TAKING STOCK 14 December 2017


REFLECTIONS on the 2017 calendar year must start by repeating that there was no global sharemarket collapse, interest rates did not rise, indeed they fell in New Zealand, and savers continued to ignore risk.

Investors who make conscious, reasoned decisions may not have ignored risk but all those savers who simply loaded up the index-buying funds clearly fell for the big lie, that any time is a good time to buy any security.

We now all know that these observations are not just sourced from a seaside village north of Wellington.

The Bank of International Settlements (the central bank for all central banks), has this month observed that risks are being ignored.

This warning is far weightier than any message from any market participant where the motive might be click bait, or a marketing device, as the Royal Bank of Scotland displayed two years ago.

In 2017 much has been made of the risk posed by inappropriate people in leadership roles, in places like North Korea and the USA.

Much has centred on other trouble spots, the usual suspects being places like the Gulf, Russia, South America, Central Asia, Europe and Africa.

Currency wars, trade wars and real wars remain an unpleasant potential outcome, probably stemming from over-population and inequality in many countries.

These add to the risks that investors consider.

Also adding to the risk are those who indulge in cyber-attacks and those who continue to pollute our oceans, soils, atmosphere and waterways (Lake Taupo!).

Here in New Zealand, risk has wrongly focussed on the cost of houses in our most desired suburbs or towns.

Xenophobes and silly politicians have sought to gain votes by blaming ‘’immigrants’’.

Many, indeed most, immigrants are looking for what we spoilt New Zealanders see as modest jobs supporting modest aspirations, in tasks like broadband connecting, road works, construction, farm work, orchard work and rest home care.

Without immigrants these tasks would be left undone.

I do accept that we do not need itinerant pompous pillocks, having failed in their own country, to come here to borrow big time to acquire and then arbitrage mundane assets.

We do benefit from wonderful newcomers, like Julian Robertson and his late wife, whose aspirations are altruistic, and who are not self-acclaimed, faux philanthropists.

New Zealand investors have had a relatively attractive menu in 2017, able to achieve returns of between three and four per cent with very little risk, perhaps in bank deposits.

Equity investors have done much better, double figure returns being commonplace.

Success has come to those of our listed companies which produce core products or services – the likes of Spark, the power generators/retailers, the banks, the ports and airports, and those who facilitate export.

The retirement village sector has provided rich capital gains and is starting to release dividends to investors.

The listed property trusts have largely been in de-risking mode, reducing debt levels and lengthening tenancy terms.  This sector has performed well.

One can be grateful that none of the listed trusts are making the mistake that amateurs make, gearing up to acquire during market peaks and venturing into property development.

To those who have had careers that span different cycles, patterns may appear but as the past is not a reliable guide to the future the patterns are not a foolproof guide.

It will be obvious to all that over-population and ambition often lead to stress on our natural resources.

Obvious symptoms of stress through excessive exploitation of natural resources have been visible in the fishing industry, the dairying sector (animal health, pasture health, waterway health) and the building sector (human errors everywhere).

It would be unwise to ignore the dairy herd health problem in South Canterbury and now in Hastings.

Until it is contained and animal health has been prioritised, there must be concern, dairy exports being of such importance.

Fixed interest investors ought to be interested in the levels of liquidity in the bond market.

They should also care about the compression of margins, providing very little extra reward for borrowers whose credit rating imply greater risk.

In recent weeks we have seen Christchurch City Holdings Ltd raise money for five years at 3.4%, the KiwiSaver and other fund managers being the biggest buyers of this security.

We have had bond issues from three well-run listed property trusts, the first, Property for Industry, paying 4.59%, Precinct Properties 4.42% and now Kiwi Property Group will pay 4.33%.

KPG has a BBB credit rating, yet its seven-year bond is paying barely more than the AA-rated banks are paying for five-year term deposits.

Yet there are valid reasons why a retail investor might choose KPG.

