the revelation that it too planned a digital currency (Libra) has become a 'clear and present danger'.

One thing central banks will not cede is control over payment systems, just as tax collection authorities will always have the support of central government with policies to catch their margin.

Even the Bank of International Settlements has been forced to update its position on digital currencies, from not being enthusiastic, to encouraging global cooperation across the central banking community.

Various central banks from dominant global economies are now offering comments supportive of further research into developing digital currencies, with some such as China a little ahead of others.

Countries will not want a shared product but they will all need to establish a product that is acceptable for a centralised clearing point, otherwise they will not be an effective alternative to current foreign exchange markets provided by the banking community, nor perhaps a suitable competitor to Facebook's Libra concept.

I'd expect all central bank digital currencies to be linked back to local currencies so they can be monitored from a monetary base perspective, and AML perspective and a tax collection perspective. It will also mean that cash can continue within each local economy, which is a non negotiable requirement in my experience.

NZ may be very good at EFTPOS payment routines but many nations I have visited are not.

Further, our central bank governor explained that New Zealanders' made it very clear to the RBNZ that they expect long term access to cash for payments. He hardly needed to survey for this given the constant increases to cash within the NZ economy at rates that appear to be faster than our economic growth. (crime? – Ed)

Yes, I suppose crime is part of the driver for growth in the use of cash but once a digital currency exists it will provide another tool for monitoring when cash is being used appropriately and thus also when it is being used inappropriately.

You do not need to prepare your mobile phone to manage digital currencies in multiple jurisdictions, but it is a service that is coming, so keep reading if you're curious about its development.

EVER THE OPTIMIST

Shareholders of businesses will be pleased to repetitively learn that when the pressure comes on our government steps in to offer cash to alleviate risks that should be expected in the normal course of business.

Last week it was an $11 million offering to the tourism community.

This happens on top of the ever decreasing cost of debt within the risk of managing a business.

(Tongue firmly in cheek).

INVESTMENT OPPORTUNITIES

Oceania Healthcare Bond – There's been no further sign of the proposed new bond from Oceania, yet, but you can wager your lunch money they will appear soon if interest rates fall much further!

If you would like to be added to our list of interested persons please contact us.

TRAVEL

Johnny will be in Christchurch on 25 March.

Have a good week,

Mike Warrington

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