The answers will include diversification, transferability (liquidity) and the secured nature of the bond, from a company with extremely low debt.

However, the question does point to a trend that reminds me of previous cycles, when there was similar compression of rates, sometimes little or no distinction between the best organisations, slightly lesser ones, and poor operators.

Recall how in the 1980s the dishonest contributory mortgage company RSL Securities would knock on the doors of pensioners and get them to shift term deposits, then earning 18% with their bank, into contributory mortgages at 22%.

The money was lent by RSL’s crooks to some sound propositions, like hedgehog racing clubs based on Somes Island, to help build grandstands (or some such nonsense).

RSL, like the Money Manager’s First Step rubbish, never offered a premium that even vaguely compensated the underlying risk.

Both were extreme examples of a compression of margins that denied return for risk.

Investors may perceive that the corporate bond market today barely offers enough margin over bank deposits.  This seems unlikely to change in the near future.

Of course, the residential property market also sends signals that are confusing.

How can people on average salaries afford to live in our best suburbs?

Indeed, is it even a logical aspiration for people who do not regard high income as their prime priority?

If a bank team leader, earning $60k per annum in Dannevirke or Greymouth, was offered promotion to Auckland’s North Shore, and a pay increase to $100k per annum, would the banker take the promotion?

If the banker understood maths he would stay put.

The NZ equity market, seen to be vulnerable by those who focus on price to earnings ratios, would undoubtedly collapse if bank deposit rates, or bond rates, rose to 8 per cent.

But there seems no chance of such a rise in interest rates, nor could a meaningful rise occur without quite disastrous consequences, worldwide.

The global focus on ZIRP (zero interest rate policy) is unwavering.

A global sharemarket ‘’collapse’’ rather than normal ‘’corrections’’ is not impossible as emotion drives extreme behaviour and fear can be triggered by an infinite range of events.  However it would seem odd if a company with sustainable revenues, margins and dividends suddenly saw its share price collapse.

The key word of course, is ‘’sustainable’’.

In New Zealand most people assume that the power generators/retailers, the banks, and the major providers will be selling their services profitably, and delivering steady dividends, for many more moons.

If Spark, as an example, saw its share price halved to $1.80, its dividends of perhaps 30c would be offering 16% returns.

I would keep my finger on the buy button.

Fear of property price collapses would assume a collapse in demand, perhaps caused by a huge rise in unemployment with a simultaneous reversal of immigration demand, combining at a time when ten thousand builders were completing their apprenticeships.

Fear of a NZ standalone market collapse would reflect a huge leap in interest rates, an uncontrollable rise in unemployment, a biosecurity failure affecting animal health, or, even more improbably, bizarre political behaviour.

A market collapse globally would lead to a loss of foreign investment in New Zealand which would impact liquidity, and therefore prices.

In my view investors must always arrange their affairs so that they can survive market volatility but an absolute disaster, like a nuclear war, would test the readiness of any survival plan.

Investors ought to focus on what they can control, and one obvious example is the costs they will pay to invest.

Everywhere the cost of intermediation (advice, funds management, transaction costs) is being camouflaged by clever strategies.

Many in my industry expect that ‘’brokerage’’ will eventually be abandoned after investors have accepted a replacement ‘’annual fee’’ for access to advice, research, and new issues.

In essence this camouflage is saying ‘’pay me 1% per annum and I will charge you less, perhaps eventually no, transaction fees’’.

A very competent and honest market participant explained to me recently that such a charging mechanism would end the practice of ‘’churning’’ equity portfolios.

He noted that there would be no incentive for the third-tier ‘’advisers’’ to churn if there were no fees earned by churning.

His words were no doubt accurate and honest, but still nauseating.

Until fees, calculated as a percentage of a portfolio, are omnipresent, investors ought to be examining the issue, using as a guideline ‘’value add’’.

In assessing the ‘’extra’’ return from good advice, they should also make an adjustment for ‘’extra’’ risk.

The adviser in Lower Hutt who sold a client’s government stock to buy Feltex shares might have added ‘’return’’ had Feltex survived but he would have done so at the expense of risk, as, sadly, the investor discovered.

My personal view is that transaction fees are much fairer, and more cost effective for the client, than an annual fee based on portfolio value.

It remains inexplicable to me that investors will accept annual fees paid on their cash and bond portfolios, the ‘’fee’’ often eating a quarter or even a third of the revenue.

To pay brokerage rates and a hefty annual fee seems unwise.

In 2018 I have no doubt many more investors will be pondering these multi-thousand dollar annual fees, especially if 2018 is a year, an overdue year, when returns are lean or negative.

Investors should also consider the fees they pay fund managers and especially they should review the ‘’bonuses’’ they allow fund managers to take when the returns surpass a defined benchmark.

How can TSB keep a straight face over the bonuses from its Fisher Funds subsidiary, when the bonus formula is manifestly absurd?

Investors cannot control returns, they can address risk by using appropriate asset allocations, (though credit risk is still a threat) but most of all they can address costs, by demanding that fees are not just calculated lazily and extravagantly as a high percentage (like 1%) of a total portfolio.

The other risk investors should consider is the potential failure of those who should be guardians for investors, preventing poor behaviour.

The Financial Markets Authority, the auditors, occasionally trustees, directors and fund managers have imperfect histories.

The FMA’s predecessor, the Securities Commission, despite a few individuals standing tall, was still an example of an inept regulator, lazy, ineffective, under-funded, and guilty of cowardice in its intended role of stomping on the heads of cheating companies.

This guilt goes right back to the 1980s, when it allowed bullies and liars to ignore the intention of the laws, Colin Patterson a rare exception who would not tolerate bullies.

The NZX and the FMA are today more robust organisations but we still observe compromises that make little sense.

Personally, I would prefer that bad behaviour is referred to the High Court, rather than dealt with by ‘’settlements made without admissions of guilt’’.

Audit standards are variable, partly, I suppose, because of some idiotic accounting guidelines to companies ‘’regularising’’ their results, often on subjective matters.

How did Powerhouse Ventures Ltd ever get approval to run a prospectus in Australia that used an utterly misleading, unarguably obsolete, valuation of its biggest asset?  And still there has been no announcement of a prosecution!

Trustee companies are now licensed but the criteria for a licence is far too loose, in my opinion.

This role should be for staid, bureaucratic, boring but fastidious people, modestly paid to do a low-value job.

It is not a service that should be controlled by flamboyant entrepreneurs seeking to buy, grow and then sell, leaving another entrepreneur to do it again.

If I were the licensor, I would place much emphasis on the stability and constancy of the licensee.

Clients of trust companies must take matters into their own hands.

Never sign up with a trust company without establishing the uncontestable right to sack the trust company.

A clever person might put a maximum number on the total annual charges, perhaps of $1000 or some similarly modest sum.

Trust companies will never have meaningful value-add, they are nowhere near the gold standard as fund managers, and should be a last resort as a manager of trusts or estates.

This is an area where people can stop cash wastage.

Director behaviour should also be monitored.

I expect the standards of boardroom behaviour will improve as the NZ Shareholders Association gains in gravitas.

Sadly many New Zealand companies still allow directors to live with a feeling of entitlement. Feudalism remains in many mindsets at board tables.

Competence, integrity and complementary skill sets are what an investor should seek, along with experience and relevant knowledge.

The concept of filling up boards with retired politicians is absurd.

Commerce has disciplines utterly different from politics.

The likes of John Key will have relevant experience but academics and politicians, generally speaking, are rarely relevant.

I still recall the days when senior bankers were often more like politicians than businessmen, and were as much use around a board table as carp fillets in a fish shop.

One such banking goof once wasted fifteen minutes of board meeting time telling me that my request for an 8% wage increase request on my $800,000 staff bill was not worth discussing as it involved only $6,400, and continued to fiddle with his calculator after I politely pointed out that his arithmetic was incorrect.

Directors need candour, vigour, rigour, valour and intellect just as a great CEO needs these qualities.

New Zealand went up a gear when Sir John Anderson brought these qualities to banking in the 1980s and 90s.

So in 2018 investors will face uncertainties that will give the investors the least grief only if they address these issues with careful thought, perhaps discussing them with competent advisers who charge a fair price.

My guess is that those NZ investors who can succeed in collecting the desired level of income, and retain their capital, will not feel dissatisfied when they review 2018.

It might be a challenge in 2018 to do much better than this.

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THE search for more female directors is not helped by instances of female director incompetence, as displayed by former politician Jenny Shipley.

Shipley chaired Mainzeal, an appalling company whose tribulations were obvious to everyone but its board of directors, it seems.

She would do more to advance the case of women as directors if she resigned from all her directorships now, setting an example of accountability for abject failure at Mainzeal.

She is far from the model that aspiring female directors should follow, in my opinion.

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INVESTORS who seek to avoid errors will have had no pleasure at all from observing the meltdown of Powerhouse Ventures Ltd (PVL).

Indeed many in the markets openly supported PVL for several years, believing it had the capacity to nurture a stream of good ideas into a few successful, innovative commercial operations.

The hope was that it would help entrepreneurs achieve scale, generating jobs, showcasing some clever New Zealanders, and helping new companies to build wealth.

A large group of BNZ financial market specialists supported many of the projects and I too provided capital for what seemed like potentially exciting ideas.

To achieve success PVL needed a group of smart, wealthy, experienced and available people to provide all the necessary help for a pathway to success.

Innovation, entrepreneurship, and academia rarely have much clue about matters like capital-raising, banking solutions, necessary governance and management structures, exporting, personal development, patents, premises etc.

Sadly, PVL pretended it had the people with these practical skills. These people may have had good intentions but they were goofs, and accepted rewards well before the rewards had been earned.

In reality it had a group of people, some of whom had no real wealth, few of whom had ever built companies, and some of whom seemed to be takers rather than givers.

The nett result has been failure, destruction of potentially great companies, and at very least major setbacks in timing for virtually all PVL’s ‘’incubated’’ companies.

Far from accelerating progress PVL has delayed it.

It is now chaired and managed by Australians whose brief contact with me gave me no confidence that PVL could be re-established.

I have sold my PVL shares and have chosen not to contribute money even to the potentially good concepts that the likes of Invert Robotics have showcased.

There has been no published progress on the regulators’ investigation into PVL’s flawed prospectus, no sign of accountability for fundraising that was undeniably mis-described, perhaps cynically.

PVL’s managing director Stephen Hampson has vanished, probably asked to carry the can that could just as easily have been handed to any of the board members who signed the PVL prospectus.

New Zealand has many so-called incubators, the Morgan family among them, where there is a combination of money, experience in building companies, and some intellectual grunt.

At one end will be the likes of FNZC, in the middle will be various opportunists who seek to attract other people’s money and generate fee income, and there will be experienced companies like Rangatira, where there is real money and a history of supporting companies that are in the final stages of their development.

The NZ Venture Investment Fund has a patchy record, again lacking the ultimate accountability of being stewards of their own money.

Coming around in a few weeks, 2018 will follow many years of handsome, easy gains, when many investors and fund managers have recorded victories without much effort.

In cricketing parlance they have been batting against a bowling attack that delivered half trackers and full tosses.

They may face a more hostile attack in 2018.

There will be no room for the likes of bumblers like Powerhouse.

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Urgent for investors in Hanover Finance, United Finance, Hanover Capital

ANYONE who invested or reinvested in any of the above companies AFTER DECEMBER 7, 2007 is entitled to a part repayment.

Those who invested BEFORE December 7, 2007 are NOT entitled.

Entitled are those who invested, or re-invested, in Hanover Secured Debentures, United Finance Debenture or Hanover Capital bonds AFTER December 7, 2017.

These investors are entitled to:

Hanover Finance debentures – 16c in the dollar

United Finance debentures – 19c in the dollar

Hanover Capital – 6.8 cents in the dollar

If any investor who is eligible and has NOT communicated with Deloittes, which is managing the repayments, must email nzhanover@deloitte.co.nz or phone 0800 426 683 before 16 February, 2018.

Investors after December 7, 2007 are eligible because they were misled by a prospectus dated December 7, 2007.  The directors and their insurers have paid a sum in recognition of these errors.  That money is distributable to eligible investors.

Please check your records to see whether you are eligible.

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Holiday Arrangements

Our office in Paraparaumu Beach closes at 5pm on Wednesday December 20, in Timaru at 5pm on Friday December 15.

This is the last Taking Stock for 2017.

May the Christmas and holiday season bring joy, good health, and clean the slates for a successful 2018.

Chris Lee Managing Director

Chris Lee & Partners

TAKING STOCK 7 December 2017


IN the months and years before the 2008 global financial crisis, investors were bombarded by advertisements for all sorts of mortgage trusts, property syndicates and finance companies.

Companies like Bridgecorp, Hanover, Money Managers, Canterbury Mortgage Trust, NZ Guardian Mortgage Trust, Lombard, Strategic and Prudential Contributory Mortgage Trust were on almost every page of the NZ Herald, The Dominion and the National Business Review.  They were also all over the television screen, many ‘’sponsoring’’ the weather or TV1’s then equivalent of the modern abomination, Seven Sharp.

These companies were also all over the publications of the retirement villages and Grey Power.

The Queen wondered why the London School of Economics did not foresee the GFC but no one asked the question why so much dishonest or inaccurate advertising was never prosecuted.

Dishonest?  Or inaccurate?

Well, recall that Bridgecorp advertised that Lloyds of London, a AAA-rated insurer, underwrote Bridgecorp’s loans.  None were insured.

Dopey and pompous people like Doug Graham front-paged letters to investors attesting to standards that were not even remotely adopted by Lombard.

Hanover could ‘’weather all storms’’.

St Laurence’s owner Kevin Podmore treated investors’ money as though it was his ‘’mother’s money’’.

Guardian Mortgage Trust and Money Manager’s First Step mortgage fund were described as being equivalent to cash and bank accounts (maybe they meant Zimbabwean cash).

Money Managers described a Hamilton property syndicate’s building as being the equivalent of government stock (because it had a short-term lease to a government department).

MFS (Octavia) said its investments were ‘’secured’’ by a ‘’put option’’ to its Australian owners, themselves so swamped with useless loans that the put option might as well have been written on saturated tissue paper.

What reminded me of all this was November’s copy of NZ Grey Power Magazine.

A concerned investor took the trouble to cut out and send to me all of the promotional guff and advertising run in a magazine that is designed to enhance the wellbeing of its readers.

Grey Power’s acceptance of advertisements from mortgage trusts, and its ill-informed promotion of them, should stop right now.

In the November issue it presented one half-page editorial article headlined as follows:-

‘’Investors benefit from Midlands Mortgage Trust’s conservative, flexible approach’’.

The article discussed how bank savings ‘’feels safe and your term deposits simply roll over without having to give it much thought.

‘’But there are alternatives that really are worth considering.’’

It concluded by noting that in the quarter ending September 30, Midlands Mortgage Trust, run by Fund Managers Central Ltd, returned five percent before tax.

The article supplied phone numbers and website information.  On another page was a half-page advertisement from Midlands.

First Mortgage Trust was the subject of an article headlined ‘’First Mortgage Trust – the smart choice’’, accompanied by a half-page advertisement.

A further page was adorned by an advertisement from j.c.l.@clear who offered ‘’syndicated trusts’’ with payments of 6.5% to 9.5%.

Whoever JCL is, he describes himself as a ‘’Kiwi family business, a supporter of mindful mental health trust, and as being ‘’Kiwi owned since 1984’’.

I realise Grey Power needs advertising but surely its first need is to serve the interests of its readers.

The truth is that unrated investment offers, especially those without any capital, are far from ‘’smart’’ choices, or ‘’worth considering’’ for people who can neither afford to lose money, nor can perform useful research.

The Grey Power newsletter needs to lift its game.

Let me just pass on the following facts.

Midlands Trust is based in Hastings, has no capital, lends its money to those who do not, or cannot, borrow from banks, and deducts costs and fees from income received, before returning the residual income to investors.

If mortgage defaults occurred the loss would be the investors’ money, not the capital belonging to the fund manager.

Its manager Peter Harrison arrived from Zimbabwe in 2002, lives in Havelock North, and has managed the trust since 2004.

Midlands says it has achieved ‘’fairly consistent outcomes’’ since 2004 and draws on the experience of three law firms, one each in Waipukurau, Hastings and Hawera.

For investors the reward for foregoing comfort from a credit rating, Reserve Bank supervision, and bank lending criteria is a return of nearly 0.5% greater than a five-year bank deposit.

Sound like a ‘’smart’’ choice?

First Mortgage Trust is based in Tauranga.  It also is unrated, unsupported by capital, and specialises in non-bank mortgage lending.

It has a larger and younger management team and, like Midlands, is entitled to brag that it survived the 2008 GFC without defaulting.

It is larger, holding a $560m portfolio, and its website has a useful level of detail.  It will repay investors within 90 days of a withdrawal request.

Investors in the past five years have received interest returns of between 4.3% and 5.72%, the latest return being 5.15%.

Commendably it highlights that as there is no capital, and no commitment to pay any particular interest rate, past rates are no indication of future rates.

The third Grey Power advertiser was a website domain which appeared to be owned by John Lehmann (Northern Trust).

The search engines do not produce a clear-cut picture of Lehmann though it details one fellow called John Lehmann who sued various media outlets for breaching his privacy a decade or so ago.

I am going to take a guess that today j.c.l. is a distributor of unlisted property syndicates.

There are 1845 Authorised Financial Advisers in New Zealand, one of whom has the initials JCL.  That is Jonathan Christopher Lee AFA, currently head of the trading desk at ANZ Securities, a very fine young man whose father loves him dearly.  He does not advertise in Grey Power.

However there is no John C Lehmann on that AFA register so if indeed JC Lehmann is an adviser he needs to notify the FMA of his omission from a list that should be relevant to all investors who take financial advice.

If JCL (North Trust) is someone quite different, I advise him to be specific when he advertises unlisted property syndications.

My point is worth repeating.

Mortgage Trusts and unlisted syndicates should never be promoted as being even remotely equivalent to a bank deposit.

Nor should a magazine for retired investors promote any risk product with editorial.

In my view such a publication should protect with great vigour its role as a provider only of carefully chosen news and advertised products that are suitable for its audience.

Mortgage trusts and unlisted property syndicates may NOT be suitable for Grey Power’s audience.  Research or advice, and consideration of personal circumstances, must precede any such investment.

No one wants to see a repeat of the sort of dishonesty or inaccuracy that investors endured a decade ago.

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ONE property syndicator that does seem to have learned from the past is Augusta, an NZX-listed property manager.

Maybe its CEO Mark Francis has had two property crashes to guide him, one being the collapse precipitated by the dreadful public property companies of the 1980s, among the greater causes being the disgraceful and cynical behaviour of Chase Corporation, in which Mark Francis’s father, Peter Francis, was a senior executive.  (The collapse of Chase was, at the time, NZs biggest ever NZX failure).

The property market crash of 1987 was caused by excessive debt, dishonest or utterly incompetent valuations, absurd and excessive developments, cynical treatment of investors, and, sadly, public gullibility, some believing that self-focussed property moguls could foretell the future of the share prices of their rotten companies.

Mark Francis will have access to the ‘’what not to do’’ file which may have given him the wisdom not to build Augusta into a geared property owner with limited capital, with little liquidity, and a dependence on generous but reversible bank lending policies.

To be fair to him he was barely out of nappies in 1987.

In 2008 he would have observed the disastrous consequences for investors of being stuck in a property company where the fund manager could not be booted out and replaced.

Money Managers/Dominion Properties will be a textbook example so I applaud Francis’ latest attempt to win over the National Property Trust investors.

Francis will no doubt get Augusta to manage NPT’s portfolio, but he has made a sensible concession, clearing the way for investors to replace him and Augusta if ever they sense that their interests are compromised or the management fees are not exceeded by their added value.

I expect he will also make it clear that if Augusta is ever replaced, the formula for its exit package will be pre-determined and will be of a dollar size that is measurable in thousands, not hundreds of thousands.

Augusta should be rewarded only for its value-add, not for any failures.

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FOR those whose investment strategy assumes that interest rates will rise slowly, there might be affirmation from the published opinion of Goldman Sachs.

The American business, which some regard as the food source for the greedy, is forecasting that the US Federal Reserve will lift the cash rates four times in 2018.

Its logic is that the US economic growth rate, after many bleak years, is reaching 3%, that unemployment is low, and that wage rates will soon rise.

Of course it does not mention the millions of Americans without a job but who do not get included in unemployment figures because they have given up looking for jobs.

Nor does the GS prediction take account of new imminent changes in global liquidity, one being the announcement that Europe’s central bank is reducing liquidity, the other being the announcement that the US Treasury is about to sell half a trillion of long bonds.  All of this is timed to happen in the next few weeks!

The removal from the market of a trillion of liquidity is not a trivial event and would ordinarily lead to a fall in equity markets, the source of the funds that have driven increases in consumption.

If you squeeze consumption and contemporaneously drive up interest rates, you create a series of problems you might not anticipate.

Perhaps investors guided by Goldman Sachs should recall its forecasts on gold and oil prices.  Oil, according to GS, would be $200 a barrel today.

My expectation is that interest rate rises will be minimal, restrained by the lack of red corpuscles in this so-called magic economic recovery.

If the recovery is so concentrated that only the top earners and wealthiest are involved, it is not a sustainable recovery,

Can the world absorb greater debt servicing costs without impacting employment, loan default rates, banking stability and ultimately tax revenues?

I am not convinced.

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THE decision not to prosecute those who certified the sustainability of the design and robustness of the CTV building in Christchurch is understandable.

The collapse of the building, during Christchurch’s second enormous earthquake, cost 115 people their lives and was a tragedy that will never be forgotten.  The grieving has not ended six years later.

Conversely the decision not to prosecute the Pike River Mine directors and senior executives will never make any sense to me.  Probably it will never make sense to anyone who has read the detailed account that Rebecca Macfie provided in her chilling account of this disgraceful episode.

The CTV building was assessed by independent people making a subjective judgement based on their own, perhaps inadequate, knowledge and experience.

There was little science in their attempt to assess the vulnerability of the structure after the first major earthquake.

Had the structures been crumbling, creaking and groaning, the building would have been red-tagged immediately.

By contrast the Pike River Mine was all but belching flames for months, or years, before it exploded.

Science was available to the directors and executives of PRC.  Any number of experienced people knew of the dangers.  The potentially lethal gas volumes were measured.

The escape exit was utterly inadequate – that was known.

The venting was utterly inadequate – that was known.

In the case of the CTV building there was no obvious conflict of interest.  Had the vulnerability of the building been known every user would have been ordered out and would never have returned.  Insurers would have built a new building.

In the case of the mine, production schedules were very clearly a conflict of interest, as was financial survival of the company.

Rebecca Macfie’s book, with all its evidence of cynical, dreadful governance and management, points to many almost unbelievably callous decisions including the Crown’s decision to underfund the mine’s inspection function, leaving just one man to take responsibility for work that might have tested a dozen inspectors.

The Key government’s culpability should have been tried.

The difference between the two tragic outcomes is that one came from bad decisions made without adequate evidence, the other came from decisions made despite very specific evidence that the decisions risked lives.

The directors of Pike River Coal were John Dow, Stuart Nattrass, Ray Meyer, Tony Radford and two Indian shareholders, whose steel company had pre-purchased production, Arun Jagatramka and Dipak Agarwalla.

Gordon Ward resigned as chief executive two months before the fatal explosion and was replaced by Peter Whittall.

Ward led PRC during its design and build process, Whittall was in charge during the race for production to meet contractual obligations.

There has rarely been a more disgraceful failure of governance than PRC, yet no director or executive manager was charged with anything, let alone manslaughter.

Those people are fortunate they do not live in a jurisdiction like China, where accountability is taken seriously.

A case like this in China leads to a conclusion that means the errant people simply cannot repeat their mistakes in the future.

Nattrass, a former foreign exchange jockey who worked in the 1980s alongside the 2008 Prime Minister John Key, commented to me once that he had scored a trifecta of disasters, being a director of PRC, South Canterbury Finance and a property owner in Christchurch.

He may have made the mistake of believing that divine intervention had interfered in each of these activities.

SCF was a man-made disaster, caused by negligent governance, dishonest behaviour and extravagant risk-taking, the latter with self-interest in mind.

PRC was a man-made disaster, not much more stupid than a General ordering the ANZACs to march into machinegun fire.

The earthquake was not comparable.

No action could have stopped the earthquake from occurring.

Nattrass rode a quinella, not a trifecta.

Like all the others who directed PRC, or SCF, governance should never again be a role for his energy.

Perhaps one day we will understand why those paid to govern SCF and PRC have not adequately been made accountable for their errors.

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THE imminent repayment of bonds or securities issued by Kiwibank (15/12/2017), Trustpower (15/12/2017) and Credit Agricole (19/12/2017) pumps around half a billion dollars into bank accounts before Christmas.

Kiwi Property Group will accept $125m in a new secured bond issue, paying around 4.25% for seven years.

Some years ago I recall Kiwi Property Group offering a five-year bond at 6.15%.

At the time the media commentators, the bank economists, the fund managers and the finance sector salesmen were all in public loudly opining that interest rates were about to rise, meaning the Kiwi Property instrument would under-reward investors.

Of course the fund managers sought as many as they could get from a pool less disturbed by retail demand because of the rising rates discussion.

Weeks ago Property for Industry offered 4.59%, then came Precinct at 4.42%, now we have KPG, probably raising their money at 4.26%.

These falling yields might seem insignificant but retail bond investors rarely invest less than $10,000.

The average is likely to be $30,000.

A difference of 0.33% on $30,000 is $99 per year, or $693 over seven years.

I have heard disrespectful people describe $693 as ‘’peanuts’’.

I have never seen anyone throw $693 in notes into an incinerator, though I have heard how one Scrooge-like character once scooped up hundreds of dollars thrown by mourners into a grave, in a country where this behaviour was traditional.  The canny Scrooge replaced the notes with a duly signed and dated cheque before the soil filled the grave.

The KPG issue will be fully subscribed.

Those who wish to access the issue should contact us urgently.

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I will be in Christchurch on January 23 and 24 and in Auckland on January 30 and 31.

Any client or investor is welcome to contact our office to arrange a meeting.


Our Paraparaumu Beach office closes on Wednesday, 20 December.  The Timaru office closes on Friday, 15 December.

Outside these hours, clients are welcome to phone Chris (021 838561), Edward (027 477 8474) or Kevin (027 688 8702).

Merry Christmas

Chris Lee

Managing Director

Chris Lee & Partners Ltd

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